Introduction
Layer 2 (L2) solutions on Ethereum have seen significant growth in recent years, with Total Value Locked (TVL) surpassing $40 billion—up from $10 billion a year ago. Despite this expansion, L2 tokens have underperformed compared to ETH as liquid investments, even while excelling as venture bets.
Key Observations
Market Dynamics of L2 Tokens
- FDV Dilution: New L2 tokens (e.g., Arbitrum, Starkware, zkSync) dilute the valuation of existing ones.
- ETH Dominance: Top L2 tokens collectively account for ~9% of ETH’s Fully Diluted Valuation (FDV), similar to two years ago.
👉 Discover how ETH’s stability outperforms volatile L2 tokens
Performance Comparison (12-Month Returns)
| Asset | Return |
|--------|---------|
| ETH | +105% |
| OP | +77% |
| MATIC | -3% |
| ARB | -12% |
Takeaway: ETH consistently outperforms major L2 tokens.
Challenges Facing L2 Tokens
1. High Valuation vs. Revenue
- 400x FDV/Fee Ratio: Leading L2s have an FDV of ~$400B but generate only $40M annually in fees.
- Blob Fee Impact: Post-EIP-4844, transaction fees dropped sharply (~$0.01/txn), reducing revenue streams.
2. Liquidity and Supply Pressure
- Excessive Supply: Unlocks and vesting schedules flood markets, suppressing prices.
- Weak Demand: Limited liquidity inflows due to high valuations and low yields.
👉 Explore ETH’s long-term value proposition
Contrast with DeFi Protocols
DeFi protocols trade at significantly lower multiples (15–60x fees) compared to L2s:
- AAVE: 20x
- MKR: 15x
- GMX: 15x
Why? DeFi’s revenue models are more sustainable, attracting liquidity.
Future Outlook
- Application Layer Focus: The next cycle may reward dApps over infrastructure.
- Block Space Abundance: Solana, Sui, and Aptos highlight that scalability alone isn’t enough—adoption drives value.
FAQs
1. Why do L2 tokens underperform ETH?
ETH’s scarcity and network effects create stronger demand, while L2s face dilution and high supply.
2. Are L2 tokens good long-term investments?
As venture bets, yes—but liquid markets favor ETH due to lower risk and higher liquidity.
3. Will L2 fees grow enough to justify valuations?
Current fees ($40M/year) would need to increase 10x to match $400B FDV—a steep climb.
4. How does EIP-4844 impact L2 economics?
Blob fees reduce revenue, making profitability harder for L2s unless activity surges.
Conclusion
While L2s advance Ethereum’s scalability, ETH remains the superior liquid investment due to its established value capture and lower speculative pressure. Investors should prioritize ETH for stability and L2 tokens only for high-risk, high-reward exposure.