Another wave of traditional giants Layer2 new chain narrative: Catfish effect or fleeting phenomenon?

Author: @Ice_Frog666666

Recently, Paradigm announced a $20 million investment in Ithaca to build a Layer 2 blockchain called Odyssey; the established DeFi project Uniswap launched Unichain; the exchange Kraken, which raised $120 million, is launching its own L2 public chain inkonchain; and traditional giant Sony announced the launch of a new L2 network.

As the battle of elimination among hundreds of L2s has not yet concluded, a new wave of well-connected L2s has joined the already chaotic battlefield, facing even more severe challenges to Ethereum's fragmented liquidity. The debate over whether L2 is parasitic or symbiotic has also intensified. However, from a longer-term perspective, the intensification of divergence often signals that some transformation and adjustment are occurring. This article will comprehensively elaborate on how these new L2 narratives will settle and what new changes they will bring.

Before sorting out the newly entered L2s, it is necessary to first discuss the positive and negative evaluations of L2 and the fundamental issues behind them.

1. What is the Fundamental Issue

Parasitism and symbiosis are not contradictory; they are essentially developmental dilemmas.

The South Korean film "Parasite" sparked a huge global discussion upon its release because it revealed one of humanity's deepest mysteries: the boundaries of human nature depend on the boundaries of wealth distribution. The issue of wealth or benefit distribution has been the root of all social problems since ancient times, and this holds true in the real world as well as in the blockchain world.

From this perspective, the so-called L2 liquidity fragmentation issue is essentially about insufficient traffic and uneven distribution. The so-called parasitic problem of L2 is fundamentally that L2 currently lacks the ability to generate value and cannot feed back into the mainnet while selectively lying flat.

From an economic perspective, the cost side of L2 mainly consists of fees paid to the mainnet for settlement operations, and the other is the cost of renting Blob space; the revenue side mainly comes from user-paid gas fees. In this economic model, it is equivalent to the Ethereum mainnet outsourcing transaction execution to L2, allowing the mainnet to focus on security and data availability while continuously upgrading to reduce costs.

The positive cycle of this economic model is based on L2s being able to attract more users through their own ecosystem construction, thereby forming a larger scale economy to feed back into the mainnet. The reality is that, apart from a few strong L2s, most active users have not only failed to increase but have gradually fallen into stagnation.

Further reflecting on the economic model and benefit distribution, it is not difficult to understand why so many L2s are entering this track one after another. Behind any commercial behavior, there must be clear profit motives, whether it is on-chain margin or the vast traffic built by Ethereum, or the wealth effect after token issuance, all of which make this business highly attractive. However, how to view profits divides these L2s into different types, mainly as follows:

1. Follow-the-trend and Lie-flat Type: Since the entry threshold for L2 is low and I can share a piece of the pie, why not participate? If the narrative fails, it’s the mainnet's fault, not mine, but I must get my share of the money. This type is often seen among tireless PUA users, who after taking advantage of the situation, directly reveal their cards, saying you can criticize all you want, but the money is in my hands, like Scroll.

2. Self-reliant and Strong Type: I am strong enough, I want to share this pie, but the mainnet is not performing well. The money I earn, I cannot take the lion's share; if I cannot compete with you, then I will do it myself. For example, Optimism and Unichain.

3. Finding a New Path Type: I bring my own traffic; I may not necessarily value your traffic, but I need to borrow your path. For example, Sony's Soneium.

As analyzed in our article "L2 in Data: The Sudden Halt of Growth, the Elimination Race Begins," L2 itself has not been disproven. The current reality is that it faces external environmental challenges, stagnation in the Ethereum mainnet narrative, and the overdraft of user trust by the aforementioned lie-flat L2s. When these factors are combined, especially when the majority of L2s are purely "following the trend and lying flat," merely sucking the lifeblood from the mainnet without any building mentality, then criticizing parasitism is not unwarranted. More critically, such L2s occupy the vast majority, akin to the gut microbiome in the human body; when your immunity is strong enough, an imbalanced microbiome cannot stir up waves, but once you become weak, it becomes the last grain of dust that crushes you.

We need not deny Ethereum's current weakness, but we cannot doubt Ethereum's long-term future as the cornerstone of the blockchain world. The dilemma of L2 is merely a turning point in the history of development. From a longer-term perspective, these follow-the-trend and lie-flat L2s are likely to become the ruins of blockchain, while the Ethereum ecosystem must undergo a process of sifting through the sands to be reborn.

Therefore, from the above analysis, we can have a more objective perspective to view this divergence: parasitism is merely the status quo, while symbiosis is the true future. Looking at the problem from a developmental perspective, the newly entered L2s may not be a bad thing; they are more likely to be catalysts for accelerated elimination or adjustment and transformation.

2. Newly Entered L2s

Each has its own ambitions, but the central idea is user experience and application.

2.1 Unichain

Recently, the most talked-about L2 is undoubtedly Unichain launched by the DeFi leader Uniswap, which has received both criticism and praise. However, as analyzed above, for a native DeFi leader that already brings its own traffic, creating its own L2 makes complete commercial sense.

As the largest DeFi on-chain, Uniswap currently has over 1 million daily active users. In terms of trading volume, it accounts for over 40% of the largest DEX on-chain, which is twice that of the second place, with an annual trading volume close to $700 billion on Ethereum. The development challenges Uniswap faces are expanding market position and share, and increasing protocol revenue and token value. The solution to these two issues lies in how to enhance user trading experience, save trading costs, and further strengthen competitiveness.

From the composition of trading fees, there are several main variables and corresponding revenue sources.

Roughly speaking, traders pay an average cost of about 60 basis points. Based on an average trading volume of $700 billion, the annual fee from this alone is about $4.2 billion.

If you are a UniSwap and UNI token holder, you will naturally have two thoughts: can the more than $4 billion a year be distributed to UNI token holders instead of Ethereum stakers? Additionally, can the fees be lowered further to continue expanding the scale? Following this line of thought, Unichain was naturally born. Analyzing the problem from the perspective of interests, many project choices become quite clear. Unichain specifically achieves the above goals through the following methods:

• Instant Transactions: Overall built on the Op Stack, and developed a feature called Verifiable Block Building in collaboration with Flashbots. This mainly subdivides a block into four sub-blocks (Flashblocks), further accelerating state updates and shortening effective block time, reducing overall block time to 0.25 seconds. At the same time, Unichain uses TEE (Trusted Execution Environment) to separate sorting and block building, allowing for prioritized sorting and internalizing MEV income through MEV taxation. The combination of TEE and Flashblocks effectively balances transaction speed and security, but it also places higher demands on the network and technology.

• Cost Reduction and Greater Decentralization: Unichain's verification network is composed of a decentralized network of node operators. To become a validator, one must stake UNI tokens and receive rewards based on the amount staked. Each block verification will be selected based on UNI staking weight. In other words, Unichain mainly utilizes the combination of centralized verification and verifiable blocks to further achieve sorting transparency, while executing transactions on Unichain can significantly reduce transaction costs.

• Cross-chain Liquidity: At this level, Uniswap is practicing "intention-centered" interaction construction. In other words, through an intention model, user needs are directly converted into intentions, and the system autonomously selects paths to execute, completing the entire cross-chain interaction. Intention-centered truly enables seamless cross-chain operations, effectively reducing liquidity fragmentation and manual operation risks.

Overall, as the leader, Uniswap's launch of Unichain not only demonstrates its understanding of technology but also highlights its ambition to become the liquidity center for DeFi across the entire chain, further enhancing its value capture ability and the value of UNI tokens.

2.2 Ithaca

On October 11, Paradigm announced a $20 million investment in Ithaca, dedicated to building a Layer 2 blockchain called Odyssey. They have sent several executives to take positions, particularly with Paradigm's CEO as chairman and CTO as CEO, indicating significant attention.

Odyssey is built on Reth, OP Stack, and Conduit. Reth is an Ethereum execution node client launched by Paradigm, characterized by being written in Rust, offering good memory safety and concurrency efficiency. Odyssey is built using the Reth SDK, meaning this library's use will give Odyssey high throughput and low write latency, along with greater scalability. Additionally, another relatively notable feature is that it directly incorporates the upcoming Ethereum upgrades Pectra and Fusaka into Odyssey, mainly to achieve account abstraction, improved operational efficiency, and reduced gas costs.

On this basis, in terms of user experience, users can directly create wallets using existing Google or Apple key tools; they can log in to use the testnet without needing a wallet, gas tokens, bridge interactions, or RPC prerequisites.

As Ithaca claims, Odyssey indeed has a flavor of a future L2, not only incorporating many functions from Ethereum's roadmap in advance but also allowing for an early experience of a series of functions such as account abstraction. From this perspective, it reflects Paradigm's ambition to accelerate the development of the entire Ethereum ecosystem, attracting participation from the ecosystem and users, especially early involvement from developers.

2.3 Sonic

In August of this year, Fantom officially changed its name to Sonic Labs and launched the S token. The token will be used for airdrops, staking, incentive programs, and more.

Fantom, as an established public chain, is primarily based on an improved version of the DAG (Directed Acyclic Graph) advanced aBFT (Asynchronous Byzantine Fault Tolerance) consensus mechanism called Lachesis, originally designed to solve the blockchain trilemma. Due to this mechanism, Fantom is characterized by high speed and cost advantages. In 2019, it launched the EVM-compatible Opera mainnet, and during the subsequent DeFi frenzy, this characteristic made Fantom a hotspot, especially with the involvement of DeFi leader Andre Cronje in the foundation, which brought Fantom to its peak. However, things did not go as planned; with Andre Cronje's exit, not only did the token price plummet, but the emergence of newer competitors like Solana with more impressive technology further suppressed Fantom's development.

This significant overall technical upgrade by Fantom has attracted market attention, partly due to the traffic effect brought by Andre Cronje's (AC) return, as he is an influential figure in the DeFi era; on the other hand, there is indeed considerable room for improvement in Ethereum's scalability and performance. AC claims that Sonic will surpass parallel EVMs. Specifically, the main upgrades include:

• Introduction of a New Fantom Virtual Machine (FVM): This mainly involves converting EVM bytecode into FVM format while compressing data through parallel processing, significantly reducing execution time.

• Carmen Data Storage Solution: Previously, the state data of smart contracts on Fantom was stored in StateDB, with EVM executing these contracts and updating the database. This upgrade has redesigned the database, adding an indexing system, and it no longer uses RPL encoding and MPT pruning, saving both time and space. The change in storage solutions is akin to the virtual memory of an operating system, resulting in an overall RPC storage cost reduction of nearly 90%.

• Consensus Mechanism Upgrade: Further optimizations have been made on the original Lachesis, reducing redundant information, improving decision-making efficiency, and further shortening transaction confirmation times.

According to the test data provided by Michael Kong during his speech, an average of 4,500 transactions can be processed per second, an 8-fold increase, with block space usage reduced by 98%. Theoretically, it can handle 400 million transactions daily, about four times the current transaction volume of VISA.

If the Sonic upgrade truly reflects the experimental data, from the perspective of the Ethereum ecosystem, it will become an L2 with high concurrency and top-tier TPS, surpassing most L2 projects. Additionally, the foundation will establish an incubator through Sonic Lab, investing heavily to support ecological projects. Currently, there are over 300 projects, and if subsequent operations are handled well, the overall development momentum is worth looking forward to.

2.4 Soneium

Soneium is the Ethereum L2 launched by tech giant Sony, primarily built on the Op Stack and will also join Optimism's Superchain network.

From the limited information available, the overall architecture is expected to be not much different from Optimism. DA mainly relies on the Ethereum mainnet, but indexing may primarily be controlled by the project team, with execution and settlement details still unclear. Currently, after more than half a month of development, the ecological projects have begun to take shape, with over 60 projects, and the cooperating applications will focus on entertainment, Web3 gaming, and NFT services. Additionally, due to Sony's prior collaboration with Astar Network, it is expected that Astar zkEVM will transition to Soneium, and the token will also migrate accordingly.

Overall, this is an attempt by a traditional giant, and the growth of testnet data reflects market expectations. However, it remains unclear whether there are plans for token issuance and a specific roadmap.

3. Summary and Outlook

Only through the sifting of sand can true gold be seen; application breakthroughs are the future!

As mentioned at the beginning of this article, the current Ethereum coin price is weak, the ecological narrative is lacking, and liquidity fragmentation is a real issue, especially with the continuous decline in coin prices, which exacerbates negative market feedback. However, even so, it is evident that the newly entered L2s still need to rely on the big tree of Ethereum.

From the product layout and intentions of these newly entered L2s, we can roughly see an important trend: while there may be divergence in the re-evaluation of Ethereum's value, a transformation around value distribution is occurring. The new L2s either possess disruptive technological strength, have their own traffic support, or have high potential in linking Web2 scenarios. They do not intend to replace Ethereum but rather consider how to carve out a larger piece of the pie amid the current existing dilemmas.

This may also represent a way to break the deadlock in the Ethereum L2 ecosystem. Projects need to have particularly outstanding advantages in technology, traffic, or ecology; otherwise, they will hardly stir any waves in the market. Additionally, from the focus of these projects, a clear trend is that new projects emphasize developing applications with better user experiences rather than simply stressing the foundational role of infrastructure. This is significant in the current context of overabundance in Ethereum infrastructure.

For many lie-flat L2s, whether these newcomers are catfish or sharks, or merely a piece of fish meat, remains unclear in the current environment. If we look at the longer history of humanity, no great endeavor escapes the cyclical laws. The process of rising from a long trough to the peak must undergo the test of refining through fire, but no one knows if today’s market stars will still have a voice in the next cycle. What we can be sure of is that elimination will not stop, and development will not stagnate.