IOSG Founder: L2 Growth Dilemma, Ecological Cooperation and Future Trends

Author: Jocy, Founder of IOSG

L2 summer or dilemma?

Recently, I heard several friends working in the yield farming studio complain that many studios had invested massive resources and transaction volumes in zkSync and Linea, only to find themselves empty-handed, inadvertently helping several major L2s generate tens of millions of dollars in transaction fees. Therefore, when these studios see new L2s launching, they have become less enthusiastic about creating transactions.

What we originally expected was a prosperous L2 Summer that didn't require studios, but now we find that as studios gradually fade away, the transaction volume and TVL of several major zkEVMs have not reached expectations. When speculators in the market no longer participate in L2s and fail to create vitality for the ecosystem, the dilemma of sluggish growth and ecological shrinkage emerges.

L2 competition in the eyes of investors

From an investor's perspective, the investment logic for laying out L2 infrastructure is based on our belief that these teams will engage in ecological competition across different dimensions with ample capital support, encouraging a flourishing of applications within the ecosystem. However, most of the current L2 arms races have not focused on ecological construction, still allocating substantial funds to attract high-priced ZK and PSE technical talents (of course, from a strategic standpoint, L2's investment in technology research and talent acquisition is justifiable). However, I believe that high-concurrency compatible Rollups without applications hold little value and will only be castles in the air.

The growth dilemma of the L2 ecosystem

Waiting for natural growth of the ecosystem will be a long process. If this arms race cannot help Ethereum usher in an explosive growth of application ecosystems, and continues to over-invest and redundantly invest in share sequencers/Bytecode underlying design/and other foundational technologies, we cannot expect to see a prosperous ecosystem.

Currently, competition for ecological applications among L2s is very fierce. If an application binds its interests to a specific L2 chain, it becomes exceptionally difficult to gain support from other L2s. At this stage, the application also hesitates to easily migrate to other L2 chains because such a move would mean they would find it harder to obtain grants from the originally bound L2.

Thus, choosing the right partners has become a challenge for applications. For this reason, every L2 wants to have exclusive applications, leading to a fragmented battle among applications across different L2s. Of course, once applications grow larger, they may consider application chains or multi-L2 deployments, but the issue lies with the L2s. When they cannot determine whether future applications will remain on their L2, they are reluctant to invest heavily.

We often see underdeveloped L2 applications that cannot obtain grants or incentives on certain L2s, causing them to wander across different L2s seeking financial support for survival. So, which L2s have not yet publicly disclosed their ecological grant plans?

Solution One: Leading L2 projects take on the responsibility of ecological construction

We certainly do not want to see a situation where L2s stand alone, as this leads to a relatively fragmented Ethereum ecosystem. Perhaps this is a product of a competitive market, but in our view, leveraging a combination of L2 applications to incubate and support a more diverse range of application products is necessary for the emergence of bound applications that reach a certain scale within the entire L2 ecosystem.

Unicorn companies valued at over a billion dollars should fully take on the responsibility of ecological construction, which is very important. There are many ways to build an ecosystem, such as Starkware and Optimism focusing on supporting Dojo and Mud engines in FOG games; Arbitrum Grant incentives, where they have done an excellent job in ecological investment support, with the trading scale and user experience of GMX launched exclusively on Arbitrum rivaling dydx in a short time. They also jointly invested with IOSG in the TreasureDAO gaming platform (known in the industry as on-chain 4399); Optimism and Coinbase launched the Base chain based on Opstack, and the Base chain has seen the emergence of phenomenon-level applications like http://Friend.tech, with protocol revenue exceeding 20 million dollars in less than two months and TVL reaching over 20 million…

What they are doing is very simple: attracting developers within the ecosystem based on network effects and executing various incentives through protocol tokens to encourage more diverse innovation and investment. Of course, recently I discussed with some zkEVM L2s, and many founding teams believe that providing airdrops and incentive expectations, including how to internally support ecological projects, does not encourage innovation. They prefer a hands-off approach, allowing projects within the ecosystem to compete naturally. At this level, I believe that not heavily investing funds and tokens to build the ecosystem, a more radical strategy will create advantages in future market capacity and positioning. Platforms that do not execute a certain level of investment will also encounter developmental bottlenecks.

Solution Two: Competition should emphasize alliances and collaborations

In theory, L2 competition differs from L1. Ethereum emphasizes equality and open cooperation, with everyone having different technical routes and challenging different technical implementation difficulties, while all scaling protocols are helping Ethereum establish a stronger network effect.

After Ethereum transitioned from the ETH2.0 roadmap to Rollup, the ecological technological responsibilities fell on L2s. The industry's prospects lie in super applications and large-scale user entry, with capital always executing Ethereum's roadmap at the first opportunity. Should L2s that receive capital support initiate an arms race based on ecological application construction? With valuations in the hundreds of billions and over 5 billion dollars in capital investment, how should this be conveyed to the industry's downstream user application innovations?

I believe that in addition to allowing capital to continue heavily investing and supporting the application ecosystem, zkEVM represents the hope of significant industry innovation and should shoulder the mission of repositioning ecological development planning. L2s should learn from DeFi Lego, where entrepreneurs and developers should not merely replicate similar technology service stacks but should explore different ideas to generate more new perspectives and directions, trying out more creativity and possibilities. In some technically open-source protocols and directions, they should use the same standards as much as possible to reduce redundant resource investment, emphasizing a strategy of alliances and collaborations, deploying more financial resources on breakthrough applications, and striving to support applications like GMX/Friend.tech on every platform at all costs.

The flourishing ecological endgame - L3 and application chains begin to grow

The industry is currently in a phase of tortuous innovation. We have witnessed too many lamentable moments during the bear market, with many first-time founders encountering various difficulties. To overcome these challenges, L2 project founders must truly understand their importance in the industry, and during such difficult times, they should not only consider competition but should also foster more cooperation to encourage and support the flourishing of the Ethereum ecosystem.

Mainstream VCs and L2 projects can build some infrastructure for the developer environment and ecosystem. The industry should dare to support projects that do not issue tokens but provide value to other projects, build open-source communities, enhance developer experiences, develop application front-ends, and establish developer education and training. I firmly believe that an L2 Summer based on application explosions can lead us out of the bear market!

After dydx chose to leave Starkware, they decided to deploy application chains on Cosmos, and more and more application projects are beginning to detach from mainstream L2s, reconstructing their valuation logic and product architecture based on their own infrastructure and applications. At the same time, we see a large-scale emergence of Rollup as a Service projects like Conduit/Caldera/Gelato based on opStack, intensifying support for gaming and application ecosystems.

For example, Caldera helps protocols and games build small temporary functions. Each function requires 2 to 5 engineering days, providing high-touch and customized application features (with monthly and function-based payment options). Gelato helps Astar complete the issuance of zkEVM on the Polygon chain, charging monthly based on Raas. Emerging projects like Arbitrum Orbit/Risc0/Nil foundation are also competing and building ecological protocols under this new Raas landscape.

In the past year, IOSG's investment strategy has reduced the proportion of infra investments from 80% to the current 60%, while the proportion of investments in application directions has also increased to over 40%. We are very optimistic about the innovations of Asian teams in product user interaction/AI-driven applications/social games, etc. Moreover, we will support these application teams to collaborate with various L2s to gain broader ecological support.