Rollup Summer Thoughts: Narrative Evolution and Investment Opportunities

Author: Alex Xu, Mint Ventures

This article is the author's observation of new trends in the Rollup market, future developments, and potential opportunities. It attempts to discuss the following topics:

• What is Rollup Summer?
• New Rollup cases: ZKFair and Manta
• Development projections for Rollup Summer
• Opportunities in the secondary market: related assets to the Rollup Summer narrative

The content of this article reflects the author's interim views as of the publication date, with more emphasis on business perspectives and less on the technical details of Rollups. This article may contain factual errors and biases and is intended for discussion purposes only. Corrections from other investment research peers are welcomed.

1. What is Rollup Summer

Similar to the DeFi Summer that began in 2020 and the inscription Summer of 2023, Rollup Summer is defined by the author as a state where a new type of Rollup project may experience explosive growth in quantity, business volume (TVL, active users, ecosystem projects), and other dimensions. Although it is just beginning to show signs, it remains a projection and hypothesis.

Rollup Summer is specifically manifested in:

• A large number of new Rollup or application chain projects being initiated and launched on mainnet
• Users, funds, and developers flowing into the Rollup ecosystem at a much faster pace than in the past year
• Business data and asset prices mutually reinforcing, leading to rapid expansion of the total market capitalization of the Rollup sector and related projects

Rollup Summer may start at the end of 2023 and the beginning of 2024, and could become an important narrative spanning half a year or even the entire year.

The main factors incubating Rollup Summer are:

1. The Flywheel Effect of New Rollups

Rollups themselves are not a new species; existing Rollups like Arbitrum and Optimism already have substantial market capitalizations and business volumes, while other ZKRollups like Starknet and zkSync have also been running for some time.

However, the protagonists of this Rollup Summer will be the new Rollup projects that have just emerged in this cycle because:

• The concept of modular blockchains has gained widespread acceptance, and the infrastructure for various Rollup modules is becoming increasingly refined, such as OP stack, DA layer Celestia, decentralized sequencers, and various RaaS service providers, making it easier to develop and maintain a Rollup based on modularity
• New Rollups and new tokens have ample budgets for cold starts and incentives, with more aggressive token distribution and incentive mechanisms that are more attractive to users and funds
• Low initial market capitalization and significant room for imagination
• Bull market atmosphere, boosting market optimism

In simple terms, the characteristics of this new Rollup wave are: new projects, tokens, modularity, and generous incentives that help the initial business and token price flywheel spin faster.

The flywheel of Rollup Summer may initially come from: token airdrop plans → attracting user assets, increasing core business data (TVL) → expanding project market capitalization.

The second phase may come from: token ecosystem airdrop plans → directly subsidizing dapps within the ecosystem, indirectly subsidizing users → further attracting user assets, enhancing core data (TVL + active users + gas fees) → further expanding project market capitalization → new Rollups flipping older generation Rollups → further market FOMO.

2. The Cancun Upgrade

In addition to the flywheel effect of emerging Rollups, another background factor is the anticipated Ethereum Cancun upgrade coming in February this year, which directly benefits Arbitrum and Optimism by rapidly lowering their L1 costs, creating a larger profit margin for Layer 2. However, Cancun will also attract the entire market's attention to the Rollup sector, bringing attention and funds to new Rollups.

2. New Rollup Cases: ZKFair and Manta

The author analyzes the operation modes and characteristics of the protagonists of Rollup Summer—new Rollups—using two recently popular Rollups as examples.

1. ZKFair

The main characteristics of ZKFair as a Rollup are:

• Built on Polygon cdk, using Celestia for the DA layer (currently maintained by a self-operated data committee), EVM compatible
• Uses USDC as gas fees
• 100% of the Rollup token ZKF is distributed to the community. Of this, 75% of the tokens are distributed in four phases, completed within 48 hours to participants in gas consumption activities. Essentially, participants engage in the primary market sale of tokens by paying gas to the official sequencer, with a corresponding primary market financing valuation of only $4 million.

• The operational profit of the Rollup promises to return 100% to the community, with 75% distributed to ZKF LP stakers and 25% allocated to qualified dapp deployers. Here, profit = total fees - operating costs (infrastructure costs such as Rollup's browser, oracle, etc.)

Since ZKF is distributed based on the ratio of participants' total gas consumption during the event to the total gas amount, this means that the ZKF sale is a "capital competition" game, with a large number of users transferring USDC to the ZKFair mainnet for the event. During the airdrop event, on-chain funds skyrocketed from $0 to a peak of around $140 million in just 2-3 days, comparable to leading ZKRollup project Starknet at that time. Even now, after the airdrop has ended, ZKFair's TVL of over $70 million is still higher than that of the earlier launched ZKRollup project Scroll.

The benefits of ZKFair's operational model are evident:

• Rapid cold start and popularity accumulation: On-chain TVL surged from $0 to over $100 million in just 3 days (currently still over $70 million), making it one of the fastest-growing Rollups, with 334,000 addresses.
• Direct token empowerment: Sequencer fees are directly distributed to users and developers, providing intrinsic value support for the Rollup's token.

Currently, ZKF's FDV is around $100 million, which is still not high compared to other Rollups when making horizontal valuation comparisons.

2. Manta

The characteristics of Manta Rollup are:

• Built on Celestia DA + Polygon zkEVM, EVM compatible
• In addition to Rollup, the overall product line is rich, especially with a large number of ZK-based suite services

Manta's Rollup officially launched in September 2023, but its business data took off after the launch of the "new paradigm" event in mid-December, with the total on-chain funds (official data) nearing $750 million.

The following chart shows the trend of Manta's on-chain DeFi TVL, with a clear growth inflection point after the launch of the new paradigm.

Manta's investment lineup is also very impressive, with the last round of financing valuing it at $500 million:

The logic of the new paradigm activity is very simple, an upgrade of blur's blast model:

• Distributing its Rollup token rewards based on the amount of cross-chain funds, rapidly increasing on-chain funds
• Cross-chain assets will at least earn the basic interest rates of the crypto world (ETH POS + stablecoin treasury yields), reducing users' opportunity costs
• Setting airdrop expectations for dapp interactions, encouraging users to interact with existing dapps after cross-chain transfers, boosting developer confidence

The new paradigm will distribute 45 million Manta tokens to NFT holders, accounting for 4.5% of the total supply. Based on today's (January 5, 2024) secondary market data for NFTs, the estimated FDV valuation of the Manta token after its launch is in the range of $1.5 billion to $2.5 billion.

In addition to ZKFair and Manta, many other similar new Rollups are emerging, such as the earlier launched Blast, and the recently introduced Layer X, which combines the models of ZKFair and Manta.

Moreover, considering that ZKRollup projects like Scroll and zkSync have yet to issue tokens, these earlier launched projects also have the opportunity to reference the models of ZKFair and Manta to attract users and funds to their ecosystems through clearer token reward mechanisms.

3. Future Projections for Rollup Summer

Next, we can project the possible development paths for Rollup Summer:

1. New Rollups launch, quickly gaining traction through token airdrops and interaction activities, with rapidly rising data and superior mechanisms leading to good market expectations for their growth (currently in progress)
2. Rollup projects launch tokens, revealing wealth effects (ZKFair 25-30x increase), stimulating more players and funds to pay attention
3. Token incentives shift from purely TVL in the initial phase to increasing ecosystem activity, gas fee consumption, and project introductions, with the market shifting from observing TVL to observing the sustainability of ecosystem development (challenges begin to increase here)
4. A large number of new Rollups launch wholesale, diluting funds and attention (which also means the wealth effect of new Rollup tokens decreases), leading to a sharp decline in project quality, and even the emergence of scam projects (after attracting funds, they may be stolen or exit), damaging market confidence
5. Summer fades, competition among Rollups returns to a steady state, but the distribution methods of Rollup tokens may inherit the approaches that emerged in this cycle (to address the challenge of cold-starting businesses)

From this, we can see that the biggest challenge for new Rollups and Rollup Summer after achieving initial success lies in how to incentivize the sustainable development of the ecosystem after the initial distribution of tokens, and how to cultivate applications and services within their Rollup ecosystems that can retain users and funds, creating wealth effects, whether they are memes, DeFi, or more airdrops and clever Ponzi schemes.

4. Secondary Opportunities: Assets Related to the Rollup Summer Narrative

Which secondary assets will benefit from the development of Rollup Summer? Starting from Rollup Summer, the following sub-narratives may further emerge:

Sub-narrative Speculation 1: "Celestia is the Ethereum of the Rollup Era"

ZKFair, Manta, and more new Rollups will adopt Celestia's DA products, and Celestia is moving from story to instance. Once instance projects using Celestia receive favorable market feedback, more new Rollups will inevitably follow suit. "Using Celestia as the DA layer" may become a standard configuration for new Rollups, with Celestia becoming the new consensus layer for Rollups, thus becoming the core infrastructure of the Rollup era.

This may give rise to the sub-narrative that "Celestia is the Ethereum of the Rollup era." Whether this story can come true in the future is not important in the short term, as Celestia's current circulating market capitalization of only $2.3 billion leaves it two orders of magnitude away from Ethereum's $270 billion circulating market capitalization.

Sub-narrative Speculation 2: Yield-bearing Assets Become Standard

Yield-bearing assets, especially yield-bearing stablecoins like sDAI, have historically had a slow replacement process for mainstream stablecoins. However, in the airdrop activities of Blast and Manta, ETH yield-bearing assets and yield-bearing stablecoins have almost become the native assets of these new Rollups. If more Rollups follow this approach, it will directly promote the expansion of user groups and the formation of habits. This directly benefits yield-bearing asset issuers capable of securing strong Rollup partnerships, such as Blast choosing Lido and MakerDao, and Manta selecting Stakestone and Mountain Protocol.

Sub-narrative Speculation 3: Rollups Devour L1 Market Share

In terms of experience, Rollups and L1s have no substantial difference. The previous cycle's L1 public chain boom may be replicated in this cycle through a sovereign Rollup wave, where Rollups will compete with each other while also directly competing for users and funds with L1s. Additionally, some rapidly growing native dapps on Rollups are also worth noting, such as LayerBank on Manta, which has total deposits exceeding $300 million, approaching the data of leading lending projects on Arbitrum.

However, while we are optimistic about the rapid development of numerous Rollups, it is also necessary to consider the risks of narrative failure.

Risks of the Rollup Summer Narrative

The core challenge for new Rollups is the smooth transition from the launch phase to the growth phase. Using token airdrops to incentivize capital inflow is relatively simple, but retaining users and funds long-term presents a more complex challenge. In fact, various L1s in the previous cycle made similar attempts, such as launching hundreds of millions in public chain incentive funds to encourage leading DeFi projects on Ethereum to migrate, while DeFi projects transferred the incentives received to their users to enhance their business data. Such measures achieved good initial results, but as various public chains launched similar policies, the effectiveness of incentives gradually diminished in the competition.

Even established Rollups like Arbitrum and Optimism have been continuously distributing their tokens to ecosystem projects, which then pass them on to users in hopes of retaining user activity and funds. Arbitrum's latest round of total incentives has exceeded 70 million ARB (currently valued at over $14 million).

Therefore, how the Rollup Summer narrative, which is still in its infancy, will develop remains to be seen as we observe the next moves of new Rollups.