The next L2 rookie favored by capital: An analysis of Morph's technical logic and ecological positioning
Base and Blast, if they are the fierce newcomers, then Morph and others are like the emerging potential stocks, which may bring new variables to L2.Written by: Terry, Deep Tide TechFlow
What is the main battlefield for Ethereum L2?
The Ethereum ecosystem has always been at the center of the crypto narrative, whether it was the ICO frenzy of 2017, the DeFi summer of 2020, the subsequent NFT wave, or the current crowded L2 landscape.
However, while there are numerous L2 projects on the market today, the Ethereum ecosystem is becoming increasingly fragmented. So what problems are Ethereum L2s supposed to solve? For many, this seems to be a difficult question to discern, and it has become a must-answer question for L2 projects in the second half of the competition.
The Crowded L2 Landscape
As the most fiercely contested track in Ethereum, the competition for Ethereum L2 has been intense.
From a data perspective, the L2 track over the past year can be divided into two phases, with mid-October 2023 as the dividing line:
According to L2BEAT statistics, before October 2023, the overall TVL of the L2 track had long hovered around the bottleneck of $1 billion;
After October 2023, the TVL began to rise rapidly from $1 billion, reaching around $4 billion in just six months, an increase of 300%;
Even when calculated in ETH terms, from October 2023 to now, the growth of TVL in the L2 track has also clearly accelerated—breaking through the bottleneck of 70,000 ETH, reaching a historical high of 12.5 million ETH, with an increase of 80% in the past six months.
At the same time, in terms of types, L2 projects mainly consist of two mainstream scaling solutions: Optimistic Rollup and ZK Rollup, with OP projects holding a dominant share:
There are 10 L2 projects with a TVL of over $500 million, of which the OP category occupies 7 seats, accounting for over 85% of the market share, far exceeding the ZK category's market share of less than 15%.
Among them, the top 5 are all dominated by the OP category, with the leading OP project Arbitrum (nearly $17 billion) and the leading ZK project (about $1 billion) differing by a factor of 17. Therefore, as of now, the competition in the L2 track is essentially still dominated by OP, while ZK remains in a catching-up position.
Let’s review the dynamics of new projects and established players over the past year beneath the surface information.
First, on March 23, 2023, Arbitrum officially issued its token, directly helping the L2 track's TVL break through the significant milestone of $10 billion, raising the entire L2 track's TVL fluctuation range to around $10 billion. However, it struggled to surpass this bottleneck until the end of 2023.
At the same time, the Ordinals wave and the booming Bitcoin ecosystem narrative have made the heat of Ethereum L2 gradually diminish. Coupled with the resurgence of heterogeneous chains represented by Solana, the developmental bottlenecks faced by L2 itself have led to renewed discussions about Ethereum and L2 in the industry.
Especially among the L2s launched based on scaling concepts, new problems such as liquidity fragmentation and incompatibility have emerged, causing the Ethereum narrative to appear sluggish.
Until the major disruptor Blast launched in November 2023, leveraging staking interest, airdrop expectations, and an invitation system, Blast's TVL surpassed $500 million in just 5 days, overtaking established L2 projects like zkSync and Starknet, with a growth rate that can only be described as insane:
As of the time of writing, the TVL has reached $2.6 billion in less than six months, ranking fourth in the L2 track, behind only Arbitrum ($17 billion), Optimism ($6.7 billion), and Base ($5.72 billion).
Additionally, Optimism's OP Stack superchain narrative has also given rise to the representative project Base in 2023, accelerating the trend of "one-click chain creation + modularization"—according to incomplete statistics from Coin98 Analytics, by the end of last year, the OP Stack ecosystem already had over 20 L2 sub-projects (including testnets).
At the same time, various L2 projects have also accelerated their superchain ecosystem processes:
Arbitrum has laid out new networks designed specifically for gaming, social applications, and high-throughput DApp use cases, such as Arbitrum Nova, and an open-source toolkit for building L3 networks called Arbitrum Orbit, which supports developers in deploying and creating their own chains;
zkSync has launched a modular open-source framework called ZK Stack for building custom ZK Rollups;
At the Paris EthCC conference, StarkWare co-founder Eli Ben-Sasson stated that Starknet will soon launch Starknet application chains (Appchains), which can be initiated by applications using the Starknet stack, featuring customizability and decentralization;
It is also worth noting that the Dencun upgrade activated on the Ethereum mainnet on March 15 has significantly reduced the Gas fees required for transactions and transfers on L2 over the past month, visibly lowering costs and increasing efficiency—OKLink statistics show that L2 transaction fees have generally decreased by over 80% after the Dencun upgrade, with actual costs dropping to $0.10 or even below $0.05.
Against this backdrop, as we enter 2024, with the expanding modular narrative and DA concept, the increasingly numerous and fragmented L2s will undoubtedly become a new trend. Many projects are beginning to consider issuing their own L2/L3, which will inevitably make the Ethereum L2 track even more crowded, with the issue of homogeneity becoming increasingly prominent.
Finding differentiated competitive directions has become the key to whether L2 can break through in the second half.
New Insights into the Development Path of the L2 Track
From this perspective, the Dencun upgrade is far from the endpoint of the L2 landscape; the market is calling for new solutions for Ethereum L2.
In this context, some new variables regarding L2 have begun to emerge—new players in Ethereum L2, including Morph, have been gaining increasing attention from the market since the end of last year, with many keen Web3 capitalists sensing the enormous opportunities hidden within:
In November 2023, Blast completed a $20 million financing round, with Paradigm and Standard Crypto participating;
On March 3, 2024, the Ethereum Layer 2 network Taiko, based on zkRollup, completed a $15 million Series A financing round, led by Lightspeed Faction, Hashed, Generative Ventures, and Token Bay Capital, with participation from Wintermute, Amber Group, OKX Ventures, GSR, and others;
On March 20, 2024, Ethereum L2 Morph completed a $20 million financing round (including $1 million in angel funding), with top VC players in the industry such as Dragonfly Capital, Pantera Capital, Foresight Ventures, The Spartan Group, and MEXC Ventures participating;
On March 26, 2024, the modular L2 Reya Network completed a $10 million financing round, with well-known VCs such as Coinbase Ventures, Wintermute, and Fabric Ventures participating; on April 9, HashKey Group announced it would launch the Ethereum L2 network HashKey Chain, using ZK Proof technology to provide users with low-cost, efficient, and developer-friendly on-chain solutions;
Amidst this fervor, the market is further turning its attention to the Ethereum L2 track, and discussions about Ethereum's technical aspects are beginning to intensify, especially in the current context of building a prosperous on-chain application layer on L2, which has become the mainstream long-term narrative.
This article will take Morph as an example to briefly analyze the new development paths these new players bring to the L2 track and what variables they can bring to the Ethereum ecosystem and L2 track.
The "Horse Racing Mechanism" Behind Decentralized Sequencers
As is well known, sequencers are responsible for controlling the order in which transactions are packaged for submission to L1 on L2. Currently, many L2 projects operate sequencers in a centralized manner to provide users with faster transaction confirmation speeds.
However, this solution also carries significant risks—if a few centralized nodes go offline, it can cause the L2 network to be down for an extended period. Additionally, these centralized sequencers may prioritize transaction ordering based on personal interests to maximize their arbitrage opportunities, thereby capturing MEV value, delaying user transactions, or even censoring and rejecting user transactions.
Therefore, the advantages of decentralized sequencers are self-evident—they can eliminate the impact of single points of failure, ensure the decentralized nature of the network, and maintain network security and stability; at the same time, they can share the major profits of the sequencer with all Builders in the network.
As the first L2 network on Ethereum to implement decentralized sequencer design from the ground up, Morph has emphasized the importance of establishing decentralized sequencers from the beginning and has designed feasible solutions based on principles of high efficiency, low cost, scalability, and ease of maintenance:
In Morph's operational mechanism, a decentralized sequencer network allows multiple nodes (sequencers) to participate in transaction packaging and ordering, rather than being controlled by a single node.
Moreover, Morph's decentralized sequencer mechanism design has given rise to another grand potential vision: redistributing sequencer profits to on-chain project teams/DApp developers, providing more diverse and proactive on-chain products and user experiences.
In other words, in the future, Morph's sequencers can completely redistribute profits to on-chain project teams/DApps after charging users Gas fees, thus creating a new incentive mechanism. For example, project teams can receive rewards based on their contributions in a fair and transparent manner, achieving a competitive mechanism similar to "community horse racing"—with the decentralized sequencer mechanism, Morph can fully leverage the profit distribution rights of the entire network's sequencer fees as a guiding principle to incentivize DApps that contribute to Morph.
This fully utilizes the advantages of different project teams, achieving a highly market-driven competition among DApps in Morph's market promotion and innovative services, motivating these contributors to jointly realize the sustainable development of the Morph ecosystem:
A simple example is that if Morph chooses to link incentive measures to the Gas spent by DApp smart contracts and the number of active users, developers will undoubtedly be indirectly incentivized to maximize their contract's Gas expenditure and enhance their project's active user count, thus achieving breakthroughs from "0 to 1" and large-scale adoption.
Theoretically, this design concept can achieve "a hundred flowers blooming, a hundred schools of thought contending," helping Morph rapidly open up promotion and implementation at low cost while also providing users with efficient and diverse on-chain scenario services.
Finally, project teams/DApps that receive sequencer fee income can also distribute this additional profit as incentives to different types of individual users to meet their operational needs. This way, each DApp has an additional operational means to incentivize users, and Morph achieves its goals of promotion and large-scale adoption, realizing a "win-win" situation.
According to official disclosures, Morph plans to launch its mainnet and open the decentralized sequencer function by mid-year. Given the current progress of the L2 landscape, this may also be the first L2 network that developers/users can experience with a decentralized sequencer.
A Long-Term Development Framework Integrating OP and ZK
As mentioned earlier, almost all mainstream L2 solutions are derivatives of OP Rollup or ZK Rollup, and when DApps/project teams decide whether to adopt OP or ZK, the core consideration is still the trade-off between low cost and security.
Directly, while Optimistic Rollup lacks security, it is easier to achieve Ethereum compatibility, and due to its optimistic challenge nature, it generally does not incur costs for L2 state verification most of the time, making it relatively low-cost.
On the other hand, ZK Rollups, while highly secure, lack efficiency—they rely entirely on mathematics to provide higher security objectively and do not require a dispute period to ensure network security. However, achieving ZK Rollups in the short term is more challenging, as proof generation is slow and it is difficult to make it compatible with EVM.
Thus, while the vast majority of OPRs in the OP category have not implemented interactive fraud proof systems, leaving users unable to respond when they discover that OPR has submitted an incorrect L2 state and unable to supervise malicious behavior by OPR operators, at least for now and in the coming years, ZK Rollup still does not hold an economic advantage for high-transaction-volume DApps.
In light of this, many DApps may prioritize cost advantages over enhanced security, which is a reality contributing to the current dominance of the OP category. Therefore, there is a commonly accepted judgment in the L2 world that OP is the present of L2, but ZK is the ultimate future of Rollup and Ethereum L2.
The key question is, with the development of ZK Rollup, what will happen to DApps that originally chose to deploy using OP once ZK achieves a good balance between economic viability and security in the future? How will they address the technical and time costs of migrating again?
For this reason, the integration of Optimistic Rollup and ZK Rollup is seen as the future of Ethereum scaling, and Morph has innovatively proposed a responsive validity proof (RVP) that combines the advantages of both:
As a state verification method, RVP combines Optimistic Rollup with Validity Proof and uses ZK-Proof to verify the correctness of the state. After L2 accepts state changes, if a challenge is initiated, the sequencer must generate and submit a ZK-proof to L1 for verification within the challenge period. This design reduces the complexity of verification and theoretically shortens the challenge period from 7 days to 1-2 days, enabling fast, secure, and low-cost transaction processing:
In traditional Optimistic Rollup, malicious sequencers have the motive to perform a denial-of-service attack on L1 to refuse the challenge process, but since RVP is generated by the sequencer, this motive does not exist in RVP, effectively eliminating this issue and significantly shortening the challenge period.
This can also be understood as providing a hybrid solution—allowing DApps to start from a more economical configuration (OP) while maintaining the flexibility to gradually enhance security measures (ZK Proof) without making significant changes to existing infrastructure.
This also highlights the flexibility of the Morph architecture. Counterintuitively, just as alloys often exhibit superior performance compared to pure metals, Morph's hybrid solution has achieved an optimal balance between scalability, low cost, and high performance—being cheaper than ZKR while also being more secure than most OPRs without permissionless fraud proofs.
Low Cost & Operational Threshold of Modular Design
Furthermore, from the perspective of attracting project teams/DApps, the migration threshold and usage costs are core considerations in the competition among different L2s.
The degree of modularity is undoubtedly key, and Morph is divided into three important modules: the Sequencer Network responsible for consensus and execution; the Optimistic zkEVM responsible for settlement; and the Rollup responsible for data availability.
Morph employs a design mechanism similar to Ethereum 2.0, separating the consensus client and execution client to prevent invalid transactions from being included in blocks, avoiding losses of user transaction fees.
The Rollup strategy maximizes efficiency, allowing a single transaction to contain multiple batches, with each batch containing multiple blocks. Additionally, using ZK Proof functionality, the content of blocks is compressed to effectively manage the costs of L1 data availability.
At the same time, the design of multiple batch submitters allows each sequencer to take turns submitting batches to Ethereum, thus solving the single-point failure problem of a single submitter, ensuring the activity of batch submissions, and combining incentive mechanisms to ensure there are no transaction conflicts.
This modular collaborative architecture provides developers with highly attractive deployment options while enabling them to quickly adapt to new standards, reducing trial-and-error costs, and maintaining consistency with Ethereum as much as possible.
For instance, during significant Ethereum upgrades like Dencun, Morph can efficiently integrate EIP-4844, adding new features immediately and achieving compatibility with Ethereum's development path; in contrast, ordinary Rollups require a hard fork of the mainnet or contract proxy upgrades and extensive testing phases to achieve seamless interaction with existing systems.
Overall, if Arbitrum and Optimism are the leading stars of the L2 track, and Base and Blast are the rapidly rising newcomers, then Morph appears to be a potential stock that is about to emerge and holds promise for the future.
Can Morph and Others Bring a Turning Point for L2 in the Second Half?
Currently, new players like Morph are still only online on testnets and have not yet issued tokens, so it is possible to objectively look at their competitive advantages and potential growth space compared to other L2s.
As mentioned earlier, in the current Ethereum L2 ecosystem, competition in underlying performance may not be the mainstream narrative point that the public focuses on: compared to improvements in scalability and performance, how to attract more and more developers, project teams, communities, and markets to create a prosperous ecosystem with various use cases in AI, DeFi applications, NFTs, and GameFi is the breakthrough point to avoid the awkward situation of "high valuation" but stagnant on-chain construction.
After all, time seems to be a cycle; in 2021, we marveled at how Axie Infinity swept Southeast Asia, bringing a new wave of incremental users to Web3, and now in 2024, we have returned to the beginning of that time, facing the unique traffic dilemma of the Web3 world amid accelerating wild expansion—Web3's existing user base has peaked, while the entry of new users faces numerous challenges.
In this dimension, Morph's unique positioning as a "consumer-grade L2" aligns well with this incremental demand—on one hand, the scenarios involved in consumer-grade applications are rich enough, and there are numerous points for the ecosystem to exert effort, covering everything from satisfying spiritual entertainment and leisure to meeting material needs with on-chain assets through continuous ecological construction.
On the other hand, the user market targeted by consumer-grade applications is also broad enough. In the current context of blockchain seeking to break through, by providing low-threshold and seamless experiences, it can become the gateway for massive Web2 users to enter the Web3 world.
Especially with the long-term development framework integrating OP & ZK, the "horse racing mechanism" behind decentralized sequencers, and the low cost & operational threshold of modular design mentioned earlier, this combination is essentially a solution for internal development of L2 driven by the market, utilizing different resources, talents, technologies, etc., to achieve transparent and fair distribution.
First, the long-term development framework integrating OP & ZK and the low cost & operational threshold of modular design can effectively lower the migration and development thresholds for developers and project teams/DApps, providing highly attractive deployment options while enabling them to quickly adapt to new standards and reduce trial-and-error costs, maintaining consistency with Ethereum as much as possible.
On this basis, developers can even make minimal changes to their code, maintaining high compatibility with Ethereum's operational execution side, thus lowering the usage threshold for developers on Morph to the minimum. This means that different on-chain projects, especially leading protocols, can quickly integrate and enter a positive cycle.
Secondly, the "horse racing mechanism" behind decentralized sequencers can fully leverage the advantages of different project teams, achieving highly market-driven competition among project teams in Morph's DApp ecosystem construction, market promotion, and service usage, incentivizing these community Builders to jointly realize the sustainable development of the Morph ecosystem.
Also, because it is currently in the early stages of ecological construction, Morph has launched a series of ecological activities and long-term plans in recent months:
On March 25, Morph announced the launch of the Sparkloom Builder Program, lasting 4 months, including an online hackathon and incubation program, with a hackathon prize pool of $20,000. Winners will be invited to join the Morph incubation program, and the final winners of the incubation program will have the opportunity to receive up to $100,000 in funding and share 30% of the total Morph airdrop;
On April 9, Morph co-hosted the Hack.Summit Hackathon competition with BeraChain, Solana, and The Graph, providing various workshops and lectures around different application scenarios of Web3 technology, with prizes for winners to promote the development and application of Web3 technology;
On April 13, Morph held an offline Meetup & Mini-HackerHouse event in Shanghai in collaboration with OpenBuild, Chainlink, SNZ, EthPlanet, and MaskSolidity, assisting developers interested in blockchain to enter the Ethereum ecosystem to build;
Additionally, Morph launched the Sparkloom incubation program, running from April 29 to June 30, primarily targeting projects in AI, DeFi, GameFi, Infrastructure, NFTs, middleware/tools, etc. Winners will receive mentorship from institutions such as Dragonfly, Pantera, LayerZero, The Block, Nansen, Pyth, and comprehensive support including grants of up to $100,000 for individual projects and 30% of Morph's initial airdrop, as well as quarterly returns of the full first-year sequencer fee profits;
This can leverage the existing mature user base of crypto practitioners to help Morph rapidly open up promotion and implementation at low cost; from the perspective of ordinary users, it also serves as an effective channel for "C2E" (Contribution-To-Earn)—encompassing different types of user groups from various on-chain protocols, providing diverse reward opportunities for on-chain users, where contribution equals reward. Ordinary users can earn transparently and fairly distributed rewards by contributing to on-chain services designed by different B-end institutions (using protocols, holding positions, lending, etc.).
This way, each institution has an additional means to incentivize users and a new choice for income, while ordinary users have diverse opportunities to share in Morph's network sequencer fee profits, achieving Morph's goals of construction, promotion, and large-scale adoption, realizing a "win-win" situation. If this can be steadily advanced, it may well be a good path from self-circulation to positive feedback.
If "Web3 in 2022 is like Web2 in 2002," then now may be the right time to act, focusing on how to unlock consumer-grade scenarios and attract more incremental new users—whoever captures the billions of future users in the Web3 world will win this war.
Conclusion
Of course, new L2 solutions like Taiko and Morph are currently in very early stages, and the core team's focus remains on developing and improving the underlying infrastructure. However, with the L2 track developing vigorously and crypto giants like Coinbase and ConsenSys making their moves in L2, the second half of L2 may have already begun.
Everything that has happened is prologue. From a macro perspective, if all goes well, whether it's potential stocks like Morph and Taiko or rising stars like Base and Linea, they will lay the foundation for a new wave of DApps, new users, and ultimately the growth of Ethereum's ecosystem TVL, which may unfold in a completely different manner from the previous wave of L2/public chain frenzy.
Especially with Morph's integrated solutions stirring the waters, if it can steadily advance through the long-term development framework integrating OP & ZK, the "horse racing mechanism" behind decentralized sequencers, and the low cost & operational threshold of modular design, it may well be a good path for L2 from self-circulation to positive feedback, full of imaginative potential and challenges.
