Boom1 marked the rise of Bitcoin in 2013. Boom2 in 2017 was centered around Ethereum and ICO mania. Boom3 brought us Ethereum Alternatives, DeFi and NFTs. As we wander the depths of the 2023 bear market, we’re revisiting each crypto sector to see how it performed during Boom3 and formulating our plan of attack ahead the next bull market – Boom4.
- #49 Boom4 Predictions – Part 1: Bitcoin
- #50 Boom4 Predictions – Part 2: Ethereum
- #51 Boom4 Predictions – Part 3: ETH Killers & L2s
- #52 Boom4 Predictions – Part 4: DeFi, Web3, DAOs & NFTs
Today, we’re looking at ETH killers, alternative Layer 1 blockchains (L1s) and Ethereum Layer 2s (L2s).
Boom3 saw the rise of dozens alternative layer 1 general purpose smart contract platforms, aka “ETH killers”. Chains like Avalanche, Solana, Fantom, Binance Smart Chain, Cosmos, Tezos, Polkadot, etc. all believe they can out perform Ethereum in cost and speed – but is that enough to attract users?
Apparently not. One thing all these chains had in common during Boom3 was large “liquidity mining” programs, aka they gave away millions of dollars in free crypto to attract people to their chain. This made it easy to drive demand, but is it sustainable? How does a platform even afford to give away money?
Liquidity Mining Programs
Projects like Avalanche set aside large portions of their token for liquidity mining programs. They give these extra tokens to projects building on their platform and instruct them to reward it to their users as incentives. As a result, the yields all go up as well – prior to the liquidity program, for example, you could get 3% for lending our your AVAX. And now it’s ~38%, all because you’re getting a bunch of AVAX on top of the rewards with the fees you are earning. This is what causes the mania and why we start seeing prices 2x, 3x, 10x…
For example, Avalanche launched a $180 million liquidity mining program in late 2021, and the price went vertical (~$20-$150 over a few months). This method of incentivizing new users is highly effective and can be thought of as a marketing budget. Although it is a short-term technique, the hope is that users will stick around and continue to use the platform.
Are “ETH Killers” Dead?
Ethereum is the general purpose smart contract platform – you can do anything with it. NFTs, gaming, DeFi, Web3, the list goes on. Instead of trying to compete directly with Ethereum, we might start to see platforms become more specialized. For instance, Fantom’s focus on DeFi last cycle made it stand out from the crowd. I wouldn’t be surprised to see a chain focus on NFTs.
Obviously cost and speed are important, but as we discussed in the Ethereum episode, it comes at the cost of less decentralization. Something like Binance Smart Chain (BSC) became wildly successful because they essentially took Ethereum and got rid of all the decentralization, ran their own validators, and relaunched it.
Decentralization: How Important Is It?
The success of BSC shows that decentralization is of no concern to many crypto users. It’s the same in the rest of the tech world – most websites are run on Amazon Web Services, and most of the growth in the last decade has been from enterprise companies and conglomerates. So why don’t most people care?
One of the big trade offs with decentralization is that the more decentralized something gets, the slower it becomes. Ethereum is sort of like a government – there’s a lot of hoops to jump through and it’s not cheap, but it’s transparent. On the other hand, centralized chains offer the advantage of speed – which is important in a cycle where people are trying to make money fast.
All that considered, none of the chains were able to “kill ETH” even with their centralization. Now, the battle rages on – to L2s!
L2s: An Overview
Layer 2 is the faster, cheaper layer on top of Ethereum. Think of Ethereum as the database – it’s slow, where all of the world’s data is stored. L2s, on the other hand, are where the processing will be offloaded to.
The way it works is that many transactions are combined into “rollups” – several different technologies exist for how this is done. Ultimately, this allows many transactions to be processed at once while only one interaction with the base layer is needed.
There are lots of projects to keep an eye on – Arbitrum, Polygon, Optimism. These are all L2s being built on Ethereum that roll up tons of transactions together. They then do one major transactions and peg those to the Ethereum blockchain.
From a user standpoint, there’s nothing but benefits – it’s faster and cheaper, for one. You can do the same DeFi things as before, use the same dApps you are familiar with and continue to interact with most of the smart contracts you are using. When it comes to fast trades or flipping NFTs, the speed (and fees) of L2s are going to be what you’re after.
These L2s are, in a way, leveraging some of the security benefits of Ethereum and its decentralization. It’s almost like saying, “Ethereum is here to stay, so we might as well build on top of it.” This is a bullish outlook moving forward, and it’s likely we’ll continue to see more L2s during the next cycle.
It’s also important to note that Ethereum wants users to move to L2s. They are actively designing the base layer to be inoperable with all these new L2 technologies, and they want users to be interfacing with only L2s. Perhaps in the future, users will think they’re using Ethereum but instead they’re using an L2 without even realizing it.
Polygon / MATIC
Polygon is not only its own blockchain but they’re also building an Ethereum L2. Polygon is the blockchain, MATIC is the token. There’s a lot of momentum – they’ve got a ton of impressive partnerships in the pipeline:
- Stripe – Payouts in USDC over Polygon – instead of to bank accounts
- Reddit – Millions of NFT avatars minted on Polygon
- Starbucks – Starbucks Odyssey loyalty program
- Adobe – Enable NFT marketplace on Behance, creative design community
- Instagram – Users can mint and sell NFTs directly within the app
- Robinhood – Crypto wallet exclusively on polygon
This is a big deal, and it could drive a lot of demand in the next cycle.
Do End Users Care?
To the average person, the technology doesn’t matter as much as what you can do with it. In the future, we’re likely to see blockchains being used “under the hood” while the general consumer isn’t necessarily “aware” of it. Loyalty programs and paycheck platforms are examples of use cases that are currently happening, but wouldn’t necessarily involve the end user needing to know anything about cryptocurrency. This is huge for adoption.
The Internet itself is much the same – users are interacting with Google Cloud and Amazon Web Services all day long, but generally have no idea they are doing so.
This is why these partnerships – like the ones Polygon has acquired – are so important. They allow for the creation of native tools that bridge the benefits of what crypto is to the end user without them having to do anything new. People won’t care what it’s running on, they’ll just notice the benefits!
Issues with L2s
One issue with all these alt chains is that DeFi liquidity is fragmented across them. If you want to do a swap on Uniswap, for instance – what chain are you doing it on? The only liquidity available to you is the liquidity on that chain.
ZK rollups will eventually enable the ability to have “cross roll up liquidity.” This means that the L2 you’re on won’t even matter! A billion dollars worth of USDC across all the rollups could have a shared liquidity pool, and that means you’d have access to it no matter which L2 you’re on.
Portfolios and Predictions
So do ETH Killers and L2s make for good investments in Boom4? Gerbz will continue to keep his portfolio primarily in “blue chips” (BTC/ETH) while reserving ~25% for speculative trades throughout the cycle. He’ll keep an eye on “where the energy is flowing”. Where are the meme coins launching? What are people excited about? Then he’ll pick up tokens – not for a long term hold, but just for a trade.
As for L2 tokens like Optimism’s OP or the potential of an Arbitrum airdrop, they’re essentially just governance tokens and have no real use. Still, they’ll likely see lots of speculative trading around them as they’re used to incentivise the platform.
Buying L1 or L2 tokens during the bear might still be a bit premature, but we’re keeping an eye on them. Which of these tokens move along with the rest of the market? If you notice certain Alt L1s and L2s aren’t “along for the ride” so to speak, they might not perform well in Boom4.