GM, this is Milk Road PRO, the crypto newsletter that gives you multiple angles like an isosceles triangle. Layer 2s have become the hottest real estate for the crypto world to build on top of this cycle. In the last cycle, Ethereum reigned supreme while faster and cheaper Layer 1 blockchains like Solana, Avalanche, and Terra Lunaaimed to dethrone it and become the new prime properties in crypto.Some have failed… “Sup, Do Kwon 🤡” – Morgan Freeman
Meanwhile some have continued to ship, aiming to become a legitimate contender in the blockchain world (looking at you Solana 🫡). Today, Ethereum is fighting back against these fast L1s by moving down the tech stack and powering Layer 2s to offer an abundance of cheap blockspace on its behalf. 😃 In the last few months, Ethereum L2s are offering blockchain transactions at less than a penny, effectively solving the issue of expensive blockspace that had plagued Etheruem since its early days of fame in crypto. ✨
This was Ethereum's scaling roadmap all along, to remain maximally decentralized at the base layer and use L2s to execute cheap blockspace for the masses — a very different strategy than that of Solana’s and other L1 blockchains.
Which strategy will win in the end? Only time will tell. It’s still too early to pick winners, though we think it won’t be just one. 🤝 But today’s report isn’t about the winning blockchain strategy… We’re focusing on Layer 2s and their tokens, exploring whether they are assets worth investing in right now. 🧐 If L2s are a clear contender for the future of blockspace, shouldn't their tokens perform well? Well, if you have been paying attention to the charts, you might have noticed that L2 tokens look similar to the Terra Luna chart in 2022. 📉 Ok ok, we are exaggerating, they aren’t THAT bad. But the last few months haven't been too nice to L2 tokens… 😅
To be fair, $SOL has experienced some volatility too over the past 60 days. However, we remain bullish on Solana, and you can see why by reading our last week's report here.
But the question for today is.... Do we feel the same bullish vibes for L2 tokens as well?
Let’s go down the rabbit hole and see what we uncover. We’re going to break today’s report into:
- The good, the bad and the ugly of L2s right now
- Future considerations for the L2 ecosystem
- Which L2 assets are a good investment this cycle
And then finish off with some thoughts and key takeaways for your portfolio. Vamos. ⤵️
THE GOOD ABOUT LAYER 2s 😁
Fundamentally, at least in terms of onchain metrics, L2s appear to be cooking! 🍳
The amount of wallets interacting across the L2 ecosystem is growing almost every month, even while prices have been heading to the shitter. 🚽
The amount of transactions across L2s continues to rise and appear to be growing exponentially on a monthly basis.
Crypto’s most prominent use case is stablecoins and there’s no doubt in our minds that whichever blockchain(s) become the home of stablecoins will do really really well in the long term.
The stablecoin market cap on L2s is growing massively, about to surpass $10 billion and is showing no signs of slowing down anytime soon.
For context, L2s combined are the 3rd biggest blockchain for stablecoin market cap.
We can continue to list every relevant metric for blockchains and L2s will report nothing but all-time highs and growing results across the board.
In terms of activity and adoption L2s are on a roll.
But of course, as we suggest time and time again, protocols must generate sustainable revenues (or have a path forward for revenue) to remain relevant in crypto.
The good news once again is that L2s are quite profitable, generating a combined $15 million in the month of June.
Arbitrum, Base and Blast have each generated more than $3.5 million last month. But will those revenues remain? More on this later in the report. 👀
THE BAD ABOUT LAYER 2s 😢
You could consider this chart bad or ugly, it just depends on your perspective, but there’s no doubt that L2 token prices are down bad! 😬
To be clear, all crypto assets are down bad in the last few months – this isn’t specific to L2s. The entire crypto market is down 14% since March.
Even $SOL dumped a whopping -42% from its top in March to its bottom in July.
But one of the key differences between Solana and L2s is that there is only 1 $SOL.
There’s currently 61 Layer 2s and another 79 on the way. 😣
If you’re bullish Solana, you simply grab $SOL. If you’re bullish L2s, what do you buy…?
This is an obvious fragmentation problem for L2 tokens as an investment. 🧩
Before we share our thoughts on this problem and ultimately provide the 4 avenues to capitalize on L2s, let’s move to the ugly…
Uh, Oh… 😧 The rest of this report is exclusive to Milk Road PRO members!
WHAT’S LEFT INSIDE? 👀
- Key considerations when investing in L2 tokens
- The future of L2s
- 4 ways to capitalize on L2s
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