IOSG Founder: Navigating the Growth Challenges and Breakthroughs of Layer2 in the Eyes of Investors

Layer2 Summer or Challenges？

I recently heard from a few friends working in blockchain studios complaining that many studios had invested significant resources and transaction volume on zkSync and Loopring, only to find their efforts going in vain. Instead, they inadvertently contributed tens of millions of dollars in transaction fees to major L2 solutions. Consequently, when these studios witnessed the launch of new L2 solutions, they became less enthusiastic about generating transactions.

We initially anticipated a thriving L2 summer that didn't rely on studios, but now we realize that as studios gradually fade away, the transaction volume and TVL of major zkEVM solutions have not met the expected growth. When speculators in the market no longer participate in L2, no longer breathe life and vitality into the ecosystem, we face the challenges of stagnant growth and ecological contraction.

Investor Perspective on L2 Competition

From an investor's perspective, the investment logic behind laying the groundwork for L2 infrastructure is based on our belief that these teams will engage in multifaceted ecological competition with ample capital support, encouraging a proliferation of applications within the ecosystem. However, at present, most L2 arms races have not focused on ecosystem development. They still allocate a substantial amount of funds to recruit high-profile ZK experts and technical talent from projects like PSE (Public Sector Ethereum). While this strategic approach is justifiable in terms of technical research and talent acquisition, I believe that a high-throughput Rollup solution without applications is of little value and remains a theoretical construct without real-world utility.

Challenges in the Growth of the L2 Ecosystem

The natural growth of the ecosystem will indeed be a lengthy process. If this arms race cannot lead to an explosive growth of the application ecosystem for Ethereum, and if there continues to be excessive and redundant investments in low-level technologies such as share sequencers, Bytecode, and other foundational aspects, we may not witness the emergence of a thriving ecosystem.

Currently, the competition for ecosystem applications in the L2 space is fierce. If an application aligns its interests with one L2 solution, it can become exceptionally difficult to gain support from other L2 solutions. In the current stage, these applications are also hesitant to migrate to different L2 chains because such a move could jeopardize their ability to receive grants from their original L2. Therefore, selecting suitable partners becomes a significant challenge for applications.

Due to these factors, each L2 solution aims to secure exclusive applications, resulting in territorial battles when multiple L2 solutions host the same applications. Once applications grow, they may consider deploying on application-specific chains or multiple L2 solutions. The dilemma for L2 solutions lies in their uncertainty about whether these applications will stay on their platform in the future, leading them to be cautious about excessive investments.

We also frequently observe L2 applications that are still in their early stages struggling to secure grants or incentives on certain L2 platforms. This forces them to seek financial support on different L2 platforms just to survive. Are there any L2 solutions that have not publicly disclosed their ecosystem grant programs？

Breakthrough Approach 1: Top L2 Projects Taking Initiative in Ecosystem Building

We certainly don't want to see a situation where each L2 solution operates in isolation, which results in a relative fragmentation of the Ethereum ecosystem. While competition is a natural outcome in a competitive market, we believe that incubating and supporting a diverse range of application products through a combination of L2 solutions is essential for the entire L2 ecosystem to thrive.

Unicorn companies valued at over a billion dollars should absolutely take on the responsibility of ecosystem development. This is of paramount importance. Ecosystem development can take many forms, such as StarkWare and Optimism focusing on the FOG game and providing support for the Dojo and Mud engines. Arbitrum's grant incentives have performed exceptionally well in supporting the ecosystem. In a short period, the trading volume and user experience of GMX, an application exclusively launched on Arbitrum, rivals dydx. They've also co-invested in TreasureDAO's game platform (referred to as Chain 4399 in the industry) with IOSG. Optimism and Coinbase launched the Base chain based on Opstack, and it has witnessed the emergence of phenomenal applications like https://Friend.tech. In less than two months, the protocol revenue has exceeded 20 million USD, with a TVL of over 20 million USD.

What they have done is quite simple: they have harnessed the network effect to attract developers within the ecosystem and have incentivized a diverse range of innovation and investments through protocol tokens. However, I've recently discussed with some zkEVM L2 teams, and many of them believe that providing airdrops and incentive expectations, including how to internally support ecosystem projects, do not encourage innovation to emerge. They prefer a more hands-off approach, letting projects within the ecosystem naturally compete.

On this front, I believe that not making substantial investments in tokens and funds to build the ecosystem is a more aggressive strategy that will yield advantages in terms of market capacity and positioning in the future. Platforms that do not execute a certain level of investment will likely encounter development bottlenecks.

Breakthrough Approach 2: Emphasizing Collaboration and Strategic Alliances in Competition

In theory, the competition in the L2 space is different from L1. Ethereum values decentralization and open collaboration, where various teams follow different technical paths and challenge different technical implementation difficulties. All scaling solutions aim to help Ethereum establish a stronger network effect.

With Ethereum transitioning from the ETH2.0 roadmap to Rollup solutions, the responsibility for ecosystem technology now falls on L2. The industry's future depends on the entry of super applications and a massive user base. Capital always follows Ethereum's roadmap at the earliest opportunity. Given the valuations of several billion dollars and capital investments exceeding 5 billion dollars, how should these be channeled downstream toward user-facing application innovation？

I believe that apart from continued heavy capital investments in supporting the application ecosystem, zkEVM represents the industry's substantial potential for innovation and should shoulder the mission of repositioning the ecosystem's development roadmap. L2 should learn from DeFi's Lego approach. Entrepreneurs and developers should not merely replicate similar technical service stacks but explore different perspectives, generating new ideas and directions, and experimenting with more creativity and possibilities.

In open-source protocols and directions, it makes sense to use a common standard as much as possible to reduce the wasteful duplication of resources. In terms of competition, it's essential to practice a strategy of collaborative competition, deploying more financial resources towards breakthrough applications. In the race to pioneer innovative applications, every platform should strive to support applications like GMX or Friend.tech, no matter the cost.

The Grand Finale of a Flourishing Ecosystem - L3 and Application Chains Begin to Thrive

The industry is currently going through a phase of challenging innovation. During the bear market, we've witnessed many moments that have left us sighing. Many first-time founder entrepreneurs face various difficulties, and emerging from these challenges requires L2 project founders to truly understand their importance in the industry. During such difficult times, it's not just about competition but also about fostering more collaboration to encourage and support a flourishing Ethereum ecosystem.

Mainstream VCs and L2 projects can contribute to the development of the developer environment and developer ecosystem. The industry should be willing to support projects that don't necessarily have their tokens but provide value to other projects. This means building up the open-source community, enhancing the developer experience, frontend applications, and developer education and training. I firmly believe that an L2 Summer driven by application explosions can lead us out of the bear market.

When dydx chose to leave Starkware, they decided to deploy their application chain on Cosmos. More and more application projects are moving away from mainstream L2 solutions and redefining their valuation logic and product architecture, combining infrastructure and applications. At the same time, we see the emergence of Rollup as a Service projects like Conduit, Caldera, and Gelato deployed on opStack, which are strongly supporting the gaming and application ecosystem.

For example, Caldera helps protocols and games build small, temporary features. Each feature takes 2 to 5 engineering days and offers highly customized application features with monthly and feature-based payment options. Gelato is assisting Astar in deploying zkEVM on the Polygon network, and they charge monthly fees based on Raas. Emerging projects like Arbitrum Orbit, Risc0, Nil foundation, and others are competing and building ecosystem protocols within this new Raas landscape.

In the past year, IOSG's investment strategy has shifted from 80% in infrastructure to the current 60%, while the investment focus on applications has increased to over 40%. We have high hopes for Asian teams in innovative fields such as product-user interaction, AI-driven applications, social games, and more. We will support these application teams to collaborate with various L2 solutions and gain broader ecosystem support.