214 - L2 Tokens: Bullish or Bearish? with Sassal, Jordi, & Ippolito
Mar 18, 2024
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Experts explore the value of Layer 2 tokens, their business models, and capturing upside. Discussions on worthless governance tokens, vertically-integrated chains, and the need for tokens. Delve into L2 experimentation, value accrual, and the complexity of valuations.
Investors buy Layer 2 tokens based on narratives like gaming without deep analysis of fundamentals.
Layer 2 chains like Immutable X and Base have unique business models driving value and adoption.
Layer 2 networks explore revenue models beyond fees, focusing on profit-sharing and unique economic mechanisms.
Balancing foundation-building revenue models and promoting creative experimentation is crucial for sustainable growth in Layer 2 networks.
Valuation dynamics of Layer 2 tokens are influenced by ecosystem narratives, strategic partnerships, and investor behavior.
Deep dives
Investing in Layer 2 Tokens during a Bull Market
During a bull market, the high valuations and growth of Layer 2 tokens like Immutable X and Base are driven by investors' behavior. Investors may buy these tokens based on narratives, such as gaming or platform use cases, without deeply analyzing their fundamentals. These tokens serve as a convenient index for exposure to specific ecosystems, attracting investors seeking broad ecosystem exposure rather than specific token utility.
Different Business Models in Layer 2 Strategies
Layer 2 chains like Immutable X and Base follow distinct business models. Immutable X focuses on collaboration with applications to align incentives, fostering a gaming narrative and favorable market sentiment. Base benefits from its association with the Coinbase ecosystem, indirectly boosting the value of the underlying Layer 2 chain. These unique approaches showcase how diverse business models drive value and adoption in the Layer 2 space.
Balancing Revenue Models and Value Capture
Layer 2 networks explore diverse revenue models beyond traditional fees, emphasizing profit-sharing agreements with applications and unique economic mechanisms like refundable NFTs. The challenge lies in capturing ecosystem value beyond sequencer fees, promoting sustainability and value sharing across the network. Innovative approaches, such as yield generation through tangible economic activities, aim to enhance long-term token valuations and ecosystem growth.
Challenges and Opportunities in Layer 2 Growth and Experimentation
Layer 2 networks face a spectrum of challenges and opportunities in forging sustainable growth and differentiation. Striking a balance between foundation-building revenue models and fostering creative experimentation in applications is key. Continuous innovation, strategic partnerships, and community-centric approaches shape the evolving landscape of Layer 2 networks, driving narratives, valuations, and market dynamics.
Strategies Behind Network Valuations and Industry Dynamics
The valuation dynamics of Layer 2 tokens reflect nuanced strategies and narratives cultivated by ecosystems like Immutable X and Base. Investors consider factors such as the association with prominent chains like Coinbase or the utility within gaming ecosystems, driving market sentiment and token valuations. The interplay of network success, strategic partnerships, and investor behavior influences the growth trajectories and valuations within the Layer 2 space.
Ethereum as Index of Layer 2s and Primacy of ETH
Investing in Ethereum can serve as an index for exposure to layer 2 solutions, capturing the overall upside. In the short term, tracking activity flow and mindshare, assessing quality founders and fundamental projects can guide investment decisions. Long-term, Ethereum has been viewed as a solid bet for outperformance due to its foundational importance.
Network Effects via Ethereum Migration to Layer 2s
Monitoring the amount of Ethereum migrating to layer 2 solutions could indicate potential success. Layer twos attracting significant Ethereum deposits might indicate future success and network effects. Tracking this movement of Ethereum to layer twos could provide insights into the market dynamics.
Short-Term vs. Long-Term Investment Strategies
Short-term strategies involve assessing risks, tracking fund flows, and focusing on quality projects attracting Ethereum. Long-term investment considerations center around Ethereum as a fundamental bet for stability and potential outperformance over an extended period.
Trade-offs, Experiments, and Fragmentation
Navigating trade-offs in user experience, decentralization, and interoperability will be crucial as layer 2 ecosystems evolve. Experimentation, fragmentation, and standardization will impact the future landscape of layer 2 solutions, presenting challenges and opportunities for investors.
Risks and Rewards in Layer 2 Investments
The dynamic and evolving nature of layer 2 solutions presents both risks and rewards for investors. Assessing the state of interoperability, network effects, and Ethereum migration can guide investment decisions. Ultimately, the market's trajectory remains uncertain, requiring a nuanced approach to capturing the potential upside of layer 2 investments.
0:00 Intro 7:50 L2 Value Capture 13:37 Short-Term vs Long-Term 17:30 L2 Business Model 28:24 Worthless Governance Tokens? 42:04 Immutable & Base 53:40 Vertically-Integrated Chains 1:05:24 Do L2s Need Tokens? 1:15:38 L2 Experimentation 1:32:44 Capturing L2 Upside 1:38:44 Closing & Disclaimers
------ RESOURCES
L2Beat https://l2beat.com/scaling/summary
ETH in 2024 https://www.youtube.com/watch?v=0rPF8zNnfnE
Anthony Sassano https://twitter.com/sassal0x
Mike Ippolito https://twitter.com/MikeIppolito_
Jordi Alexander https://twitter.com/gametheorizing
------ Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research.
Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets.
See our investment disclosures here: https://www.bankless.com/disclosures
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