Ethereum at Risk of L2 Balkanization – Trustnodes

Ethereum at Risk of L2 Balkanization

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Uniswap liquidity on Arbitrum, Sep 2021

The dawn of second layers (L2) is slowly making its way through the crypto tubes with locked sums up by another half a billion on all tracked L2s.

Arbitrum is attracting much of it because it has Sushiswap and Curve, with $2.7 billion locked. dYdX has seen a 50% growth to $370 million with the second main contender for generalized L2 scaling, Optimism, currently at just $245 million.

That may be in great part because Optimism has a secret whitelist. It’s not know what dapp is in it, with the company apparently keeping it in “just a google form,” we’re told.

“We were really disappointed in the non preferential treatment we got,” Joseph Delong of Sushiswap said. “First in line, first to deploy. That’s fair,” was Optimism’s public response.

“We have been coordinating with Sushi. The challenge has been onboarding larger/complex projects with the current OVM compiler. Which is why Optimism is basically reducing the ovm to have a minimal diff with the evm for the next network upgrade that is scheduled for Sept. 28th,” a spokesperson for Optimism said.

Sushi on the other hand says the “Optimism team gave preferential treatment to the project backed by their backers.”

Venture Capitalists (VCs) that have invested in Uniswap have also invested in Optimism. On the other hand Alameda Research of Sam Bankman, who ‘rescued’ sushi and kind of took over, although sushi spokepeaple say he now has no influence, has invested in Arbitrum.

Sushi is on Arbitrum, but not on Optimism. The project however says their L2 strategy is to deploy on them all. Presumably that will be the approach of most dapps. Uniswap for example has deployed on Optimism as well as on Arbitrum.

It has just $37 million of liquidity on Arbitrum however (pictured), and $32 million on Optimism, compared to $2.6 billion on mainchain.

Part of that may be because a lot of these dapps are almost totally connected to the point a dapp on its own is kind of useless without the other ones.

To illustrate, we wanted to test what we’ll jokingly call a house of cards. So first we get some SNX on a centralized exchange because it doesn’t cost $60 in fees, but just $5 to transfer it to our Metamask.

Then we try stake this so as to mint some sUSD. We wanted to use this sUSD in a Curve pool to get some CRV. The CRV was then going to go to Convex to get some CVX.

So we’re yield all the way, and house of carding because from $1 we’re in theory creating some five tokens as there’s also veCRV (voting Curve) and cvxCRV (voting Curve but through Convex).

Brilliant right, or dum, but whatever some amount locked and forgot for naught or king of the world.

The problem is to do this on mainnet probably costs us at least $400 taking into account all the ‘approve’ pre-transactions. So great opportunity to test this L2 stuff.

We can’t, because SNX is on Optimism, Curve is on Arbitrum, while Convex is on neither and thus for our purpose they all become useless.

Curve is also having some mini-problems of its own on Arbitrum mainly due to low liquidity, with L2s effectively creating two different dapps where liquidity is concerned, but this is to be expected in these day zero situations so we would have been happy to pay what would have cost $20 on Arbitrum or Optimism to see what this carding would translate to in raw numbers with something like $100.

But we can’t for now. That may change, SNX may deploy on Arbitrum or Optimism may drop it’s whitelist, although the project say they don’t quite have a timeline of when they may do so.

Then if the dapps re-create the current universe on these and other L2 chains, the user decides. However whatever the L2s may say, they are fundamentally competitors, and presumably they know very well that one of them has to be dominant as liquidity fragmentation will converge.

That makes this a bit of a Hunger Game for the L2s themselves as they may see it a winer takes all. So Arbitrum hasn’t open sourced itself fully while Optimism has a whitelist.

Arbitrum’s launch moreover may have cost some investors as that Nyan token has gone from $8 to $0.50. There have also been some problems with the sequencer which kind of paused the chain, with the debut not quite smooth.

But for now no one quite knows whether this is just expected newly launched pains or the sign of awaiting replacement with the L2 space having just began.

The gains of course can be immense. Validators get a cut of the fees, and eventually you’d think that will reach the point of sufficient to cover cost plus some profit. The eventual one that gets full adoption will be decentralized. To guard against all things it will probably need a token that shares revenue with validators while the fees being in eth. The value of that token, depending on the execution of the L2, is then potentially a second eth.

So there’s vital interests on how all this develops with any risks of balkanization probably short term as eventually network effects will impose themselves.

To not be chained from that imposition in a decade or two, all have to be on guard and effectively vote through liquidity for the platform that has the most functionality with the least ability for abuse.

Just what that is, will probably be answered during the bear if other contenders even launch prior to next bull, with the atmosphere now more just try all the things and see what works as the price of any balkanization currently is very small.

Eventually there may be solutions to move funds from L2 to L2 through L2 banks of sorts, but liquidity providers (LP) tokens probably can’t talk through chains so what we’re looking at basically is the rise of a new eth and thus those are the criteria that should be applied, as well as the expected behavior, when judging L2s.

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