Keep up with the latest in crypto research as we share the insights from leading institutional research players.
In this edition, we share what Cumberland sees in the markets analyzing Ethereum Layer 2 Tokens.
One surprising aspect of crypto markets this year has been the dramatic underperformance of Ethereum L2s. Outside of RON, which is up about 60% on the year, every single L2 token is dramatically underperforming ETH’s +65% YTD performance. In fact, most L2 tokens are outright down on the year, an impressive feat given the overall state of the bull market… and generally, they’re down a lot. OP, MATIC, and ARB are down 33%, 26%, and 24% respectively. That means that 1 ETH invested in OP at the beginning of the year is only worth 0.4 ETH today. This underperformance is not just due to the ETH ETF, or due to a broader altcoin underperformance. The L1 market shows a healthy dispersion this year: some L1s are outperforming (TON +197%, NEAR +97%), while others, like APT and AVAX, are underperforming. There seems to be something specific about the L2 market that is leading to an underperformance. There are a few possibilities, and the truth is that it’s probably some combination of the above:
There is really only one thesis for L2s: Volume will move from Ethereum Mainnet to L2s, and therefore value will accrue to L2 tokens rather than ETH. This is a convincing thesis, but the problem is that it is one thesis that needs to serve multiple L2 tokens. In the heyday of 2020, anyone holding this thesis would likely have just scooped some MATIC; it was really the mainstream L2 with a token. Anyone holding this thesis today is looking at MATIC, ARB, OP, STRK, RON… the investable universe has gotten larger while the overall capital investing in the thesis hasn’t.
There’s oversupply from unlocks. Last week, $82m of OP unlocks hit the market; the week before there was nearly the same amount of ARB. L2 tokens are also typically used generously to build the ecosystem, whether through DeFi incentives or through private BD enterprise deals, and it’s hard to fight that flow even when TVL numbers are going up.
L2 tokens are not the only way to invest in the L2. If a trader has conviction that a particular L2 is going to grow in any of its key metrics (TVL, Volume, unique wallets), it might make more sense to purchase a memecoin in the ecosystem, or maybe a DEX governance token. Base doesn’t have its own token, but traders have expressed their conviction in the Base ecosystem through memes on the network.
There’s fundamentally no such thing as an L2 Maxi. L2s are a scaling mechanism, and by their nature, they’re a cheaper alternative to Ethereum; if anything, L2s are the idea that ruin Ethereum Maximalism. L2s are relatively easy to create as well; there will always be more, so there is very little moat.
This is all observation, and not prediction. L2 underperformance may continue, or the sector could bounce. It does imply that any L1 that reaches critical mass in user base has a moat that L2s cannot have, and therefore bear a closer look; particularly blockchains that can scale within themselves (such as Avalanche with its subnets). Happy Trading!
Disclaimer
The information (“Information”) provided by Cumberland DRW LLC and its affiliated or related companies (collectively, “Cumberland”), either in this document or otherwise, is for informational purposes only and is provided without charge. Cumberland is a principal trading firm; it is not and does not act as a fiduciary or adviser, or in any similar capacity, in providing the Information, and the Information may not be relied upon as investment, financial, legal, tax, regulatory, or any other type of advice. The Information has not been prepared or tailored to address, and may not be suitable or appropriate for the particular financial needs, circumstances, or requirements of any person, and it should not be the basis for making any investment or transaction decision. THE INFORMATION IS NOT A RECOMMENDATION TO ENGAGE IN ANY TRANSACTION.
If any person elects to enter into transactions with Cumberland, whether as a result of the Information or otherwise, Cumberland will enter into such transactions as principal only and will act solely in its own best interests, which may be adverse to the interests of such person. Before entering into any such transaction, you should conduct your own research and obtain your own advice as to whether the transaction is appropriate for your specific circumstances. In addition, any person wishing to enter into transactions with Cumberland must satisfy Cumberland’s eligibility requirements. Cumberland may be subject to certain conflicts of interest in connection with the provision of the Information. For example, Cumberland may, but does not necessarily, hold or control positions in the cryptoasset(s) discussed in the Information, and transactions entered into by Cumberland could affect the relevant markets in ways that are adverse to a counterparty of Cumberland. Cumberland may engage in transactions in a manner inconsistent with the views expressed in the Information.
Cumberland makes no representations or warranties (express or implied) regarding, nor shall it have any responsibility or liability for the accuracy, adequacy, timeliness, or completeness of, the Information, and no representation is made or is to be implied that the Information will remain unchanged. Cumberland undertakes no duty to amend, correct, update, or otherwise supplement the Information.
The virtual currency industry is subject to a range of risks, including but not limited to: price volatility, limited liquidity, limited and incomplete information regarding certain instruments, products, or cryptoassets, and a still emerging and evolving regulatory environment. The past performance of any instruments, products, or cryptoassets addressed in the Information is not a guide to future performance, nor is it a reliable indicator of future results or performance. Investing in virtual currencies involves significant risks and is not appropriate for many investors, including those without significant investment experience and capacity to assume significant risks.
Cumberland SG Pte. Ltd. is exempted by the Monetary Authority of Singapore (“MAS”) from holding a license to provide digital payment token (“DPT”) services. Please note that you may not be able to recover all the money or DPTs you paid to a DPT service provider if the DPT service provider’s business fails. You should not transact in a DPT if you are not familiar with the DPT. This includes how the DPT is created, and how the DPT you intend to transact is transferred or held by your DPT service provider. You should be aware that the value of DPTs may fluctuate greatly. You should buy DPTs only if you are prepared to accept the risk of losing all of the money you put into such tokens. You should be aware that your DPT service provider, as part of its license to provide DPT services, may offer services related to DPTs which are promoted as having a stable value, commonly known as “stablecoins.”
The information provided in this document by Cumberland DRW LLC is for informational purposes only and does not necessarily represent the views of OKX. Any additional disclaimers issued by these third parties are also applicable and should be considered as part of this document.
This report is not intended as financial advice, investment recommendation, or an endorsement of specific trading strategies. The contents of this report, including but not limited to any graphs, charts, and numerical data, are provided “as is” without warranty of any kind, express or implied. The warranties disclaimed include but are not limited to performance, merchantability, fitness for a particular purpose, accuracy, omissions, completeness, currentness, and delays.
The cryptocurrency markets are highly volatile and unpredictable, subject to substantial market risks including significant price fluctuations. The strategies, opinions, and analyses included are based on information available at the time of writing and may change without notice. They are also based on certain assumptions and historical data that may not be accurate or applicable in the future. Therefore, reliance on this report for the purpose of making investment decisions is at your own risk.
Past performance is not indicative of future results. While we strive to provide accurate and timely information, we cannot guarantee the accuracy or completeness of any data or information contained in this report. We are not responsible for any losses or damages arising from the use of this report, including but not limited to, lost profits or investment losses.
Investors should conduct their own research and consult with a qualified financial advisor before making any investment decisions. The inclusion of any specific cryptocurrencies or trading strategies does not constitute an endorsement or recommendation by OKX.
© 2024 OKX. This article may be reproduced or distributed in its entirety, or excerpts of 100 words or less of this article may be used, provided such use is non-commercial. Any reproduction or distribution of the entire article must also prominently state: “This article is © 2024 OKX and is used with permission.” Permitted excerpts must cite to the name of the article and include attribution, for example “Article Name, [author name if applicable], © 2024 OKX.” No derivative works or other uses of this article are permitted.
