Source: The Defiant
Compilation: BitpushNews Mary Liu
Following Optimism ’s OP token, Arbitrum’s launch ofthe ARB token brings the combined market capitalization of the two largest Ethereum scaling tokens to over $2 billion. Some investors have asked the question: what are these tokens for? Do their use cases justify such lofty valuations?
Currently, the only function of ARB and OP tokens is governance , which equates to the ability to vote on the direction of the project, but there has also been confusion surrounding the Arbitrum Foundation AIP-1 proposal recently, so voting rights are not fully guaranteed .
Governance is often considered a key value proposition for many crypto tokens. DeFi’s most valuable token, UNI , is worth $4.7 billion, though its only unique value is for voting on governance decisions on the Uniswap exchange. With ARB now joining the ranks of multi-billion dollar governance tokens and many other scaling solutions for Ethereum on the horizon, investors are starting to wonder if these tokens are justified at valuation.
Citing governance as the primary use case for rollups tokens, Tushar Jain , founding partner at venture capital firm Multicoin Capital , asked in an interview, “What exactly are you governing, how does that governance work, and why is it worth billions of dollars? "
$20 billion fully diluted valuation
ARB and OP are digital assets issued by the Ethereum expansion platform based on the Optimistic Rollups solution. They are the main tools to achieve faster and cheaper transactions on the second largest blockchain network. measure.
ARB's current market cap is $1.6 billion, OP 's is $700 million, and their fully diluted valuation (FDV) is over $20 billion.
Rollup Token Use Cases
Rollups’ tokens neither secure the scaling solution’s network nor do users pay transaction fees denominated in them.
These are the two biggest use cases for tokens tied to blockchain networks, according to Jain, whose Multicoin Capital raised $430 million for its latest fund last year.
With Rollups, Ethereum’s native token, ETH, can play both roles, Jain said. A third potential use for rollups tokens would be to stake them in exchange for being a validator, the investor added, but this has not yet been enabled. A validator is a participant in a blockchain system responsible for validating transactions.
Potential future AirDrop
The ARB was distributed in an AirDrop last month, and at least two projects among mainstream scaling solutions are likely to have two AirDrop– Starkware and zkSync , whose parent companies have each raised over $2.5 billion in funding. Polygon and Consensus are also developing rollups.
With the potential for increased competition between Layer 2, there will be increased pressure on rollups teams to prove the value of their tokens.
No token required
While Jain isn't against Layer 2 tokens across the board, he is skeptical of their current valuation, with Tezos blockchain co-founder Arthur Brietman arguing that they shouldn't exist at all. When News Block director Frank Chapparo asked on Twitter: "Why does Layer 2 need tokens"? "It doesn't need to," Breitman said.
Tezos just released an upgrade called Mumbai on March 29, which enables developers to deploy Rollups to the blockchain without permission.
Arthur Brietman told The Defiant : “Rollups are free to use, no special tokens, no restrictive licenses, no validator approval required, it’s completely open.”
Can the protocol make money?
To be sure, that’s not to say there isn’t an on-chain demand for Rollups. Data provider L2BEAT shows that Layer 2 transaction volume significantly outpaced Ethereum last year.
Rollups not only provide utility, but they may already be profitable. A dashboard developed by Kofi, a former partner at venture capital firm 1confirmation, shows increasing profits from scaling solutions since July.
Crucially, how the tokens will gain potential profit remains unclear.
Kofi said in an interview that the dashboard does not include costs that are not captured on the blockchain. Based on these off-chain costs, rollups are not necessarily profitable overall.
David Mihal , an engineer who developed the data platform CryptoStats, told The Defiant that the revenue comes in part from two sources, both of which are currently captured by a software component called the Sequencer.
The sequencer is responsible for summarizing and submitting users' transactions to Ethereum's Mainnet. Its two sources of revenue are transaction costs for users, known as " gas costs", and maximum extractable value (MEV), which is a complex subfield of the blockchain space, validators or in this case ordering server, reordering or remixing pending transactions.
"There's a lot of money behind MEV," Mihal said.
Decentralized Sequencer
Currently, Arbitrum and Optimism's sequencers are controlled by the company that developed the solution, according to the Whitepaper document. In short, they are centralized.
Decentralized sequencers are probably the most likely method for Rollups tokens to capture profits.
Kofi, the developer of the Rollups dashboard, said that tokens such as ARB and OP could gain additional utility if Rollups can decentralize its sequencer.
The decentralized sequencer will enable users to participate in its operations by "staking" (i.e. temporarily locking up Rollups' tokens), which in turn will pass some revenue from transaction fees and MEV to token holders.
Both Arbitrum and Optimism state in their documentation that they plan to decentralize their respective sequencers.
A key reason the two Rollup launched without a decentralized sequencer was that it was "technically very difficult," Jain said. “Once you try to decentralize them, you run into the same problems you have with scaling layer 1,” he said.
Defend against regulatory risk
Another possible reason for Layer 2 projects to issue so-called "fair" governance tokens: the crypto industry enters an extremely challenging regulatory environment in 2023, and tokens with for-profit purposes are likely to attract the attention of regulators.
Polynya, a well-known researcher in the field of encryption, said that while the tokens of rollups may not be essential, they are at least useful.
"They don't necessarily need tokens, but it makes decentralizing governance, ownership and upgrades easier, so I expect most L2s to have one," Polynya said, adding that foundations can use tokens for grants. grants and other incentives, and help L2 decentralize its sequencer.
Going forward, Jain believes that rollups will essentially be separated from ethereum, the blockchain currently responsible for securing the scaling solution. Investors say this will come from the project’s own token holders as they try to capture more value through their digital assets.
“I think the battle will come in a year or two, and that’s my guess, once there are enough competitors, they’ll start wanting other things, like a spinoff from ethereum,” he said.
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