5 months ago
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Investment firm VanEck has released a report forecasting that the Ethereum Layer 2 (L2) market will reach a valuation of at least $1 trillion by 2030. However, due to the intense competition in the space, the firm remains “generally bearish” on the long-term value prospects for most Layer 2 tokens.
VanEck arrived at its $1 trillion base case valuation by applying a free cash flow multiple of 25 to its projections of future cash flows, assuming a 60% market share of the Ethereum ecosystem smart contract. The cash flow estimates were derived from forecasting transaction revenues and maximal extractable value (MEV) for the Layer 2 networks’ anticipated total addressable market.
VanEck Head of Digital Assets Research Matthew Sigel and Senior Investment Analyst Patrick Bush cite the proliferation of “cutthroat competition” among L2s, claiming that the network effect was “the only moat” in this instance.
“Accordingly, we see cutthroat competition amongst Layer 2s where the network effect is the only moat. As a result, we are generally bearish on the long-term value prospects for the majority of Layer 2 tokens,” the analysts said.
The analysts predict that a few general-purpose Layer 2s will dominate the market, while also anticipating the emergence of thousands of smaller use-case-specific rollups. They noted that the top 7 Layer 2 tokens already have a fully diluted valuation (FDV) of $40 billion, with many strong projects planning to launch in the medium term, potentially adding another $100 billion in FDV over the next 12-18 months.
VanEck analyzed 46 networks for its Layer 2 market valuation, assessing factors such as transaction pricing, developer and user experiences, trust assumptions, and ecosystem scale. The report highlighted the impact of recent innovations like EIP-4844, which followed Ethereum’s Dencun upgrade last month, in reducing transaction costs for Layer 2s, particularly benefiting optimistic rollups.
The developer experience, influenced by Ethereum Virtual Machine (EVM) compatibility, and user experience, focusing on asset onboarding/offboarding, transaction finality, and seamless integration of familiar tools, were also evaluated. Trust assumptions, such as the move towards decentralized sequencer models to mitigate risks, were considered, with Arbitrum identified as the current “gold standard” among Layer 2s in terms of safeguards.
Ecosystem size, measured by the total value locked on the networks, was deemed the most important competitive factor. Arbitrum, Optimism, and Blast were highlighted as having ecosystems that “matter” to users, with significant interest generated through their token airdrop programs and rollup frameworks like the OP Stack and Arbitrum Orbit.
Despite the bullish valuation forecast, VanEck’s analysts believe that Layer 2s are currently trading more on speculation of long-term value accrual rather than current revenue dynamics, and they express doubts about the crypto market’s ability to absorb the anticipated influx of new Layer 2 tokens without significant price discounts.
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