Vol Commentary: Ethereum L2s Underperforming

Cumberland is commenting on the recent volatility and potential opportunities to take advantage of it.

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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).