According to analysts from investment manager Van Eck, Ethereum’s layer 2 scaling networks are projected to reach a market capitalization of $1 trillion within six years. These networks will consist of numerous chains tailored to specific use cases. Van Eck’s senior digital assets investment analyst, Patrick Bush, and digital assets research head, Matthew Sigel, stated in a report on April 3rd that layer-2 blockchains will capitalize on Ethereum’s main challenge, which is its limited capacity to process, store, and compute data.
Bush and Sigel arrived at their market cap prediction by estimating that Ethereum would capture 60% of the market share among all public blockchains. They then estimated the volume of assets within the Ethereum ecosystem. Currently, there are 46 Ethereum L2s with a total locked value of $39 billion, with the largest being Arbirtum at $18 billion, as reported by L2BEAT.
The analysts highlighted the critical obstacle that Ethereum’s dominance in smart contracts faces, which is scalability. While the network offers exceptional security and decentralization, transaction fees and processing times skyrocket when usage becomes more intense.
To address this, Ethereum’s development is focused on enhancing its ability to process transaction data on its layer-2 networks. This is evident in the recent Dencun update, which introduced the “Blobs” feature, a specialized data-saving feature that helps reduce L2 transaction fees.
According to Van Eck, there is significant potential for generating substantially more revenue on layer 2 networks compared to the base Ethereum network. However, the analysts expressed a generally bearish outlook on the long-term value of most L2-related tokens due to intense competition. They noted that the top seven Ethereum L2 tokens already have a fully diluted valuation of $40 billion, and the launch of many strong projects over the next 18 months could increase this figure to $100 billion. They believe it would be challenging for the crypto market to absorb such a supply without substantial discounts.
Looking ahead, the analysts forecasted a future where there will be thousands of use-case-specific layer 2 networks, with only a few major players operating in the general-purpose layer 2 market. These specialized networks will be segmented by sector, application, or function, with some chains dedicated to specific purposes, such as decentralized social media-specific L2s with accompanying apps. The handful of general-purpose chains that emerge will benefit from the network effect, where their value increases with more users.
The analysts also emphasized that most roll-ups will eventually transition to the zero-knowledge framework (ZKU) due to its numerous advantages.
In conclusion, the future of Ethereum’s layer 2 scaling networks looks promising, with the potential for significant market capitalization and the emergence of thousands of specialized chains. However, the intense competition and potential oversupply of L2-related tokens may pose challenges to long-term value.