OFR Insight Sharing Session #5 - Layer 0 to Layer 2: How the crypto market will be built for the next cycle
August 15th, 2022

About OFR Insight Sharing

OFR Insight Sharing is a new weekly program session presented by Old Fashion Research, joined by other crypto practitioners of multiple notable institutions and media presses. Every week, researchers of OFR Fund will share their research results in the crypto industry for the past week. Recaps take a look back at the sharing sessions and expose a larger audience to the most discussed topics recently.

This week, we are pleased to feature two guests from Mercurius Crypto, Orlando Telles & Rafael Castaneada, who shared their insights on understanding how the main bottlenecks in the crypto market came to be, and how they can be solved from the perspective of smart contract platforms. 

[Orlando Telles](https://Twitter: https://twitter.com/orlandoincrypto) is the Research Director at Mercurius Crypto, Brazil's leading crypto-analysis firm.

Rafael Castaneada is a Mercurius Crypto analyst and software engineer Masters with over 20 years of experience.

Mercurius Crypto is a reference in crypto analysis in Brazil, having a base of more than 300 thousand people that follow its contents daily, besides being one of the first regulated Asset Management firms in Latin America (LATAM) (Website: )

The agenda of this week’s OFR Insight Sharing include: 

  1. Current Impediments of Crypto Infrastructure;
  2. Relevant Updates in the ETH Network;
  3. Evolution of the Rollup Ecosystem (L2);
  4. Evolution of the Omnichains Ecosystem (L0);
  5. Impact on Crypto DApps

In 2008, Bitcoin was born as a decentralized and permissionless “accounting system”, which (up to debate) may or may not settle in the future as an “exchange medium” and/or a “store of value”.

In 2015, Ethereum was born as a decentralized and permissionless “virtual computer with built-in accounting”, which (certainly) brings full power programmability to tokens and gave birth to several phenomenons such as DeFi, NFT’s and GameFi.

From the pictogram of Ethereum GAS Cost Evolution, we can tell that each time a mania occurred in Ethereum, its lack of scalability was made evident by slowly and costly transactions, namely CryptoKitties in 2017, DeFi Summer in 2020, NFT Summer in 2021.

Ethereum scalability issues arise from two main bottlenecks,

  1. Execution Throughput. i.e. how many TPS constrained by consensus security
  2. Data Storage/Availability. i.e. block size + on-chain data constrained by total blockchain size

Failure to promptly address scalability led to the emergence of new blockchains nicknamed “Ethereum Killers”. Meanwhile, the Ethereum community kept experimenting with scalability solutions, eventually converging on Layer-2 as the gold standard of scaling and the “Ethereum Rollup-Centric Roadmap”.



The “Killers” took market-share from ETH, but failed to replace it, and eventually renamed to 

“Layer-1 Alternatives”, in accordance with L1-L2 nomenclature from ETH.

Alternative L1’s are adapting to particular use cases and need to bring new competitive advantages to survive.

Most L2’s are still under heavy development, and although they show a lot of promise, there are no clear winners so far.

As the competition for users, developers and capital intensifies, we believe Ethereum is on the right track to not only keep but to regain some of its dominion.

The next topic of this Insight Sharing session kicked off around the ETH Updates, which brings in the Second Wind for the Ethereum Ecosystem. Discussions involve,

  1. The Merge, which improves token efficiency;
  2. Rollup-Centric Roadmap, which solves execution bottleneck;
  3. Dankshardings & Pruning, which solves storage bottleneck.

The Merge involves,

  • Changes consensus from PoW to PoS.
  • ETH Token - less issuance & less incentive to sell (“Ultra-Sound Money” theory).
  • Today’s staking is at 10% TVL, common target in PoS networks is 50% - 75%.
  • Fee reduction is not an objective, nor an expected side-effect.

In terms of Rollup Centric-Roadmap, L2’s are already scaling Ethereum AND generating top-tier revenue when compared to Alt-L1’s. Share of revenue makes its way to Ethereum, in rollup transaction costs. Also, ZK-L2’s on the rise: StarkWare, ZkSync, Polygon ZK’s and ScrollZKP.

Future EIP’s are rollup-friendly.

In terms of Dankshardings & Pruning, Not ALL nodes shall need to be FULL nodes anymore.Data will be stored in fractions (shards), divided between several validators. Old data may be pruned (deleted) when not required to assure consensus. All these lead to lesser node requirements and lesser total blockchain size.

Layer-2 & ETH - All or Nothing?

So, if Ethereum is reliant on rollups to leverage itself as the de facto settlement layer for the future, how are rollups developing

As a whole, L2 rollup protocols have raised approx. $1.5B in VC. Most of the biggest rounds took place right before the bear-market.

TVL in L2’s is steadily increasing, accounting for $6B as of today. Put together, the L2 ecosystem rivals BSC and TRON.

There are different strategies competing in the rollup scenario. All of them have pros & cons, but the overall diversity brings better odds to the ecosystem.

New solutions come with new problems! Rollups are not “solving” the Trilemma, they are “circumventing” it. And the price to pay is: Fragmentation.

Bridges are the current attempt to solve fragmentation, but…

  1. They only tackle the liquidity issue.
  2. They are insecure and prone to exploitation.

Here comes the L0 Emergence. Layer-0 protocols are rising to the challenge of fragmentation. They provide shared and (hopefully) neutral commonground where L1/L2 blockchains can share liquidity and compose contracts.

Let’s talk about Tailored-Chains. Developer Experience (DX) is still poor in the Web 3.0. 

DApps are in need of a solid and friendly infrastructure. Chains that leverage developers and abstract settlement and scalability issues may play a decisive role in the near future.

Also, for more robust use cases, app-chains may be deployed, in which case the best platforms will be the ones to provide good SDK’s and ease of cross-chain interoperability.

Special thanks to Orlando Telles & Rafael Castaneada for presenting the content. Neither OFR Insight Sharing provides financial advice, nor researchers represent the final statement of OFR Fund.


About Old Fashion Research

Old Fashion Research (OFR) is a multi-strategy blockchain investment fund founded in late 2021 by former executive and investment teams from the leading cryptocurrency exchange in the world.

OFR adopts a multi-strategy approach to capture the underlying value of Web3.0 and to build a full-cycle ecosystem to support new-generation crypto native entrepreneurs. OFR incubates promising startups, follows up with traditional venture capital investment and scaling support, and finally supports the projects if they wish to exit through a merger or acquisition.

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