The race is on to see who will win the L2 wars

The current consensus around rollups is that there will be several rollups, each one with its own tradeoffs. Some will cost more but will be faster, some will cost less but will be less secure, some will do everything but will not be optimized for anything, some will be ZK some will be Optimistic, some will be Valadium, etc.

This is classic builders trap. Just because there are multiple possible solutions suiting multiple possible needs, doesn’t mean that there will be multiple possible viable solutions that the market would find appetizing. Rollups invoke another market phenomenon called network effects.

Network effects is a large topic in its own right. Simply put, the more users on a platform, the more valuable it becomes for other users. If you wanna deep dive, I will suggest this video by Anu Hariharan of Y Combinator which goes into much more depth. But no one wants to be on a chain where there is no one else, no matter how optimized it is for what I wanna do. Blockchains are by design multiplayer games. A single person cannot do anything on a blockchain.

A coordination technology is only as valuable as the number of parties willing to coordinate on it.

As such there is a simple equation that can be written for the L2s

Also, there is a common misconception that high L1 fees will drive users to L2. This is akin to saying if you stop giving people burgers, they will start eating salads.

If gas fee on L1 was the driving factor behind users moving to L2s, then $PEPE would have done what L2 teams with their years of development were not able to do.

What will drive users to L2s?

The answer is simple, more users. It is a chicken and egg problem, where both chicken and egg are users. Every marketplace builder has to solve this problem and by now there are tons of lectures on how to solve this problem on Youtube. The most important ingredients are determined builders and a large amount of capital. But that is not enough for rollups. Every roll-up team has these two. There are more caveats to be solved.

1. New products - The current popular use cases of blockchain are served well on L1. Even if there are new users coming into the bull market, they will flock toward where users already are. Which is the L1. Unless there are new products that can be built only on L2s, it would be difficult to move people from L1 to L2s

2. Seamless liquidity transfer - There will be a long transitory period where users will have assets both on L1 and L2. A $30 bridge fee every time I want to move my asset from L1 to L2 and vice versa is a big friction for any user. Dropping this fee to a few dollars (or cents, fingers crossed) is going to give users the peace of mind that their assets can be moved between L1 and L2 anytime and will encourage more people to move to L2s

3. Decentralized sequencer (or a proxy for it) - All optimistic rollups currently have centralized sequencers, which means you have to trust the rollup itself, to be honest. Unless the sequencers are decentralized, large-value commerce cannot happen on L2s. However, if there was an entity that people already trust with billions of dollars, it might be able to convince users to move all their high-value transactions to L2s (cough Base cough)

The toughest nut to crack here is the new products part. A lot of people think that everything that could seemingly be built has already been built on blockchain. I wholeheartedly disagree with this statement (refer to my previous post). What it could be is anyone’s guess. I have my own guesses but only time will tell who is right.

The builders’ fallacy has happened before

Back in the early days of Ethereum, there were tons of competitors building tons of L1s (some still are). The same builder fallacy was in play at that time. Every L1 provides its own unique advantages, so all L1s are viable. Turns out, No. Only one L1 did the right things the right way and was able to attract all the users. Some have tried to put in an insane amount of capital to dethrone Ethereum but have not been successful. Below is a graph of L1s by their TVL.

Does it look like people preferred cost over decentralization? Or speed over safety. The market almost always picks the right winner. It will do it again in the case of L2s.

So who will win?

The billion-dollar question, literally. Technology will only be a part of the winning formula. L2s need to attract builders who can attract users, who will attract liquidity, and so on. If there were a winning formula it would contain the following variables.

In the current space, most rollups have the first and fourth variables. Some have the second one as well. What everyone lacks is the most prominent variable of useful applications and this is what everyone should focus on.