Investment Expert Raises Concerns Over Ethereum Layer 2 Valuation

Cody Poh, an investment assistant at Spartan Capital, shares insights on the valuation dynamics of Ethereum Layer 2 (L2). He questions the optimistic projections surrounding L2 tokens and presents critical considerations regarding their potential growth.

Optimism's Growth and Superchain Vision

Poh highlights Optimism's impressive performance, with an annualized fee generation surpassing $40 million. The recent announcement of the Superchain vision, where chains joining the ecosystem pay Optimism for sequencing fees or profits, further bolsters its valuation. However, Poh urges a reassessment of investment theses, given the impending EIP-4844 upgrade set for March 13, 2024, which is expected to significantly enhance Optimism's value.

Layer 2 Valuation Challenges

Poh raises concerns about the theoretical "glass ceiling" for L2 valuation, attributing it to Ethereum L1's role in guaranteeing L2 security. He argues that L2 value shouldn't surpass L1 due to Ethereum's consensus mechanism. Moreover, he doubts the feasibility of pushing Ethereum's valuation solely through native cryptocurrency, emphasizing the need for external funding. Poh also notes the significant reduction in value accumulation from L2 back to L1, exacerbated by the EIP-4844 upgrade.

Cannibalistic Nature of Layer 2 Competition

Poh analyzes the competitive landscape, observing that L2's total value locked (TVL) remains a subset of Ethereum's TVL due to liquidity considerations. He expresses skepticism about the industry's general growth, emphasizing specific reasons driving individual L2 solutions' success. Poh cites examples like Optimism's potential as a proxy bet for the superchain ecosystem and Polygon's partnerships with institutions as key drivers of value.

Concerns Over Token Redemption Plans

Poh highlights concerns regarding the aggressive release schedules of new L2 tokens, which may exert selling pressure on the market. He favors older tokens like Optimism and Polygon, considering their relatively lower valuation risks due to their advanced release schedules. However, he warns of potential selling pressure from newer L2 tokens as they unlock in the coming months.

Poh advocates for a cautious approach towards L2 investments, emphasizing the need for thorough analysis amidst evolving market dynamics.