Bitcoin reached $69k recently and the bull market is just beginning. At this stage, there are few who maintain a pessimistic view.
However, it's precisely in these moments of euphoria that we must act with greater caution.
In this edition, I want to share with you an important reflection that emerged while I was drafting a thread on X...
As I mentioned before, there are three key trends in this bull market that have caught my attention:
1️⃣ Chainlink and its asset tokenization strategy and inter-blockchain interconnectivity.
2️⃣ Modular Architecture (L2s, DApps, etc.).
3️⃣ Restaking.
Today, we'll focus on Modular Architecture and second-layer solutions (L2s).
I've been researching the upcoming Ethereum update, Dencun, scheduled for March 13. This update promises to significantly reduce the cost of transactions on L2s.
In this link, you'll find an estimate of how much different transactions on L2s could cost, compared to current prices. Great savings await us!
Adding to this, L2s are already generating significant revenue. For example, Arbitrum recorded almost $2 million in profits during January and February (excluding operating expenses, taxes, etc., but it remains positive).
What Few Know…
Digging deeper and reading between the lines of what's happening in the market, we find another catalyst for L2s: Data Availability Layers (DALs) like Celestia or EigenDA, which reduce the cost of publishing data for rollups.
To give you an idea, almost 90% of the operational costs of an L2 are due to data publishing on Ethereum. With solutions like Celestia, any L2 could use it as a data availability layer instead of Ethereum, further reducing costs.
Thus, we see L2s:
Fantastic, but… How does all this affect the value of L2 tokens?
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This is a crucial question that I'm still exploring. Although the outlook for L2s is very positive, and their tokens are likely to increase in value during a bull market, as an investor I wonder: why do they rise, beyond market enthusiasm?
Moreover, if we consider the total circulating ratio in several cases, we see that there's still a long way to go before they are fully unlocked, which could saturate the market.
So far, for tokens like $ARB (from Arbitrum) and I believe $OP is similar, I haven't found a clear mechanism that links the value generated by the L2s with the token's value.
What does this mean?
It means that the price can increase during a bull market, (as everything does) but without real demand based on the token's utility, we must be cautious with our investments. In the specific case of $ARB, I'm very optimistic about the ecosystem and the technology in general, and if I invest in the token, it would be with the intention of speculating in the short/medium term, since there's still no clear mechanism of demand.
If in the future, Arbitrum, for example, achieves total decentralisation of its sequencers, it's likely that some type of staking mechanism for $ARB will be introduced, which could establish a minimum demand for these tokens and create a support for their price, offering a new investment perspective.
What's the moral of the story?
Take the time to understand how the supply and demand of a token work. Keep in mind that market euphoria will drive prices up, so it's crucial to know when and how to sell to not be left with tokens that lack organic demand or face a significant increase in their supply in the future.
Everything written in this blog is not financial advise.
Let me know your thoughts about this in the comments below!
See you next ime! 👋🏻