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$L2DEFI Overview

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$L2DEFI Composition & Weights
To compete with alt-L1s, rollup tokens should heavily incentivize L2 migration through aggressive airdrops, staking/liquidity mining programs, and ecosystem funds. Cross-L2 token bridges will allow rollups to overtake more centralized L1s.
“I believe rollup tokens will arrive late 2022 and sometime in 2023 in the following order:

-> zkSync (confirmed) -> StarkNet (no comment) -> Arbitrum -> (no comment) -> Optimism (public denial) followed by launch of $OPT-May 2022

Ethereum Tracking Dashboard

EVM Layer 2 DeFi - the future of Ethereum?

Investment theme: Will most Ethereum TVL/fees just move ‘up’ to L2? PowerPool is proposing $L2DEFI, a basket of sub-baskets representing major L2 scaling technology platform with auto-harvesting of intrinsic yield and meta-governance-driven extrinsic yield from staking/lending, plus hedging options through borrowing/shorting.

Many believe that in the coming ‘liquidity wars’ the majority of DeFi TVL/fees will not move ACROSS to ALTL1 chains, but rather will move UP to one of several Ethereum Layer 2 (L2) scaling sidechains/rollups/zero-knowledge (zk) proof environments designed to dramatically increase Ethereum throughput and reduce gas costs. Some believe that these complimentary ‘second’ layers (L2s) can create a situation where effective per-transaction Ethereum gas costs actually FALL with INCREASED usage, greatly diminishing the value of DeFi deployed on proliferating ALTL1 EVM chains, given the established network effects and liquidity attracting advantages of Ethereum EVM ecosystem.

For those who believe in long-term ETH+L2 DeFi dominance, TVL/fees will migrate ‘up’ to whatever scaling technology, perhaps sidechains like Polygon, or Gnosis/xDAI, or perhaps rollups like Arbitrum, Optimism, zkSync, Starkware, etc.

But which scaling technology will win the majority of TVL/liquidity? How much TVL/liquidity will still prefer ALTL1 DeFi? Non-EVM chains like Solana? Which one(s) will win increased TVL over one year? What will Ethereum Layer 2 look like in 5 years? No one knows.

Successful VCs (and all DeFi token holders are essentially VCs) do not try to ‘pick winners’. They pick a theme like L2DeFi and often invest in direct competitors. However, in DeFi much of the investment case relies not just on pure speculation, but on the additional value of periodic rewards/yield. Harvesting rewards/yields across a diversified portfolio of ‘baskets’ with ever-expanding numbers of tokens each with volatile yield generation options requires an automation network like PowerAgent.

Given that crypto investing is like early stage venture capital, with everything speeded up by open-source software, a diversified basket of Ethereum Layer 2 DeFi tokens across multiple scaling layers WITH PowerAgent automation to auto-harvest the rewards/yield that are the main weapon in the cross-chain/cross layer competition for TVL, PLUS analytics-driven DAO management of re-balancing across staking options, and the proportion of individual tokens in chain-specific sub-baskets, and even the proportion of sub-baskets in higher-level pools-of-pools seems the best approach for responsible investing (as opposed to degen ‘aping’ and/or trading).

PowerPool technology makes it possible not only to optimise and auto-harvest intrinsic yield on tokens in each basket, but also leverage aggressive meta-governance power to generate extrinsic yield opportunities from staking/lending each basket token, while also managing leverage and hedging options via borrowing and shorting entire baskets/pools, or even pools-of-pools. Delta-neutral hedging of a broadly-diversified pool-of-pools auto-harvesting rewards during a continuing ‘liquidity war’ should be a very attractive risk-adjusted investment.

Overview of L2 scaling technologies

(For more detail on motivation & rationale for the L2 scaling thematic pool, see Ethereum 2.0)

Arbitrum and Optimism now. Then EVM zk-rollups. And then eventually Ethereum data sharding will massively boost the throughput of all Layer 2 scaling solutions.

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Layer 2 Data Tracking

Ethereum Scaling Sidechains/Roll-Ups Overview

TL;DR: In the coming liquidity wars, no one knows how DeFi TVL and fees will distribute across various Ethereum L2 scaling options. Given that DeFi is venture capital investing, a broadly-diversified L2 basket token/index, with auto-harvesting of intrinsic yield, and the size/meta-governance power to achieve listings allowing staking/lending and other options for extrinsic yield is the best investment longer term.

While solutions like Arbitrum and Optimism will directly compete for market share, for DApps, there is only upside to using both. Deploying on multiple platforms makes the social consensus problem easier to manage. DApps adopting parallel solutions with each other enables inter-protocol transactions to remain on L2. Uniswap adopting both Optimism and Arbitrum will increase the number of DApps that it can have L2 to L2 transactions with.

It is likely that many DeFi protocols will deploy on more than one L2, and that is why a pool-of-pool like $L2DEFI will be used to capture this trend, as more and more protocols become multi-L2 layer.

But rather than put all Ethereum sidechain and rollup DeFi in the same pool, it will have marketing advantages to build up the composition of the $L2DEFI pool-of-pools with several individually promotable sub-pools reflecting the finncial backing of each sidechain/scaling solution, starting with at least one initial sub-pool focussed on the broadest scaling ecosystem with the most traction to date: Polygon

Sidechains for Ethereum Scaling

Note: BitGo/institutional custodians currently don’t even have concrete plans for L2s thereby restricting the institutional accessibility of L2s.

Polygon/MATIC = Sidechain+

$POLYDEFI: Polygon L2 Ecosystem
$POLYDEFI: Polygon L2 Ecosystem

But isn't Polygon a Plasma, Rollup and Sidechain all in one?

In its current implementation, Polygon is a modified Plasma PoS sidechain with validators solely responsible for validating Polygon transactions. The main advantages that other Rollup-based L2s have over Polygon is that they inherit their security from the main Ethereum blockchain. This is not the case for sidechains like Polygon. Sidechains are separate blockchain networks that introduce their own layer of risks, the main associated risks being: censorship resistance, finality, and guarantees about owning funds.

Polygon may have benefited from being a scaling front-runner, but with competition from other sidechains like Gnosis/DAI, and with major ETHL1 DeFi projects like Synthetix, Uniswap and MakerDAO launching composable L2 solutions on Optimism, Arbitrum (or both), and/or zero-knowledge options like zkSync and Starkware, Polygon’s L2 dominance is far from assured. Indeed, Polygon has already started to diversify their approach by investing about $US 1.0 billion in Polygon Zero, an implementation using zero knowledge proofs. They’ve acquired several cutting-edge teams and are developing several projects such as Miden, Nightfall, Zero, and Hermez. Their operational zk rollup product is Hermez, which only performs simple payments at the moment and has some compromises in terms of security.

Polygon MATIC’s 2021 price surge is rooted in the fact that Polygon is currently being utilized by blue chip DeFi projects such as Aave, Sushiswap, and Curve. Polygon’s TVL has already surpassed $10B and has been directly responsible for Aave’s surge to the largest DeFi protocol by TVL on Ethereum.

Gnosis (xDAI) Sidechain

$GNOSDEFI Gnosis Sidechain DeFi
$GNOSDEFI Gnosis Sidechain DeFi

The merger of xDAI and Gnosis has created another Ethereum sidechain launching a DeFi “village”

Ethereum L2 Rollups with Proofs

For the details and theory behind rollups, check out Polynya’s blog: https://polynya.medium.com/

Depending on whether Validity Proofs or Fraud Proofs are used and what is the mechanism for data availability we can broadly categorize roll-up L2s into the following categories:

  • zkRollups - Validity Proofs with data on L1 Ethereum,
  • Optimistic Rollups - Fraud Proofs with data on L1 Ethereum,
  • Validium - Validity Proofs with data kept off-chain,
  • Plasma - Fraud Proofs with data kept off-chain.

Overviews of Evolving Ethereum L2 Rollups

Arbitrum Overview
Optimism Overview
Starkware Overview
zkSync Overview

In the future we expect to see hybrid solutions using a mix of the above techniques.

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Arbitrum & Optimism Basket/Index

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$OPARDEFI L2 Scaling Pool

Arbitrum, like Optimism, is an Optimistic Rollup based scaling solution. There are few differences between the two. The benefit to both is that they are easy to integrate with DApps because they require very few changes to DApps’ underlying smart contracts. Because of this, the two solutions have become top picks for many developers. Arbitrum and Optimism are similar enough that many protocols will see very little effort not to run on both. At this stage we are planning to launch only a single basket to capture prospects for both.

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Starkware/StarkNet/StarkEx & zkSync Basket/Index

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$ZKL2DEFI L2 Scaling Pool