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Trillion by 2030: VanEck Predicts Capitalization Boom for Layer-2 Solutions

Ethereum's layer 2 scaling networks to capitalize on limited capacity

Analysts from investment management company Van Eck anticipate Ethereum's layer 2 scaling networks to achieve a remarkable milestone—a $1 trillion market capitalization—in the span of six years. Layer-2 blockchains are strategically positioned to leverage Ethereum's principal challenge, which revolves around its constrained capacity to process, store, and compute data, as highlighted by Patrick Bush, Senior Digital Assets Investment Analyst, and Matthew Sigel, Digital Assets Research Head, in a report dated April 3.

Bush and Sigel arrived at their $1 trillion market cap projection by estimating Ethereum's acquisition of 60% of the market share among all public blockchains and subsequently gauging the volume of assets within the Ethereum ecosystem. Currently, there exist 46 Ethereum layer 2 solutions with a total value locked of $39 billion, with the largest among them being Arbirtum, boasting an $18 billion valuation, according to data from L2BEAT.

Ethereum's development focuses on improving L2 transaction processing

"Ethereum's dominance in smart contracts faces a critical hurdle: scalability," 

The analysts articulated: 

"While the network offers unparalleled security and decentralization, transaction fees and processing times soar when usage intensifies."

The focus of Ethereum's development now centers on enhancing its capability to handle transaction data within its layer 2 networks. This emphasis is evident in its recent Dencun update, which contributed to reducing layer 2 transaction fees through the introduction of a specialized data-saving feature called "Blobs."

Looking ahead, the analysts foresee the potential for "substantially more" revenues to be generated on layer 2 networks compared to the base Ethereum network. 

"We expect layer 2 revenues to surpass Ethereum's because Ethereum cannot match the transaction throughput or user experience of layer 2s."

However, amidst the competitive landscape, Bush and Sigel express a "generally bearish" sentiment regarding the long-term value of the majority of layer 2-related tokens.

Future of Ethereum L2s: thousands of use-specific networks and a few major players

The top seven Ethereum layer 2 tokens already command a fully diluted valuation of $40 billion, and anticipate this figure to surge to $100 billion with the emergence of "many strong projects" in the coming 18 months.

The analysts caution:

"It seems a bridge too far for the crypto market to absorb even limited amounts of that supply without massive discounts," 

In their forecast, they envision a future characterized by "thousands of use-case-specific" layer 2s, with only "a few major players" operating within the general-purpose layer 2 market. These myriad use-specific networks would be delineated by sector, application, or function, with certain chains tailored for specific purposes, such as a decentralized social media-specific layer 2 alongside accompanying apps.

The analysts assert that the presence of just "a few major players" in the general-purpose market will be attributed to the network effect, wherein these blockchains accrue greater value due to increased user participation.

They affirm:

"It is also clear that most roll-ups will eventually move towards the zero-knowledge framework (ZKU) due to its many advantages,"