The L2 Wars - Delphi Digital

🌇 Sunsetting The Delphi Daily

During periods of lower activity, it becomes more important to focus on the broader trends and narratives that are capturing a large majority of the attention. To provide you with a more in-depth look into what really matters, we are sunsetting the Delphi Daily and introducing the Delphi Digest, a weekly deep dive into one compelling topic from across crypto.

These weekly newsletters will be concise yet comprehensive, containing data and insights that go much deeper than what you’re accustomed to with the Delphi Daily. We thank you for your continued readership and look forward to a seamless transition. This is our first edition of the Delphi Digest. In case you’d like to unsubscribe, click here.

This is the Delphi Digest. Let’s dive in.

🔍 The L2 Wars

The adoption of layer-2 networks built on Ethereum has been impressive over the past year. In this case, the proof is in the fees: ~4% of Ethereum’s gas is now consumed by L2 contracts, up from less than 1% at the beginning of 2022. Additionally, L2s have flipped the Ethereum base layer in terms of transactions per second.

This is a trend we initially explored in our Year Ahead for Infrastructure report, which has been unlocked for all readers here (fair warning: it’s an action-packed read that just can’t stop leaking alpha).

The main characters in this story are Arbitrum and Optimism. Combined, they account for over 80% of the total value locked across all L2s. After launching in 2021, both L2s experienced a dramatic rise in adoption – driven by the lethal combination of faster speeds, lower fees, and Ethereum’s ironclad security.

After a blockbuster 2022, the new year is off to a great start with combined daily transactions on Arbitrum and Optimism surpassing Ethereum on Jan. 12, 2023. Over the past 6 months, combined daily transactions have increased by over 5x from 163K to 983K. However, over the past month, one of the two major L2s is increasingly doing most of the heavy lifting in this combination.

Optimism’s daily transaction count has steadily increased since March 2022 despite the bear market, hitting an all-time high of 800K on Jan. 12, 2023. Meanwhile, Arbitrum’s daily transaction count is down 49% from an all-time high of 576K on Nov. 8, 2022. However, TVL on Arbitrum has stayed relatively flat since November 2022, while most other blockchains have seen a decline.

Over the past year, Arbitrum launched Odyssey, a program that handed out NFTs for completing various tasks. These NFTs were widely thought of as the precursor to a potential airdrop. As DeFi degens flocked to the chain like a moth to a flame, the chain experienced heavy load, which caused the team to pause Odyssey. Later, the Nitro upgrade was introduced for faster transactions, lower fees, and higher throughput.

Optimism has seen quite a happening year as well. The L2 dropped the first round of OP tokens, which was met with frustration as some users were able to claim tokens ahead of others and many claimants chose to dump them immediately. Later, the project launched Quests, its own version of Arbitrum’s Odyssey. If you’re interested in this, today’s the last date to participate!

One of the earliest projects that committed to building on Optimism is Synthetix, which accounted for the lion’s share of Optimism’s TVL until OP token grants kicked in. Moving to Optimism has significant benefits for Synthetix such as low-cost trading and sped-up oracle updates which allowed the protocol to launch perpetual futures. Today, this product brings in a majority of all fees earned by Synthetix.

Total trades on Synthetix have been steadily increasing over the past 3 months. Since then, seven-day average trades have increased by over 6x from 1K to 7.4K, hitting an all-time high of 9.6K on Jan. 12, 2023. However, the total volume has declined over the past 6 months, indicating an increase in trades of smaller ticket sizes. Since then, the seven-day average volume has declined by -53% from $42M to $20M.

Interestingly, almost all Synthetix trades occur on Optimism, with Ethereum seeing less than 50 trades on most days. However, a significant portion of volume continues to occur on Ethereum, indicating that a small number of whales are responsible for all the volume on Ethereum.

Deploying on Optimism has been hugely beneficial for Synthetix, and we expect other protocols to follow this lead and deploy on L2s over the coming months and years as they aim to capture as large of a user base as possible. We explore these trends in further detail in our August 2022 report on Synthetix, which is available for Delphi Pro members here. Here is an edited snippet from the report:

“Synthetix’s lack of user adoption on Ethereum mainnet has been a recurring criticism. Access to deep liquidity via 1inch and on-chain spot trading via Kwenta has not been alluring enough to attract more users. In the past six months, mainnet users only made up 1.7% of all unique users within the Synthetix ecosystem.

Risks also extend outside of mainnet adoption. With competitive L2 networks now live, users leaving Optimism would endanger Synthetix – who have currently put all their eggs in the Optimism basket. However, Synthetix v3 seeks to expand growth, with atomic swaps aimed to go live on not only other L2s but also EVM chains.”

📅 This Week in Delphi Research

NFT Debrief – January 2023

Catch up with the latest in the NFT and metaverse space as YH takes you through the current state of the market in this monthly highlight. Apart from exploring some upcoming mints worth watching, he takes a look at how NFT traders are farming for an airdrop from the newest marketplace on the block, Blur.

From Dutch Auctions to Open Editions: A Deep Dive Into NFT Distribution Models

How can an NFT project get its tokens in the hands of the right community members, while ensuring that the treasury doesn’t run out? In this seminal piece, Teng goes deep into various distribution models that NFT projects can use such as standard mints, Dutch auctions, free mints, and more.

Bitcoin Update: Reflecting on 2022 and the Future

In this report, Aaron takes you through the state of Bitcoin – including the two technologies dominating the discourse (Lightning and Taproot) and the turmoil facing the Bitcoin mining industry. He also explores a few key innovations such as the possibility of zero knowledge rollups on Bitcoin, which could bring Turing-complete smart contracts to Bitcoin.

📖 Delphi Reads

While traders on GMX are infamous for losing money, a tweet thread by @lookonchain identifies 7 addresses with a win rate of more than 80% on GMX. Caveat emptor: copy trading relies heavily on borrowed conviction and is essentially what landed many FTX investors in hot water. Read more here.

Last week, we held a Twitter Space where our analysts shared their key takeaways from 2022 and market outlook for 2023. During a section on contrarian views, one of our analysts said Solana could stage a comeback this year (gasp!). If you weren’t able to listen live, you can play the recording here or read the Cliff notes here.

🔥 Meme of the Week

Since the beginning of the year, BTC is up 28% while ETH is up 31%. Enjoy the pump while it lasts, for who really knows what tomorrow will bring.

Meme by @cryptunez.