Written by Alex Xu
This article is my observations on new trends in the Rollup market, future developments, and possible opportunities. I will try to discuss the following topics:
What is Rollup Summer?
New Rollup Examples: ZKFair and Manta
Rollup Summer Development
Secondary market opportunities: Rollup Summer narrative related targets
The following article is the author's interim view at the time of publication, which is more from a business perspective and less about the technical details of Rollup. This article may contain errors and biases in facts and opinions. It is only for discussion purposes, and we also look forward to corrections from other investment research peers.
1. What is Rollup Summer
Similar to the Defi Summer that started in 2020 and the Inscription Summer of 23, Rollup Summer is the author's definition of the state of a major explosion in multiple dimensions such as quantity and business volume (TVL, active users, and ecological projects) of new Rollup projects that may appear in the future. Although it has begun to show signs of happening, it is only a deduction and hypothesis.
Rollup Summer is specifically manifested in:
A large number of new Rollup or application chain projects and mainnet launches
Users, funds, and developers are flowing into the Rollup ecosystem at a much faster rate than in the past year.
Business data and asset prices reinforce each other, leading to the rapid expansion of the total market value of the Rollup track and related projects
Rollup Summer may start at the end of 2023 and the beginning of 2024, and may become an important narrative throughout the six months or even the whole year.
The main factors that incubated Rollup Summer are:
1. The flywheel effect of the new Rollup
Rollup itself is not a new species. The Rollups that have been launched, including Arbitrum and Optimism, already have huge market capitalization and business volume. Other ZKRollups such as Starknet and zkSync have also been running for a long time.
However, the protagonists of this round of Rollup Summer will be the new Rollup projects that have just emerged in this cycle, because:
The concept of modular blockchain has gained popularity, and the infrastructure of each Rollup module has become more complete, such as OP stack, Celestia of DA layer, decentralized sequencer, and various RaaS service providers. The threshold for developing and maintaining a Rollup with modular concept is rapidly decreasing.
New Rollup, new token, sufficient budget for cold start and incentives, more radical token allocation and incentive methods, more attractive to users and funds
The initial market value is low, but the imagination space is huge
Bullish atmosphere, boosted by market optimism
Simply put, the characteristics of this new round of Rollup are: the project is new, there are tokens, it is modular, and it gives generous incentives to make the project's initial business and coin price flywheel turn faster.
The flywheel of Rollup Summer may come from the following initial stages: token airdrop plan → introduction of user assets, increase in core business data, i.e. TVL → increase in project market value.
The second stage may come from: token ecosystem airdrop plan → directly subsidize dapps within the ecosystem, indirectly subsidize users → further introduce user assets, increase core data TVL+ number of active users + gas fees → further increase the project market value → new Rollup flip the old generation of Rollup calls → further market sentiment Fomo.
2. Cancun Upgrade
In addition to the flywheel effect of the emerging Rollup, another background factor is the Ethereum Cancun upgrade expected in February this year. The Cancun upgrade itself is directly beneficial to Arbitrum and Optimism, which is reflected in the rapid reduction of their L1 costs and the formation of a larger second-layer profit space. However, Cancun itself will also attract the attention of the entire market to the Rollup track, bringing attention and funds to new Rollups.
2. New Rollup Examples: ZKFair and Manta
Taking two Rollups that have received much attention recently as examples, the author analyzes the operating model and characteristics of the protagonist of Rollup Summer - the new type of Rollup.
1.ZKFair
Official website: https://ZKFair.io/
The main features of ZKFair as a Rollup are:
Built on Polygon cdk, the DA layer will use Celestia (currently maintained by the self-operated Data Committee), EVM compatible
Use USDC as Gas fee
Rollup token ZKF is 100% distributed to the community. 75% of the tokens are distributed to participants in the Gas consumption activity in four phases within 48 hours. In essence, participants participate in the primary market sale of tokens by paying Gas to the official sorter. The corresponding primary market financing valuation is only $4 million.
ZKFair attracted more than 110 million in funds to participate in the event. Image source: https://ZKFair.io/airdrop
Rollup promises to return 100% of its operating profits to the community, of which 75% is distributed to ZKF LP stakers and 25% is allocated to qualified dapp deployers. The profit here = total fees - operating costs (Rollup's browser, oracle and other infrastructure costs)
Since ZKF is distributed based on the ratio of the total gas consumption of participants during the event to the total gas amount, this means that the sale of ZKF is a game of "funding competition". A large number of users cross-chain USDC to the ZKFair mainnet for this event. During the airdrop event, the on-chain funds of ZKFair soared from 0 to a maximum of about 140 million US dollars in 2-3 days, which was comparable to the ZKRollup head project Starknet at that time. Even at the current stage where the airdrop has ended, ZKFair's TVL of 70 million $+ is higher than the ZKRollup project Scroll, which was launched earlier.
The benefits of ZKFair’s above approach are obvious:
Fast cold start and popularity gathering: The on-chain TVL increased from 0 to over 100 million in 3 days (currently still 70M+), making it one of the fastest growing Rollups, with 334,000 addresses
Direct token empowerment: Sorter fees are directly distributed to users and developers, providing support for the intrinsic value of Rollup tokens
Currently, ZKF's FDV is about 100 million. As far as a Rollup is concerned, its market value is still not high compared with the horizontal valuation of other Rollups.
2. Forget
Official website: https://Manta.network/
The features of Manta Rollup are:
Built on Celestia DA+Polygon zkevm, EVM compatible
In addition to Rollup, the overall product line is rich, especially a large number of ZK-based suite services
Manta's Rollup was officially launched in September 2023, but the business data took off after the launch of the new paradigm event in mid-December. The current total amount of funds on the chain (official data) is close to 750 million.
The figure below shows the trend of Manta's on-chain Defi TVL. It can be seen that there is an obvious growth inflection point after the launch of the new paradigm.
Manta's investment lineup is also very luxurious, with a valuation of $500 million in the last round of financing:
Image source: https://www.rootdata.com/
The activity logic of New paradigm is very simple, it is an upgrade of blur's blast mode:
Distribute your own rollup token rewards based on the amount of cross-chain funds to quickly increase the amount of funds on the chain
Cross-chain assets will at least receive the base interest rate of the crypto world (ETH POS + stable currency bond yields), reducing the user's capital opportunity cost
Set airdrop expectations for dapp interactions to encourage users to interact with existing dapps after cross-chain, boosting developer confidence
New paradigm will distribute a total of 45 million Manta tokens to NFT holders, accounting for 4.5% of the total. Based on today's (24.1.5) NFT secondary market data, the author roughly estimates that the FDV valuation of the project after the launch of Manta tokens will be in the range of $1.5-2.5 billion.
In addition to ZKFair and Manta, other similar new Rollups are also emerging in large numbers, such as the earlier launched Blast, and the recent Layer X that combines the ZKFair and Manta models.
In addition, considering that ZKRollup projects such as Scroll and zkSync have not yet issued tokens, these projects that launched their mainnets earlier also have the opportunity to refer to the models of ZKFair and Manta and directly attract users and funds for their own ecosystems through a clearer token reward mechanism.
3. Rollup Summer Subsequent Development
Next, we can deduce the possible development path of Rollup Summer:
The new type of Rollup was launched, and it quickly gained volume through token airdrops and interactive activities. The rapidly soaring data and better mechanisms made the market have good expectations for its growth (in progress)
Rollup projects launch tokens online or on exchanges, and the wealth effect becomes apparent (ZKFair increases 25-30 times), stimulating more players and funds to pay attention
Token incentives shift from pure TVL in the initial stage to increasing ecosystem activity, gas fee consumption, and project introduction. The market shifts from observing TVL to observing the sustainability of ecosystem development (challenges begin to increase here)
A large number of new Rollups were launched wholesale, funds and attention were diluted (which also meant a decline in the wealth effect of new Rollup tokens), project quality plummeted, and even fraudulent projects appeared (they were stolen or ran away after attracting funds), and market confidence was damaged.
Summer is fading, and Rollup competition is returning to a steady state. However, the way Rollup tokens are distributed in the future may continue the way that appeared in this round (to solve the problem of business cold start)
From this we can see that the biggest challenge for new Rollups and Rollup Summer after their initial success is how to incentivize the sustainable development of the ecosystem after the initial distribution of tokens, and how to allow their own Rollup ecosystem to emerge with applications and services that can retain users and funds and have wealth effects, whether it is Meme, Defi, or more airdrops and sophisticated Ponzi.
4. Secondary Opportunities: Rollup Summer Narrative-Related Targets
Which secondary targets will benefit from the development of Rollup Summer? Starting from Rollup Summer, the following sub-narratives may be further derived:
Sub-narrative speculation 1: “Celestia is the Ethereum of the Rollup era”
ZKFair, Manta, and more new Rollups will adopt Celestia's DA product. Celestia is moving from stories to examples. Once the example projects using Celestia have good market feedback, more new Rollups will follow suit. "Using Celestia as the DA layer" may become the standard for new Rollups. Celestia will become the new consensus layer of Rollups and then the core infrastructure of the Rollup era.
This may lead to the sub-narrative of "Celestia is the Ethereum of the Rollup era". Whether this story can come true in the future is not important in the short term, because considering Celestia's current market capitalization of only $2.3 billion, it is still two orders of magnitude away from Ethereum's market capitalization of $270 billion.
Data source: https://www.coingecko.com/
Sub-narrative speculation 2: Interest-earning assets become standard
The process of interest-bearing assets, especially interest-bearing stablecoins such as sDAI, replacing mainstream stablecoins has been slow in the past, but in the airdrop activities of Blast and Manta, ETH interest-bearing assets and interest-bearing stablecoins have almost become the native assets of this type of new Rollup. If more Rollups follow this practice, it will directly promote the expansion of user groups and the formation of habits. This directly benefits the issuers of interest-bearing assets that are able to obtain strong Rollup cooperation, such as Blast chose Lido and MakerDao, and Manta chose Stakestone and Mountain Protocol.
Sub-narrative speculation 3: Rollup eats up L1 market share
In terms of experience, there is no substantial difference between Rollup and L1. The L1 public chain boom in the last cycle may reappear in the form of a sovereign Rollup boom in this cycle. While competing with each other, Rollup will also compete directly with L1 for users and funds. At the same time, some native dapps on the fast-growing Rollup also have opportunities worthy of attention, such as LayerBank, a lending project on Manta, whose total deposit scale has exceeded $300 million, close to the data of Radiant, the head lending project on Arbitrum.
However, while we are optimistic about the rapid development of many Rollups, we also need to consider the risk of narrative failure.
The Risks of Rollup Summer Narratives
The core challenge of the new Rollup is the smooth transition from the startup phase to the growth phase. It is relatively simple to use token airdrops to incentivize capital inflows, but if you want to retain users and funds for a long time, the incentive challenge will be more complicated. In fact, various L1s in the previous cycle also made similar attempts, such as launching public chain incentive funds at the level of hundreds of millions to encourage the top Defi on Ethereum to migrate, and Defis transferred the incentives to their users to improve their business data. Such measures achieved good results in the early stage, but as various public chains launched similar policies, the incentive effect gradually declined in the competition.
Even the current established Rollups such as Arbitrum and Optimism have been distributing their own token subsidies to ecological projects, and then delivering them to users through ecological projects, hoping to retain users' activity and funds. The total incentive amount of Arbitrum's latest round exceeded 70 million ARB (currently worth more than 140 million US dollars).
Therefore, as a budding narrative, how will Rollup Summer develop in the future? We still need to observe the next move of the new type of Rollup.
