Layer-1 and Layer-2 Valuations: Where are they now?

Key Insights

• Layer-2 leaders Arbitrum and Optimism currently surpass alternative Layer-1 networks such as Solana and Avalanche in TVL, revenue, and DEX volumes.
• Despite lagging in most valuation metrics, Solana has the most future economic activity priced in among alternative Layer-1 and Layer-2s. With recent partnerships with Visa and Firedancer’s upcoming launch in 2024, Solana is well positioned to warrant its current valuation.
• Arbitrum led alternative Layer-1s and Layer-2s in application-generated revenue ($20.4 million), with Optimism ($13.1 million), Avalanche ($2.8 million), and Solana ($2.2 million) trailing behind.
• Arbitrum and Optimism are the fastest growing ecosystems, yet have the least amount of growth priced in.

Evaluating blockchains is an imperfect science due to the multifaceted nature of which comes from monetary utility and traditional revenue flows. Regardless of the precise valuation techniques, it is intuitive that value will flow from economic output on top of the chain as this activity drives fees and utility for the chain. In this sense, relative comparisons of activity can give the best impressions of where valuations sit across various smart contract assets.

Additionally, economic activity measurements can be done across Layer-1s and Layer-2s since both chains host smart contracts that are largely competing for the same user base. Therefore, metrics such as daily active addresses (DAA), stablecoin supply, smart contract revenues, dex volumes, debt levels, and of course, TVL, can all be used as comparative variables to judge relative valuations across various smart contract ecosystems.

This approach allows us to discern how the market is pricing in future activity – or the apparent lack thereof – for each chain. Layer 1 blockchains form the foundational protocols, while Layer 2 solutions promise scalability enhancements atop these primary chains. While architecturally different, they are competitors; Drift protocol on Solana is trying to attract the same users that GMX is on Arbitrum. Thus comparing L1s to L2s, while imperfect, gives us a sense of how that economic activity is growing.