Rollup Summer Reflections: Narrative Deduction and Investment Opportunities

Originally written by Alex Xu, Research Partner, Mint Ventures

The content of this article is the author’s observation of the new trend of the rollup market, the future development, and the deduction of possible opportunities. Try to discuss the following topics:

• What is Rollup Summer?
• Examples of new rollups: ZKFair and Manta
• Rollup Summer
• Secondary Market Opportunities: Relevant targets for the Rollup Summer narrative

The following article is the author’s interim view as of the time of publication, and is more deduced and explained from a business perspective, and less ink on the technical details of Rollup. This article may contain errors and biases in facts and opinions, and is for discussion purposes only, and we look forward to corrections from other investment research peers.

I. What is Rollup Summer

Similar to the Defi Summer at the beginning of 2020 and the inscription Summer in 23 years, **Rollup Summer is the author’s definition of the state of the explosion of new Rollup projects that may occur in the future in multiple dimensions such as quantity, business volume (TVL, active users, ecological projects). **

Rollup Summer is manifested in:

• A large number of new rollups or application chains are established and Mainnet launched
• 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, contributing to the rapid expansion of the Rollup track and the total Market Cap of related projects

Rollup Summer may start at the end of '23 or the beginning of '24, and may become an important narrative throughout the six months or even the whole year.

And the main factors for incubating a Rollup Summer are:

1.The flywheel effect of new rollups

Rollups themselves are not a new species, and the rollups that have been launched including Arbitrum and Optimism already have a huge Market Cap and business volume, and other ZKRollups such as Starknet and zkSync have been running for a long time.

But the protagonists of this round of Rollup Summer will be the new rollup projects that have just appeared in this cycle, because:

• The concept of modular Blockchain is deeply rooted in the hearts of the people, and the infrastructure of each module of Rollup tends to be perfect, such as OP stack, Celestia at the DA layer, Decentralization sequencer, and various RaaS service providers, etc., The threshold for developing and maintaining a Rollup with a modular concept is rapidly decreasing
• New Rollup, New Token, ample budget for cold start and incentives, more aggressive Token distribution and incentives, more attractive to users and funds
• The starting Market Cap is low, and there is a lot of room for imagination
• Bull market atmosphere, fueled by market optimism

**To put it simply, the characteristics of this round of new rollup are: the project is new, there are tokens, modularity, and generous incentives, so that the initial business of the project and the flywheel of the currency price will rotate faster. **

The initial stage of Rollup Summer’s flywheel may come from: TokenAirdrop plans to → introduce user assets, increase the core business data, i.e., TVL→ projects Market Cap grow.

The second phase may come from: Token ecological Airdrop plan→ directly subsidizing dapps in the ecosystem, indirectly subsidizing users→ further introducing user assets, increasing core data TVL + number of active users + gas fees→ projects Market Cap further expanding → new Rollup flip The call for the old generation of Rollup → further market sentiment Fomo.

2. Cancun upgrade

In addition to the flywheel effect of the emerging rollups, another background factor is the expected Ethereum Cancun upgrade in February this year, which itself directly Favourable Information Arbitrum and Optimism, which is reflected in the rapid drop of their L1 costs and the formation of larger Layer 2 profit margins. But Cancun itself will also attract the attention of the entire market to the rollup track, bringing attention and money to the new rollups.

2. New Rollup Cases: ZKFair and Manta

The author takes two Rollups that have attracted a lot of attention recently as examples, and analyzes the operation mode and characteristics of the protagonist of Rollup Summer, the new Rollup.

1. ZKFair

Website:

The main features of ZKFair as a rollup are:

• Built on the Polygon cdk, the DA layer will use Celestia (currently held by the self-operated Data Council) and EVM compatible
• USDC as gas fee
• 100% of the Rollup Token ZKF is distributed to the community. 75% of the Tokens are distributed to participants in the gas consumption event within 48 hours in four installments, essentially participants participate in the primary market sale of Tokens by paying gas to the official sequencer, and the corresponding primary market financing valuation is only $4 million

ZKFair attracted more than 110 million funds to participate in the campaign, image source: airdrop

• Rollup’s operating profit promises 100% back to the community, of which 75% is distributed to stakers of ZKF LP and 25% is distributed to qualified dapp deployers, where profit = total expenses – operating costs (Rollup’s browser, Oracle Machine and other infrastructure expenses)

Since ZKF is distributed based on the ratio of the total gas consumption of participants to the total gas amount during the event, this means that the sale of ZKF is a game of “fighting for money”, and a large number of users will USDC Cross-Chain Interaction to ZKFair Mainnet for the event. During the Airdrop event, ZKFair’s on-chain funds soared from 0 to a maximum of about $140 million in 2 or 3 days, which was comparable to Starknet, the head project of ZKRollup at that time. Even at the current stage where the Airdrop has ended, ZKFair’s TVL of 70 million $+ is higher than the earlier ZKRollup project Scroll.

The benefits of ZKFair’s above operation are clear:

• Fast cold start and popularity gathering: On-chain TVL has exceeded 100 million in 3 days (there are still 70 M+), which is one of the fastest growing rollups, and the number of addresses is 334,000
• Direct Token empowerment: Sequencer fees are directly distributed to users and developers, providing support for the TokenIntrinsic Value of Rollup

At present, ZKF’s FDV is about 100 million, and as far as one rollup is concerned, its Market Cap is still not high compared to the horizontal valuation of other Rollups.

2.Manta

Website:

The features of Manta Rollup are:

• Based 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 '23, but the take-off of business data was after the launch of the new paradigm campaign in mid-December, and the total amount of on-chain funds (official data) is now close to 750 million.

The chart below shows Manta’s on-chain Defi TVL trend, and we can see that the obvious growth inflection point is after the launch of new paradigm.

Manta’s investment lineup is also very luxurious, with a valuation of $500 million in the last round of funding:

Image Credits:

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 interaction to quickly increase the amount of funds on the chain
• Cross-chain interaction assets will at least receive the base Intrerest rate of the crypto world (eth pos + stable coin treasury bond yield), dropping the opportunity cost of funds for users
• Set Airdrop expectations for dapp interactions, encourage users to interact with existing dapps after cross-chain interaction, and boost developer confidence

New paradigm will distribute a total of 45 million Manta Token to Non-fungible Token holders, accounting for 4.5% of the total, and the author roughly estimates that the FDV valuation of the project after the launch of Manta Token is in the range of $1.5-2.5 billion based on today’s Non-fungible Token Secondary Market(24.1.5) data.

In addition to ZKFair and Manta, other similar new rollups are also emerging, such as the earlier Blast, and the recent Layer X, which mixes ZKFair and Manta models.

In addition, considering that ZKRollup projects such as Scroll and zkSync have not yet issued coins, these projects that were launched earlier on the Mainnet also have the opportunity to refer to the model of ZKFair and Manta to directly attract users and funds for their own ecology through a clearer Token reward mechanism.

3.Rollup Summer Follow-up Deduction

Next, we can deduce the possible development path of Rollup Summer:

1. The launch of a new type of rollup, through the rapid growth of TokenAirdrop and interactive activities, the rapid surge of data and better mechanisms make the market have a good expectation of its growth (in progress)
2. The Rollup project is launched or listed on the exchange, and the wealth effect is manifested (ZKFair increases by 25-30 times), stimulating more players and funds to pay attention
3. Token incentives shift from pure TVL at the initial stage to increasing ecological activity, gas fee consumption and project introduction, and the market shifts from observing TVL to observing the sustainability of ecological development (the challenge starts to grow here)
4. A large number of new rollups are launched wholesale, funds and attention are diluted (which also means that the wealth effect of new rollup tokens decreases), the quality of projects plummets, and even fraudulent projects (stolen or Rug pull after attracting funds), and market confidence is damaged
5. Summer fades and Rollup competition returns to steady state, but the distribution of Rollup Tokens may inherit the way this round appears in the future (to solve the problem of business cold start)

We can see from this that the biggest challenge for the new rollups and Rollup Summer after their initial success lies in how to incentivize the sustainable development of the ecosystem after the initial distribution of tokens, and how to make their Rollup ecosystem emerge applications and services that can retain users and funds and have a wealth effect, whether it is Meme, Defi or more Airdrops and ingenious Ponzi.

Level 2 Chance: Rollup Summer Narrative-related Targets

Which secondary targets will benefit from the development of Rollup Summer? From Rollup Summer, the following sub-narratives may be derived:

Sub-Narrative Guess 1: “Celestia is Ethereum in the Rollup Era”

ZKFair and Manta, as well as many more new rollups, will feature Celestia’s DA offerings, and Celestia is moving from story to example. Once the example project using Celestia has good market feedback, more new rollups will inevitably follow suit. “Using Celestia as the DA layer” may become the standard configuration of the new Rollup, and Celestia will become the new Consensus layer of Rollups, and then become the core infrastructure of the Rollup era.

From this, there may be a sub-narrative of “Celestia is Ethereum in the Rollup era”, and whether this story can come true in the future is not important in the short term, because from Celestia’s current circulating Market Cap of only 2.3 billion $, it is two orders of magnitude away from Ethereum’s circulating Market Cap of 270 billion $.

Source:

Sub-Narrative Guess 2: Interest-bearing assets become standard

The replacement process of interest-bearing assets, especially interest-bearing stable coins such as sDAI, for mainstream stable coins has been relatively slow in the past, but in the Airdrop activities of Blast and Manta, ETH interest-bearing assets and interest-bearing stable coins have almost become the native assets of this new type of Rollup, and if more Rollups follow up with such practices, it will directly promote the expansion of user groups and the formation of habits. This is directly favourable information for interest-bearing asset issuers that have access to strong rollup partnerships, such as Blast for Lido and MakerDao, and Manta for Stakestone and Mountain Protocol.

Sub-Narrative Guess 3: Rollups gobble up L1 market share

In terms of experience, there is no substantial difference between Rollup and L1, and the L1 public chain tide of the previous cycle may reappear in the form of a sovereign rollup tide in this cycle, and Rollups will compete with each other while directly competing with L1 for users and funds. At the same time, there are also opportunities to pay attention to the native dapps on some fast-growing Rollups, such as LayerBank, a lending project on Manta, whose total deposit size has exceeded $300 million, which is close to the data of Radiant, the leading lending project on Arbitrum.

However, while we are optimistic about the rapid development of many rollups, it is also important to consider the risk of narrative failure.

The risks of the Rollup Summer narrative

The core challenge of the new rollup is a smooth transition from startup to growth. It is relatively simple to incentivize the inflow of funds with TokenAirdrop, but the challenge of incentives is more complex if you want to keep users and funds for a long time. In fact, various L1s in the previous cycle also had similar attempts, such as launching hundreds of millions of public chain incentive funds to encourage the head Defi on Ethereum to migrate, while Defi transferred the incentives to their users to improve their business data, such measures achieved good results in the early stage, but with the introduction of similar policies in each public chain, the effect of incentives gradually declined in the competition.

And even the current old rollups, such as Arbitrum and Optimism, have been issuing their own token subsidies to ecological projects, and then transferring them to users through ecological projects, hoping to retain users’ activity and funds. Arbitrum’s latest round of total incentives exceeded 70 million ARB (currently worth more than $140 million).

Therefore, we still need to see how Rollup Summer will develop as an embryonic narrative in the future, and we still need to see what happens next for the new rollup.