IOSG Ventures Founder: The Growth Dilemma of Layer2 from an Investor's Perspective and the Path to Breakthrough
TechFlow Selected TechFlow Selected
IOSG Ventures Founder: The Growth Dilemma of Layer2 from an Investor's Perspective and the Path to Breakthrough
A Rollup with no high-concurrency applications is worthless and will only be a castle in the air.
Navigating Web3 tides with focused insightsL2 Summer or困境？
Recently, several friends running airdrop farming studios have complained to me that many studios previously invested massive resources and transaction volume into zkSync and Linea, only to find themselves with nothing in return—while inadvertently contributing tens of millions of dollars in fees to major L2s. As a result, when new L2s launch, these studios are no longer rushing to generate transactions.
We originally expected a thriving L2 Summer—one that wouldn't rely on farming studios—but now we see that as these studios gradually withdraw, the transaction volumes and TVL of major zkEVMs fail to meet expectations. When speculators in the market stop participating in L2 ecosystems and cease generating vitality, stagnation and ecosystem contraction become inevitable.
L2 Competition from an Investor's Perspective
From an investor’s standpoint, the rationale for investing in L2 infrastructure lies in our belief that these teams, backed by ample capital, will engage in multi-dimensional ecosystem competition, encouraging a flourishing diversity of applications. However, most current L2 arms races aren’t prioritizing ecosystem development. Instead, they continue pouring large sums into aggressively recruiting top-tier ZK experts and engineers from PSE (Privacy & Scaling Explorations)—which, strategically speaking, is understandable. Still, I believe a high-throughput, compatible Rollup without real applications holds little value; it would merely be a castle in the air.
The Growth Dilemma of L2 Ecosystems
Waiting for organic ecosystem growth is a long process. If this arms race fails to catalyze an explosive expansion of Ethereum’s application ecosystem—and instead keeps over-investing and duplicating efforts in low-level technical areas like shared sequencers, bytecode design, and other foundational layers—then we won’t witness a truly vibrant ecosystem emerge.
Currently, competition among L2s for applications is extremely fierce. If an application forms a financial alignment with a particular L2 chain, gaining support from other L2s becomes exceptionally difficult. At this stage, such applications also hesitate to migrate elsewhere, because doing so might cost them future grants from their original partner L2.
Hence, choosing the right partners has become a critical challenge for applications. For this reason, every L2 wants exclusive apps, leading to fragmented “territorial wars” across different chains. Of course, once an app grows large enough, it may evolve into its own appchain or deploy across multiple L2s—but until then, uncertainty looms over whether successful apps will stay within any given L2’s orbit. This hesitation makes L2 teams reluctant to invest heavily at present.
We often see smaller, still-emerging L2 applications unable to secure grants or incentives from certain L2s, forcing them to hop between chains seeking funding just to survive. So which L2s currently haven’t publicly disclosed their ecosystem grant programs?
Solution One: Leading L2 Projects Must Take Initiative in Ecosystem Building
Of course, we don’t want to see L2s forming isolated fiefdoms—that fractures the Ethereum ecosystem. Perhaps this is an outcome of competitive markets, but in our view, leveraging application portfolios to incubate and support more diverse products is essential. Ultimately, attracting and nurturing sizable, committed applications is vital for the health of any L2 ecosystem.
Unicorn companies valued at over a billion dollars should absolutely take responsibility for ecosystem building—it’s crucial. There are many ways to build ecosystems: Starkware and Optimism actively supported Dojo and Mud engines in FOG gaming; Arbitrum offers strong grant incentives and has done exceptionally well in ecosystem support. In a short time, GMX launched exclusively on Arbitrum achieved trading scale and user experience comparable to dYdX. They even co-invested with IOSG in TreasureDAO’s gaming platform (known in the industry as the "on-chain 4399"). Optimism and Coinbase leveraged the OpStack to launch Base, which hosted breakout hits like Friend.tech, generating over $20 million in protocol revenue in under two months and achieving a TVL exceeding $20 million...
What they’ve done is simple: leverage network effects to attract developers, and use protocol tokens and various incentive mechanisms to foster broader innovation and investment. Recently, I’ve discussed this with several zkEVM L2 founding teams who argue that offering airdrops, setting incentive expectations, or internally nurturing ecosystem projects doesn’t necessarily encourage genuine innovation. They prefer a hands-off approach, allowing projects to compete organically. On this point, I believe platforms that avoid significant financial and token-based investments in ecosystem development may gain strategic advantages in future market positioning. Conversely, those failing to commit substantial resources will hit growth bottlenecks.
Solution Two: Competition Should Embrace Strategic Alliances
In theory, L2 competition differs from L1. Ethereum emphasizes equality and open collaboration. Different teams pursue varied technical paths, tackling distinct engineering challenges—all while collectively strengthening Ethereum’s network effect through scaling solutions.
After Ethereum transitioned from ETH2.0 to a Rollup-centric roadmap, the burden of technological advancement shifted to L2s. The industry’s future hinges on super apps and mass adoption. Capital always moves fastest to execute Ethereum’s vision—so should well-funded L2s initiate an arms race focused on application ecosystem development? With valuations reaching tens of billions and capital inflows surpassing $5 billion, how can this funding effectively flow downstream to drive user-facing application innovation?
I believe beyond continued heavy capital investment in applications, zkEVM—representing the broad hope of industry innovation—should reposition itself with a renewed mission for ecosystem planning. L2s should learn from DeFi Lego: entrepreneurs and developers shouldn’t merely replicate similar tech stacks. Instead, they should explore novel ideas and directions, embracing creativity and experimentation. Where possible, especially in open-source protocols and shared directions, standardized approaches should be adopted to minimize redundant resource expenditure. Competition should incorporate strategies of alliance and coordination—directing more capital toward breakthrough applications. In pioneering sectors, no effort should be spared to help each platform nurture its own GMX or Friend.tech.
The Ultimate Vision: A Flourishing Ecosystem – Rise of L3s and Appchains
The industry is currently navigating a phase of turbulent innovation. Throughout the bear market, we've witnessed countless disheartening moments—many first-time founders facing immense challenges. To overcome this, L2 project founders must truly understand their pivotal role. In these difficult times, competition alone isn't enough—we need greater cooperation to encourage and support a truly diverse Ethereum ecosystem.
Mainstream VCs and L2 projects alike can contribute by improving developer environments and ecosystems. The industry must dare to back projects that may never issue a token but provide immense value to others—fostering open-source communities, enhancing developer experience, building better frontends, and investing in developer education and training. I firmly believe an application-driven L2 Summer can lead us out of the bear market!
After dYdX left Starkware, it chose to deploy an appchain on Cosmos. Increasingly, application teams are breaking away from mainstream L2s, reconstructing their own infra + application valuation logic and product architecture. Meanwhile, we’re seeing a surge of Rollup-as-a-Service (RaaS) projects built on OpStack—such as Conduit, Caldera, and Gelato—aggressively supporting gaming and application ecosystems.
For example, Caldera helps protocols and games build small, temporary functions—each requiring 2 to 5 engineering days—with highly customized, hands-on features (offered via monthly or per-feature pricing). Gelato assisted Astar in launching zkEVM on Polygon, charging monthly based on RaaS usage. Emerging players like Arbitrum Orbit, Risc0, and Nil Foundation are also competing and building ecosystem protocols within this evolving RaaS landscape.
Over the past year, IOSG has reduced its infrastructure investment weight from 80% to 60%, increasing allocation to application-focused investments to over 40%. We’re particularly bullish on Asian teams innovating in product-user interaction, AI-driven applications, social gaming, and related fields. We’ll continue supporting these application teams in partnering with various L2s to gain broader ecosystem backing.
This article reflects my personal views only and does not constitute financial advice. Special thanks to Jiawei and Weikeng for their editorial suggestions. Disclosure: IOSG is an investor in most major L2 protocols (including but not limited to Arbitrum, Optimism, Starkware, zkSync, Aztec, Scroll, Risc0, Linea, Taiko, etc.).
Join TechFlow official community to stay tuned
Telegram:https://t.me/TechFlowDaily
X (Twitter):https://x.com/TechFlowPost
X (Twitter) EN:https://x.com/BlockFlow_News
@JinzhouLin
