OKX Ventures: One of the Major VC Players in Layer 2

We have witnessed blue-chip companies incubating and growing rapidly after the release of Ethereum 2.0. Achieving mass adoption on Ethereum has been a major challenge for developers over the past 8 years. Fortunately, layer 2 technology has emerged at just the right time. This solution provides a clear and specific way to balance speed and security in a decentralized manner.

At the beginning of this year, as Ethereum steadily progresses along its established roadmap of upgrades such as Shanghai and Cancun, Layer 2 has also seen vigorous development. Especially after the Arbitrum airdrop, the Layer 2 sector’s expectations were raised to the fullest extent, and the TVL of the entire track continued to climb, even surpassing some Layer 1 projects.

OKX Ventures has a deep understanding of the crypto cycle and has made decisions to focus on infrastructure opportunities. We strategically invest in the long-term structural value of Layer2 projects. Other top global VCs have also put their money into these innovations. Looking back at high-growth public chains such as Near, Solana, AR, and Cosmos, OKX Ventures has played a role behind the scenes. However, this is just the tip of the iceberg for OKX Ventures’ extensive layout in the five major fields of infrastructure, DeFi, GameFi, Web3, metaverse, and NFT. In just two years, OKX Ventures has successfully invested in over 300 projects worldwide, and has become one of the most influential cryptocurrency venture capitals in the industry.

Investing in cryptocurrency is not rocket science or a “all in” gambling game. To find success in the vast market, one must have a thorough and systematic understanding of the intrinsic logic of investment targets. The following article provides a detailed yet straightforward explanation of why OKX Ventures is bullish on Layer2. It delves into the layout of the portfolio, investment logistics, trends, and more to explore the edges of Layer2.

Introduction of OKX Ventures

OKX Ventures is an investment institution under the top worldwide trading platform, OKX. It focuses on exploring the best blockchain projects globally, supporting the most cutting-edge blockchain technology innovation, promoting the healthy development of the global blockchain industry, and investing in long-term structural value.

The initial capital of OKX Ventures is USD 100 million, with over 300 portfolios spanning blockchain infrastructure (40%), DeFi (20%), GameFi (15%), NFT (15%), Web3 (15%), and Metaverse (10%).

OKX Ventures is committed to investing another $1 billion in Ethereum, Layer 2s, public goods, and Web3 in the coming years. We aim to help entrepreneurs who contribute to the development of the blockchain industry build great companies and bring global resources and historical experience to blockchain projects.

Layer 2 investment logic

We are very optimistic about Layer 2 scaling solutions. These solutions have become popular in the mainstream community prior to Ethereum 2.0, as they improve transaction speed (faster finality) and transaction throughput (higher transactions per second) beyond Ethereum Layer 1. Additionally, Layer 2 can meet the emerging demands from DApps development and is prepared for mass adoption in the future, thereby enhancing Ethereum’s leading position. Both Layer 1 and Layer 2 are complementary, which is also the core logic behind OKX Ventures’ investment in the Layer 2 map.

Currently, we have invested in multiple prominent Layer 2 projects including Arbitrum, Scroll, Starkware, zkSync, Taiko, and Metis. We will continue to increase our investments in the future.

As an example of strategic investment by OKX Ventures, Scroll is positioned as an EVM-equivalent zk-Rollup and is also one of Vitalik’s examples of Type 2 zkEVM projects. It provides minimal trust assumptions, high throughput, and fast finality.

According to on-chain data, Scroll has made great progress. As of 10:00 pm on March 26th this year, the number of wallet addresses on its Alpha testnet was approximately 1,799,980, with 594,361 new wallet addresses added. About 7,886,928 user transactions were processed, generating 757,543 blocks with an average block time of approximately 3 seconds. The data performance is impressive.

From the development path, Scroll has always needed to solve the problem of decentralized verification. Currently, the first stage is to improve the performance of Prover through hardware acceleration to achieve decentralization. The next step is the decentralization of Sequencer, where anyone can run a node. We support Scroll’s development plan and path and are willing to support a universal L2 network that can better accommodate EVM to deploy smart contracts and general computing for more complex functions. When zk’s efficiency is no longer an issue, there will be great opportunities for the infrastructure architecture of the entire Ethereum scaling layer.

Comparison between Optimism and Arbitrum, as well as the competition between ZK and OP

Compared to a competitive relationship, we believe that Optimism and Arbitrum have a higher-dimensional incentive relationship, jointly strengthening the Layer2 track. Both Optimism and Arbitrum adopt Optimistic Rollup technology, and are currently the two largest Layer2 solutions, aimed at solving Ethereum’s scalability issues.

Both teams have been committed to continuously improving performance and expanding their ecological influence in technology. Both parties are very mature in their strategies for ecological accumulation and user airdrops, which is reflected in their market share in the Layer2 ecosystem. This is worth learning for all Layer2 projects that have not yet been launched. The impact of the Arbitrum airdrop on Layer2 and the entire industry is gradually becoming apparent. As of the time of writing, Arbitrum’s TVL is $1.79 billion, and the number of transactions processed per day is also between 2–3 million.

The differentiation competition between ZK and OP systems is becoming increasingly apparent. Compared to the first-mover OP system, the progress of ZK Rollups projects is also very fast. It can be clearly seen that the progress of zkSync Era, Scroll testnet, Taiko testnet, Starknet, Polygon zkEVM, and Consensys Linea are all good.

For example, Scroll’s Alpha test network is live on Goerli, supporting smart contract deployments, and working to iterate and improve the performance of zkEVM. Starkware went live on the StarkNet mainnet in November 2021, and currently has over 50 projects live on the mainnet and over 100 projects live on the test network. zkSync launched the zkSync Era mainnet, with over 240 eco-applications in DeFi, Gamefi, infrastructure, social, public goods, and other tracks. Taiko launched the Alpha-2 test network “Askja”, which allows for open deployment of smart contracts and deployment of Uniswap forks, among other features.

However, given that the OP system currently holds over 95% of the market TVL, the ZK system needs faster progress in mainnet launch and ecosystem development to compete for user growth, as the time window for the ZK system is getting shorter. As Layer2 ecosystems gradually mature, if Rollup fees can be significantly reduced after the Cancun upgrade, user growth and ecosystem development may be the key winning factors in the competition between the ZK and OP systems. We look forward to the moment when Layer2 blossoms, truly bringing the Next Billion Users to the industry.

Impact of Ethereum 2.0 on Layer 2

We are concerned about the impact of the Cancun upgrade and Danksharding progress on Layer2. According to the latest Ether Developer Conference, we anticipate that the most significant element of the next Cancun upgrade will be EIP-4844, now renamed Deneb. Deneb introduces a new transaction type called the Blob-carrying Transaction, which marks the first time Ether has built a separate data layer for L2. This is also the first step in the subsequent Full Danksharding implementation. With the introduction of this new transaction type, Ether can carry transient data called blob. This means that data that was previously stored as calldata can now be stored as blob, which is much cheaper to store.

Danksharding can help Ethereum achieve a combination of centralized blockouts, decentralized verification, and censorship resistance. This makes Ethereum a settlement layer and data availability layer, leaving room for Layer 2 to improve computational performance. The impact of Danksharding on Ethereum is that it improves the performance and scalability of the platform, allowing Ethereum to better support more application scenarios and users.

We are also focusing on the development of the “Enshrined zk-rollup” proposed by the Ethereum Foundation and vGod. This is part of the visualization roadmap released by Vitalik to “generate ZK-SNARK proofs for everything.” OKX Ventures will monitor the long-term technical plans for Ethereum and its impact on Layer2.

Expectations for Layer 2 ecosystem development in the next 2 Years

In the next year or two, the Cancun upgrade may benefit Layer2 diversification, DA layer development, and RaaS track.

Regarding L2 track diversification, EIP-4844’s expansion and low fees will benefit each L2 ecosystem. The OP ecosystem will become more diversified, while the ZK ecosystem will become more available due to enhanced data availability. This will allow independent Layer 2 solutions, which are difficult to operate at a high cost, to grow rapidly. In addition to these two mainstream Rollups, EIP-4844 may bring opportunities to other Layer2 projects, such as Metis, Boba, Aztec, zkswap, zkspace, and other projects that are still developing. They will benefit from the reduction of uploading fees, and the ecosystem will become richer, with an increase in the number of users.

Regarding DA layer development, since Blob data can only be saved for a short period, there are problems with the call of historical data. Decentralized storage protocols and other solutions will have a new development channel, while Layer2 expansion solutions also need to use the data availability layer. Additionally, the Cancun upgrade will benefit the L1 storage expansion network, such as Eth storage, Arweave, Filecoin, and other projects that have a layout in the Ethereum DA layer.

Regarding RaaS track, customized RaaS may gain the most. After EIP-4844, all kinds of Rollup services will expand within certain markets, and full competition may be seen within the RaaS ecosystem, formed by ZK-based multi-layer grid and OP’s ecosystem building. Currently, the advantage of OP-based RaaS is to build the state quickly and ahead of the development of ZK ecology, especially the bedrock upgrade of op stack + 4844 online. However, the small improvements brought purely from cost and efficiency are not attractive enough before EIP-4844. ZK-based RaaS multi-layer grid design can superimpose the advantages of low cost and customization, which seems to be more competitive in the long run. At the specific implementation level, Gaming-type projects may have more demand to go to layer 3, defi-type projects will stay in layer 2, and social-type projects may have daily behavior in layer 3 or under the chain. Finally, core data and relationships are placed on layer 2.

Bitcoin Layer2 project

As the pioneer of decentralized narrative, Bitcoin remains the cornerstone of credit in the crypto industry. OKX Ventures is very bullish on Bitcoin-based innovation. Recently, Taproot adoption has catalyzed the growth of the entire Bitcoin ecosystem, with an average of around 10% and cumulative mintages surpassing 500,000. Additionally, cumulative revenue has surpassed 100 BTC, and daily transaction fees have reached a record high of 9.28 BTC.

Bitcoin Layer2 projects, such as Lightning Network, Liquid, RSK, and Stacks, are also growing steadily. These projects are important for the further development of the Bitcoin ecosystem as they improve scalability and speed of transactions, reduce transaction costs, and enhance privacy and security by enabling off-chain transactions that do not need to be broadcast to the entire network. While Bitcoin Layer2 projects are progressing more slowly than Ethereum Layer2, we remain extremely patient with their development.

Dimensions of evaluating investment projects

OKX Ventures is committed to embracing the future of decentralized development for the long term, not just for financial returns. Therefore, we are not traditional financial investors who just “give money”, but are willing to “provide services” and “resources” and accompany all our “entrepreneurial partners” to grow together. We not only discover excellent teams, products, and innovative technologies, but also empower excellent entrepreneurial projects, thus providing long-term service for decentralized innovation.

When investing in projects, OKX Ventures adopts different models and evaluation methods for different projects. Here we briefly explain several important dimensions, including product and technological innovation, token economics, team background, and company situation.

1. In terms of product and technological innovation, OKX Ventures focuses on whether the project’s technology and products are leading in the industry, and even have pioneering theoretical and narrative innovations.
2. In terms of the token economy dimension, we are concerned about the overall design and allocation ratio of the token, the overall unlocking situation, and the risk of misconduct. We also look at whether the token can truly motivate users, whether the depth of integration between token application scenarios and products is high, and whether there is real value capture. We pay attention to mechanisms such as buyback, dividends, deflation, and staking plans.
3. Team background and company perspective, with a focus on the founder’s professional experience and expertise, we believe that excellent entrepreneurs are the most important Driving factor in this industry.

Investment sub-sectors to watch

Investment is focused on the future, finding greater opportunities in the rapidly changing market. OKX Ventures is optimistic about several areas, including the Ethereum ecosystem, multi-chain ecosystems, innovative onboarding of new users, and the revival of DeFi.

Regarding the Ethereum ecosystem, OKX Ventures is bullish on the long-term development of Ethereum and its Layer2s, and has invested in several projects including the Ethereum donation platform Gitcoin, Layer2 ecosystems such as Arbitrum, Scroll, Zksync, and Starkware, and will continue to invest in various innovations based on the Ethereum ecosystem.

In terms of multi-chain ecosystems, we have already established a layout for multi-chain ecosystems, cross-chain ecosystems, and corresponding ecological projects, such as Near, Polkadot, Solana, AR, Cosmos, Layerzero, Aurora, Astar Network, Permaweb, Taki, Acala, Zenlink, and their projects.

In the area of innovative onboarding of new users, new users are critical to this industry. We will continue to focus on low-threshold, innovative applications that can sustainably attract new users, so we are very optimistic about innovative projects with “onboarding” capabilities.

Regarding the revival of DeFi, we maintain an optimistic and cautious attitude. Efficient decentralized trading mechanisms, compliance, and corresponding infrastructure are our investment scope. In addition, we will continue to pay attention to innovative projects and mechanisms in DeFi, such as non-custodial dApps, derivatives and options, DeFi scaling solutions (such as L2 rollups and Cosmos application chains), and real-world assets (RWA).

Crypto industry cycle

Industry cycles do not directly affect OKX Ventures’ investment projects. We invest our efforts in participating in the development of the industry itself and technological progress. We focus on Ethereum’s Danksharding, EOF, and Layer1 zk rollup, and we also pay attention to innovative applications that lower user barriers and AI production tools that improve productivity. From a technological development perspective, the cryptocurrency industry is still in its early to mid-stage, with many innovative technologies and concepts worth paying attention to, and the overall size of the industry is expanding.

The current macro environment has accelerated the deleveraging of the cryptocurrency industry, and the industry is moving towards a healthier and more compliant direction, paving the way for new innovations in asset categories. The next three years will be the most productive period for building and investing in the cryptocurrency industry, and OKX Ventures is continuously increasing its investment in high-quality assets, with a commitment of $1 billion to support Ethereum and Layer2 ecology, infrastructure, Web3, and other key areas.

Conclusion

Institutional investors not only have funding and informational advantages, but also possess a more acute sense of smell, more precise judgment, and a deeper understanding of the industry, providing a reference for the outside world. Through in-depth conversations with OKX Ventures, we have deepened our understanding of Layer2 and provided new inspiration for users in selecting and investing in projects.

As a bridge for the transition to Ethereum 2.0, Layer2’s importance and necessity are self-evident. With the arrival of the Arbitrum airdrop, the entire Layer2 sector is being pushed to a climax. Different Layer2 solutions have evolved into a diversified pattern of sidechains, Plasma, state channels, Rollups, Validium, and hybrid solutions, with differences in security, decentralization, and scalability. However, currently Rollups’ TVL is far ahead.

Ethereum 2.0 is a complex and lengthy process. It is foreseeable that as the industry continues to expand and Layer2 solutions are optimized and iterated, more and more Dapp applications will be built on top of Layer2. This will lead to further migration of users and funds to Layer2, and its ecosystem will inevitably become more prosperous.

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About OKX Ventures

OKX Ventures is the investment arm of leading crypto exchange and Web3 technology company OKX, with an initial capital commitment of USD 100 million. It focuses on exploring the best blockchain projects on a global scale, supporting cutting-edge blockchain technology innovation, promoting the healthy development of the global blockchain industry, and investing in long-term structural value.

Through its commitment to supporting entrepreneurs who contribute to the development of the blockchain industry, OKX Ventures helps build innovative companies and brings global resources and historical experience to blockchain projects.

Find out more about OKX Ventures here.

About OKX

OKX is a world-leading technology company building the future of Web3. Known as one of the fastest and most reliable crypto trading platforms for investors and professional traders everywhere, OKX’s crypto exchange is the second largest globally by trading volume and is trusted by more than 50 million users.

OKX’s leading self-custody solutions include the Web3-compatible OKX Wallet, which allows users greater control of their assets while expanding access to DEXs, NFT marketplaces, DeFi, GameFi and thousands of dApps.

OKX partners with a number of the world’s top brands and athletes, including: English Premier League champions Manchester City F.C., McLaren Formula 1, The Tribeca Festival, golfer Ian Poulter, Olympian Scotty James, and F1 driver Daniel Ricciardo.

OKX is committed to transparency and security and publishes its Proof of Reserves on a monthly basis.

To learn more about OKX visit: okx.com

Disclaimer

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