Emin Gün Sirer, co-founder of Avalanche blockchain, has raised concerns about deceptive trends within certain layer-2 (L2) solutions that pose risks to investors. These “trash” projects, as Sirer calls them, have entered the market with little to no value, prompting Sirer to educate users on their common characteristics and red flags. The lax launch procedures of L2 solutions make it easy for bad actors to create projects that do not align with the core principles of decentralization and security in the cryptocurrency realm. Sirer highlighted warning signs such as a disconnect between a project’s narrative and its technology, centralized sequencers, lack of fraud-proof mechanisms, and a heavy focus on token sales for fundraising rather than practical use on the network.
Another issue pointed out by Sirer is the prevalence of low-float tokens within L2 projects, which can artificially inflate token values through manipulative tactics similar to those employed by Sam Bankman-Fried (SBF). Sirer also advised investors to consider the moral conduct and habits of project founders, as any signs of personal misconduct should be factored into the evaluation process. To help investors navigate the vast number of L2 projects, Sirer suggested identifying the main challenges, or “blockers,” in the crypto space at any given time. Currently, scalability, performance, supporting multiple use cases on the same platform, and integrating with traditional finance (TradFi) are critical challenges that projects should address.
The Layer 2 ecosystem on Ethereum has seen significant growth over the past year and a half, with a total value locked (TVL) exceeding $27 billion. Transaction activity on Layer 2 networks has surpassed that of the Ethereum mainnet, with these networks now processing five times as many transactions. Ethereum-based layer 2 network Arbitrum holds a 49.17% market share among layer 2 networks, with Optimism Mainnet following at 28.85%. The network has seen a consistent increase in TVL, rising about 50% from $1.66 billion in October to the current value of $2.51 billion.
Sirer emphasized the importance of evaluating whether L2 projects genuinely address critical challenges facing the crypto ecosystem before investing. In the wake of the infamous crypto exchange heist orchestrated by SBF, Sirer aims to protect investors from falling victim to similar deceptive projects in the future. By being aware of red flags such as founders selling personal native tokens before a project’s launch and focusing on fundraising through token sales rather than practical use, users can avoid risky investments. Sirer’s warning comes as a reminder for investors to conduct thorough research and due diligence before engaging with any L2 project to minimize potential risks and losses.
