By some measures, Ethereum’s bet on its “rollup-centric” future has gone too well: Rollups now process more transactions than Ethereum itself and have been called parasites that depress the price of its cryptocurrency.

So, why doesn’t anyone want their tokens?

Tokens for major rollups, also known as layer 2 blockchains, or L2s, have had a miserable year: Arbitrum is down 66% since January 1; Optimism has fallen 56% in that span; Starknet is down a whopping 84%; and ZkSync is off 55%. Mantle has been the least worst off, falling a modest 10%.

At the same time, crypto has boomed.

The market value of all tokens is up more than 46% this year. Even Ethereum, which is at a three-year low relative to Bitcoin — a fact that has prompted hand-wringing and finger-pointing in recent weeks —, is up 10% since January 1.

Rollups’ abysmal year can be pinned on the swelling supply of their tokens and constant sell pressure from affiliated organisations, according to analysts who spoke to DL News.

Whether that changes is less clear.

“It’s usually lower lows before higher highs unless the L2s implement material changes that return value to the token,” Ian Unsworth, the founder of Kairos Research, told DL News.

But Brian Rudick, director of research at crypto trading firm GSR, believes a market-wide rally is around the corner. And he thinks it can lift rollup tokens, too.

Rollup boom

Rollups are built to help Ethereum reach mass appeal by offering transactions at a fraction of the cost.

The distributed group of developers that work on Ethereum have gone all-in on rollups, betting they offer a more practical road to mass adoption than attempts to lower costs and improve throughput on Ethereum itself.

That bet appears to be paying off. There are now more than 200 rollups live or in development, according to L2BEAT. Sony, Uniswap, and crypto exchange Kraken are among the companies that recently announced plans to create their own rollups.

Existing rollups blockchains have processed more than three times as many transactions as Ethereum itself over the past year, according to data collected by Jack Gorman, a data scientist at venture capital firm Variant Fund.

Rollups’ success has even frustrated some observers who believe they’ve depressed the price of Ether, as Ethereum no longer destroys — or “burns” — more tokens than it creates, making it inflationary.

Unlocks and grants

Nevertheless, rollups’ tokens — often compared to stock in a publicly traded company — have been falling all year.

Analysts say those declines are a simple case of supply and demand.

“OP and ARB both saw substantial token unlocks this year,” Thomas Bautista, a research analyst at GSR, told DL News, referring to tokens from Optimism and Arbitrum.

“The significant increase in circulating supply created sell pressure, driving down individual token prices.”

And there are more unlocks coming.

According to Token Track, 40% of all Arbitrum tokens are in circulation. Only 29% of OP tokens are currently in circulation, and Starknet will face an even larger supply shock, with a mere 19% of its tokens circulating.

Mantle is an outlier among rollups, with 54% of its tokens currently in circulation.

“In dollar terms, this means we are going to see several billions worth of tokens come into circulation over the next few years,” he said.

Moreover, the cooperatives and foundations that manage most rollups use those tokens to fuel the rollups’ growth.

For example, Arbitrum DAO in June voted to create a “Gaming Catalyst Program” that would provide grants and invest in game developers and studios. It was funded with more than 200 million ARB tokens, worth about $200 million at the time.

“Right now, all the L2s are really focused on growth, and a lot of that growth is through token incentives,” Unsworth said.

“There’s nothing wrong with that, it’s obviously with the intent of getting to a point where there is so much value being created on the chain itself that it can begin flowing back to the DAO or token holders themselves.”

To be sure, the combined market value of major rollup tokens has held steady despite unlocks and sell pressure, “suggesting that the market’s overall valuation of top L2s has held steady despite the price declines,” according to Bautista.

And if crypto enjoys an industrywide rally, it could even lift rollup tokens despite planned supply increases, according to Rudick.

“Unlocks are typically a headwind for token prices, but the largest determinant on how much [or] whether they impact price will likely be the market backdrop,” he said, “as large unlocks are often much more easily absorbed when crypto prices are running.”

The US election, central banks’ lowering interest rates, and excitement over crypto-based exchange-traded funds could buoy crypto markets through the end of the year, Rudick added.

And looking at token performance in 2024 might not be entirely fair to some rollups.

That’s because a major Ethereum upgrade came into focus at the end of 2023, igniting a rally among beneficiaries like Arbitrum and Optimism. (Starknet and ZkSync released their tokens in February and March, respectively.)

The benefits of those upgrades “were priced into the L2 tokens at year-end,” Bautista said. “Using December 31 [2023] as the comparison point might amplify the underperformance.”

In other words, rollup tokens may have plummeted in value in 2024, but Optimism and Mantle are actually up slightly since October 2023, and Arbitrum’s decline is a more modest 44%.

In any case, investors will find it will take several years before the tokens can trade entirely on their fundamental value.

All Optimism and Arbitrum tokens will have entered circulation by early 2027. Starknet and ZkSync tokens will be fully unlocked in 2028.

“Once those tokens are fully unlocked, that’s when things can get interesting,” Unsworth said. “For example, we’re just now seeing Aave go on its first real run with 100% of the supply unlocked.”

Aleks Gilbert is a DeFi correspondent based in New York. You can reach him at aleks@dlnews.com.