Code is not a moat. An L2's core value proposition—its sequencer, prover, and bridge—is defined by open-source code that any competitor can fork in minutes. This creates a market where technical differentiation is ephemeral and competition is based solely on temporary subsidies and marketing.
layer-2-wars-arbitrum-optimism-base-and-beyond
Blog
The Cost of Forkability: Eroding the L2 Network Effect
Open-source L2 tech stacks like the OP Stack and Arbitrum Orbit enable rapid innovation but create a prisoner's dilemma: cheap forks permanently fragment the very network effects—liquidity, users, and developers—that give a chain value.
introduction
THE NETWORK EFFECT TRAP
Introduction: The Forkability Paradox
The very permissionless nature that enables L2 innovation is systematically destroying the economic moats and network effects they seek to build.
The liquidity is trapped. The primary network effect for an L2 is its locked value (TVL) and active user base. However, canonical bridges like those on Arbitrum and Optimism create vendor-locked liquidity, which is not portable and does not accrue to the underlying rollup stack, only to the specific chain instance.
Forking resets the flywheel. A successful fork of, say, an Optimism Stack chain does not inherit Optimism's TVL or users. It starts from zero, forcing the forker to spend capital on bootstrapping liquidity—a cost that erodes the economic sustainability of the entire L2 category. This is the forkability paradox: permissionless innovation commoditizes the infrastructure it relies on.
Evidence: The proliferation of OP Stack chains (Base, Zora, Mode) and Arbitrum Orbit chains demonstrates the ease of forking. Yet, their combined TVL and activity remain a fraction of their parent L1s, proving that forking the tech does not fork the network effect.
key-trends
THE COST OF FORKABILITY
Key Trends: The Forking Landscape
Low-friction forking commoditizes L2 tech stacks, forcing protocols to compete on economic security and ecosystem liquidity instead of technical novelty.
01
The Problem: Forking Kills the Protocol Moat
Open-source code and permissionless deployment turn L2s into interchangeable commodities. A new chain can launch with Arbitrum Nitro's tech in days, forcing incumbents to defend their $2B+ TVL with more than just code.
- Moat Erosion: Technical innovation alone is no longer a defensible advantage.
- Value Shift: Competition moves from the VM to the validator set and capital efficiency.
- Example: The proliferation of OP Stack chains demonstrates the ease of forking a full stack.
~7 Days
To Fork a Chain
$0
Code Licensing Cost
02
The Solution: Economic Security as the New Moat
The only sustainable advantage is the cost to corrupt the system. This shifts the battleground to cryptoeconomic design and validator capital.
- Stake-Based Security: Protocols like EigenLayer and Babylon allow L2s to rent Bitcoin or Ethereum stake, creating massive slashing costs for attackers.
- Sequencer Economics: Capturing MEV and sharing fees with stakers (e.g., Espresso Systems) aligns validator incentives with chain growth.
- Result: A fork must replicate not just code, but a $1B+ economic security budget.
$1B+
Security Budget Moats
10-100x
Attack Cost Multiplier
03
The Solution: Liquidity Becomes the Ultimate Barrier
Deep, sticky liquidity is harder to fork than a codebase. L2s must become the most capital-efficient environment for assets and applications.
- Native Yield Integration: Chains that natively integrate Ethena's sUSDe or restaking yields offer superior returns, locking in TVL.
- Intent-Centric Flow: Architectures that route user intents via UniswapX or CowSwap make the chain a liquidity hub, not just an execution layer.
- Canonical Status: Becoming the default deployment for major protocols (e.g., Aave, Uniswap V4) creates a network effect forks cannot replicate.
>50%
TVL Sticky
~0 Slippage
Target for DEXs
04
The Problem: Fragmentation vs. Shared Security
Every fork fragments liquidity and security, creating a weaker overall ecosystem. Users and developers face overwhelming choice with no clear winner.
- Developer Dilution: Apps must deploy on dozens of chains, increasing overhead and security surface.
- Security Sum Game: Capital securing 100 forked chains is less effective than capital securing one sovereign chain.
- Interop Tax: Bridging assets between forks via LayerZero or Axelar introduces new trust assumptions and fees.
100+
Active L2/L3 Forks
15-30bps
Interop Bridge Tax
05
The Solution: Standardized Stacks with Sovereign Upgrades
Embrace forking at the stack level but add governance for coordinated upgrades. This creates shared innovation without fragmentation.
- OP Stack's Superchain: A shared fault-proof system and cross-chain messaging standard turns forks into a cohesive network.
- Modular Sovereignty: Chains using Celestia for DA and EigenLayer for security can fork the execution layer while retaining shared security and composability.
- Outcome: Forking adds to the collective network effect instead of fracturing it.
1 SDK
Unified Development
Shared
Security Layer
06
The Verdict: The End of the 'Better VM' Era
The winning L2s post-2024 won't be the ones with the cleverest virtual machine. They will be the ones that best orchestrate capital and community.
- Winning Traits: Superior validator economics, integrated native yield, and canonical app relationships.
- Losers: Chains competing solely on theoretical TPS or minor gas savings.
- Future Battleground: The merger of restaking, intent-based UX, and shared sequencers defines the next paradigm.
0
VM Advantage
100%
Econ & Liquidity
deep-dive
THE ARCHITECTURAL WEAKNESS
Deep Dive: How Forkability Erodes Moats
The open-source nature of L2 codebases commoditizes core technology, forcing competition onto non-technical battlegrounds.
Open-source code is a commodity. The core innovation of an L2—its sequencer, prover, or data availability layer—becomes a public good upon launch. Competitors like Optimism's OP Stack or Arbitrum's Nitro can fork the code, removing the technical lead.
The moat shifts to distribution. With technology equalized, the real competition is for users and liquidity. This explains the massive airdrop wars and grant programs from Base, Blast, and zkSync, which are costly customer acquisition strategies.
Forking accelerates commoditization. A successful fork like Base on the OP Stack validates the model but also proves the stack's fungibility. It creates a winner-takes-most ecosystem for the stack provider, not the individual chain.
Evidence: The rapid proliferation of OP Stack L2s (Base, Zora, Mode) demonstrates the low barrier to entry. Their combined TVL often rivals the founding chain, Optimism, diluting its network effect.
L2 NETWORK EFFECT EROSION
Forkability Impact Matrix: A Comparative View
Quantifying the economic and technical impact of high forkability on leading L2 ecosystems, comparing native tokens to forked alternatives.
| Key Metric / Feature | Arbitrum (ARB) | Optimism (OP) | Base (Fork-Friendly) |
|---|---|---|---|
Native Token TVL Locked in Governance | $1.8B | $700M | $0 |
Protocol Revenue Accrual to Native Token | 100% via DAO treasury | 100% via Sequencer fees | 0% (to Coinbase/Users) |
Unique Protocol-Specific Tech (e.g., Fraud Proof System) | BOLD, Stylus, multi-round fraud proofs | Cannon fault proof, OP Stack | Standard OP Stack (no unique core) |
Time to Deploy Functional Fork |
| ~1 week (OP Stack) | < 48 hours (OP Stack) |
Ecosystem Grant Program Size (Committed) | $200M+ ARB | $500M+ OP | N/A (Relies on Coinbase) |
Major DeFi Protocol Exclusivity (e.g., GMX, SNX) | |||
Cross-Chain Messaging Dependence (e.g., LayerZero, Axelar) |
counter-argument
THE FORK-TO-PROGRESS THEORY
Counter-Argument: Forking as Innovation, Not Fragmentation
Forking is a necessary evolutionary pressure that accelerates protocol development and user choice.
Forking accelerates R&D. Permissionless forking is a public goods funding mechanism that outsources protocol R&D. Projects like Optimism and Arbitrum emerged from Ethereum's conceptual fork, proving that competition validates core ideas and forces rapid iteration.
Standardization follows fragmentation. The initial chaos of forked chains creates demand for shared liquidity and tooling. This pressure births universal standards like ERC-4337 for account abstraction and drives interoperability solutions from LayerZero and CCIP.
Users arbitrage value, not loyalty. The 'fragmented' user experience argument ignores that users are rational aggregators. They use LayerSwap or Socket to chase yield across chains, forcing L2s to compete on performance and cost, not just brand.
Evidence: The OP Stack's Superchain vision formalizes this. By encouraging forks like Base and Zora to share a security layer and messaging standard, it transforms fragmentation into a coordinated, modular ecosystem.
case-study
THE COST OF FORKABILITY
Case Study: Base and the OP Stack Experiment
Base's success as an OP Stack rollup reveals a critical tension: open-source tech stacks commoditize core infrastructure, forcing L2s to compete on execution, not just tech.
01
The Commoditization of the L2 Stack
The OP Stack's MIT license made it a public good, allowing Base to launch with proven, battle-tested code. This eliminated the multi-year R&D cycle but turned the core sequencer and bridge into a commodity.
- Benefit: Base achieved $7B+ TVL in ~18 months, validating the fork-and-launch model.
- Cost: It set a precedent where any team can replicate the core tech, eroding a primary moat.
~18mo
To $7B TVL
MIT
License
02
The Superchain Vision vs. Sovereign Reality
Optimism's "Superchain" envisioned a cohesive network of L2s. Base's adoption was a win, but its massive economic gravity created a power imbalance.
- Problem: Base dominates the chain with ~90% of OP Stack TVL, making it the tail that wags the dog.
- Reality: Other OP Stack chains (e.g., Zora, Mode) become niche satellites, not equal peers, fragmenting the intended network effect.
~90%
TVL Share
1 of 8+
Chains
03
Competition Shifts to the Application Layer
With the stack forked, sustainable advantage now requires superior sequencing, business development, and user experience. This is a harder, operational game.
- New Moat: Base's integration with Coinbase's 110M+ verified users is an un-forkable advantage.
- New Battlefield: Success hinges on developer grants, seamless fiat onramps, and killer apps—areas where pure tech forks fail.
110M+
User Pool
$0
Fork Cost
04
The Inevitable Fracturing of Shared Upgrades
A shared stack implies shared upgrades. In practice, a chain as large as Base has divergent incentives from smaller chains, risking governance deadlock or forks.
- Risk 1: Base may delay or opt-out of upgrades that don't serve its scale, breaking Superchain cohesion.
- Risk 2: Critical protocol changes (e.g., fault proof systems) become political, not technical, decisions.
High
Governance Risk
Divergent
Incentives
future-outlook
THE COST OF FORKABILITY
Future Outlook: The Path to Sustainable Scaling
The ease of forking L2 stacks erodes network effects, forcing a strategic pivot from cheap blockspace to defensible ecosystems.
Forkability commoditizes execution layers. The shared tech stack (OP Stack, Polygon CDK, Arbitrum Nitro) creates a race to the bottom on sequencer fees, as any chain can offer identical performance.
Sustainable value accrual shifts to applications. Protocols like Uniswap and Aave become the primary moats, not the L2 they run on, incentivizing chains to subsidize native dApp development.
The endgame is sovereign app-chains. Projects like dYdX and Lyra v2 demonstrate that high-value applications will vertically integrate, operating their own rollup for maximal fee capture and governance.
Evidence: The combined TVL of OP Stack forks (Base, opBNB, Zora) is less than 10% of Arbitrum's, proving that liquidity fragmentation is the immediate cost of forkability.
takeaways
THE COST OF FORKABILITY
Key Takeaways for Builders and Investors
The ease of forking L2 codebases is fragmenting liquidity and developer mindshare, threatening the network effects that justify high valuations.
01
The Problem: The Superchain is a Fragmentation Machine
Optimism's OP Stack and Arbitrum's Orbit frameworks commoditize L2 creation, leading to a proliferation of isolated chains. This dilutes liquidity, fragments security budgets, and forces developers to deploy everywhere. The network effect accrues to the framework, not the individual chain.
- TVL is spread thin across dozens of chains.
- Security is a shared cost but a local responsibility.
- Developer tooling becomes a multi-chain integration nightmare.
50+
Active Forks
<1%
Dominance Per Fork
02
The Solution: Native Asset Moats & Sequencer Capture
To resist commoditization, L2s must create unforkable economic value. This means capturing value at the sequencer layer and making the native token indispensable for security or throughput.
- Enforce sequencer fee payment in the native token (e.g., Metis).
- Use the token for data availability or proof submission fees.
- Build protocol revenue that flows to a treasury controlled by token holders.
$100M+
Annualized Fees
>30%
Seq. Capture Target
03
The Reality: Application-Specific Rollups Win
Generic L2s are forkable; purpose-built ones are not. The defensible endgame is vertical integration, where an app is the chain. The application's user base, liquidity, and brand become the moat.
- dYdX: Orderbook and governance are the chain.
- Aevo: Perps trading is native to the L2.
- Lyra: Options protocol owns the stack. Forking the code doesn't fork the community.
10x
User Stickiness
1
Deployment Target
04
The Investor Lens: Value Accrual is the Only Metric
Evaluate L2s not by TVL or transactions, but by sustainable value capture. A chain with $5B TVL but $0 in protocol revenue is a feature, not a business. Focus on economic models that resist forking.
- Fee Switch Activation: Is there a credible path to turning it on?
- Token Utility: Is it a pure governance token or a required resource?
- Ecosystem Funding: Does the treasury reinvest to bolster the moat?
$0 vs. $50M
Rev. Forkable vs. Captured
P/E Ratio
New Valuation Metric
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