Metis Andromeda Investment Thesis
The race to build blockchains that are secure and scalable has really heated up over the past year, with many layer 1 blockchains gaining immense popularity, touting their chain as an “Ethereum competitor”, as Ethereum gas fees have rendered the chain unusable for many. In their search for alternatives, users may stumble onto chains such as Avalanche or Fantom, as they are EVM compatible and gas fees are much lower. These such chains have accrued a staggering amount of value, not only in market capitalization, but also total value locked (TVL). Top chains such as Binance Smart Chain and Solana have market caps well into the tens of billions, as well as billions of dollars in value held on applications on the chain.
Layer 1 chains dominated the conversation much of 2021, until the fall, when Ethereum layer 2 scaling solutions began to launch. Arbitrum and Optimism were the first two rollups to launch, with Arbitrum gaining a significant amount of TVL, exceeding $2B.
Enter Metis Andromeda
Metis Andromeda is a layer 2 optimistic rollup that launched in December 2021. It benefits from the security and decentralization of the Ethereum main chain, but boasts nearly instant finality for transactions and cheap gas fees, which are paid in METIS, the rollup’s native token. Metis benefits from running on the Metis Virtual Machine, which is EVM compatible, giving users and developers access to the existing tooling and wallets. This allows developers to more easily and quickly launch applications on Metis. The rollup can currently handle around 2000 transactions per second, which is among the fastest chains in terms of throughput. In the short few months since launch, Metis has seen a flourishing DeFi ecosystem spring up, including many of the basic primitives such as lending and borrowing, DEX’s, and yield aggregators.
As promised in the technical whitepaper, Metis has plans to integrate a decentralized storage feature into Andromeda mainnet by the end of Q1 2022. This allows a larger number of transactions to be rolled up at once, which will reduce transaction fees from $2–3 down to just cents per transaction. In addition, in their “First Half of 2022 Roadmap” update, Metis announced plans to rollout an NFT bridge in late February, which will enable users to transfer their NFT’s from Ethereum mainnet to and from Metis Andromeda. This allows much lower cost trading of NFT’s by leveraging Metis’s rollup tech and Ethereum’s security all at once.
Another important distinguishing feature of Metis Andromeda is the concept of Decentralized Autonomous Companies (DAC’s). A DAC performs similar functions to a DAO, however it aims to provide all of the necessary services to a business, such as marketing, messaging, insurance, and payroll — all of the same functions you see in any business. By offering this functionality, Metis intends to be a hub for the Web3 economy.
Key Risks
While much of the above discussed sounds great, there are some concerns over the success of Metis in the medium to long-term. Firstly, and possibly the most obvious concern, is that other solid optimistic rollup solutions also exist, namely Arbitrum and Optimism.
Arbitrum currently has almost $3 Billion TVL, and both Arbitrum and Optimism have more applications currently running on them, with Arbitrum at 59 and Optimism at 23, compared to Andromeda’s 14.
Another main risk posed to Metis’s success is zero-knowledge proofs and zk-rollup solutions. There is much debate over the merits of optimistic rollups vs zk-rollups and which will dominate long-term. There are promising versions of this tech currently in development, such as Starkware and zkSync. The largest decentralized derivatives exchange, dYdX, runs on Starkware and leverages zk-rollup technology, showing its merits in practice. There have been some criticisms of zk-rollups, such as a lack of EVM compatibility. However, if issues such as this are resolved, and zk-technology continues to scale, it could pose a real threat to Metis and other optimistic rollup solutions.
Overall Thesis
Many that are plugged into crypto have seen the immense interest in Ethereum scaling, and rightfully so. The importance that Ethereum has placed on decentralization and security has shown it’s dedication to placing users and network strength first. Optimistic rollups are an important piece in an ever-evolving puzzle, and users are getting excited about transacting with “Ethereum” again, as basic transactions on Mainnet have been $50+ for a very long time. There is huge demand for a very fast, cheap, secure chain to transact on, and it seems that Metis is positioned to be just that. It benefits from Ethereum’s security, boasts insane transaction speeds, and will soon cost just pennies to transact on.
Much like many of the layer 1 blockchains’ native tokens appreciated substantially in value in 2021, layer 2 solutions such as METIS could see similar growth in price, assuming it continues to innovate and applications continue to build on the chain and to gain users (also assuming overall market conditions are favorable). At the time of writing, the market cap of METIS sits around $270 million. Many of the top layer 1 blockchains’ native tokens sit well into the billions in market cap, and METIS could gain some of the market share from layer 1’s whose main value proposition is just being a fast and cheap alternative to Ethereum. Looking at Harmony, a layer 1 blockchain, as a comparison, we can see that technically it has similar characteristics to Metis. It can currently perform about 2000 transactions per second and it’s fees are extremely cheap, similar to Metis. Harmony TVL is currently sitting at $1 billion, with DeFi kingdoms accounting for around 60% of that, and Harmony has 44 applications running on it. At the current market cap of $1.6 Billion (5x that of Metis), and similar technical characteristics, Harmony is valued much higher, and as Metis continues to see growth in applications and TVL, it could gain market share. All technical and economic characteristics the same, Metis could be considered more “valuable” than a chain such as Harmony, solely due to the fact that it benefits from Ethereum’s security. As Ethereum rollup solutions such as Metis gain popularity and users become privy to their innovative characteristics, it seems that METIS stands to benefit immensely in terms of price appreciation and user growth.
