And how to choose the right auditor for your web3 project
Today's agenda...
- Linea's L2 battle: from high hopes to harsh lessons 🚀📉
- Choosing the right auditor for your project: key questions for success ✅🧾
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Is Linea losing the L2 chain battle ?
This article was written by Web3_pandas.
Context
Linea, a Layer 2 scaling solution was developed and launched by ConsenSys in July 2023. The expectation of Consensys was high and initially Linea showed strong signals of growth. Launched in July 2023, Q1-24 was the best for the new chain when it had a TVL of $1.2 billion with 2 million monthly active addresses making 44m monthly transactions generating a revenue of $20m.
But the golden days didn't last long, from Q2-2024 Linea started to decline and the downward curve doesn't seem to stop. Though Linea ranks 5th in terms of TVL just behind the big names like Arbitrum, Base, Optimism etc, the gap is huge. All the top chains have a TVL north of $5 billion whereas Linea is struggling to keep a constant TVL of $1 billion even at the time of ETH bull run.
If we consider the present Linea figures in October (last complete month available) then TVL is $964m (-35%), active addresses were 861k (-57%) transaction were 7.2m (-84%) and revenue generated was $525m (not showing the percent decline here as it will be scary). While we all know, Q2 and Q3 of the year were not the best for crypto and ups and downs are part and parcel of every metric. But as we see the decline rates are horribly down while some of the other companies have grown during this time. Especially Base which launched its mainnet at the same time is almost neck to neck with Arbitrum and has higher addresses / transactions.
The graphs below show the decline of Linea compared to chains like Base/Arbitrum.
Active addresses
Source : growthepie
Base (dark blue line) is rising from May and could hit 25m by the end of the year. On the other hand Arbitrum (green) is higher than Linea (light blue) which is almost flat throughout the year. Possibly Base and Arbitrum are successful in poaching users from Linea and also attract the new users.
Total transactions
Source : growthepie
The addresses registered with Base (dark blue line) are also very active users, that's what the transactions graph is saying. While Arbitrum (green) has healthy transaction numbers, the same for Linea (light blue) is downwards. A slight uptick in July due the Linea Culture SZN campaign also did not sustain after the end of the campaign.
Total revenue
Source : growthepie
After the L2 price reductions from May, all chains suffered a reduction in revenue. But fuelled by active transactions the revenue of Base (dark blue line) is increasing from September. However Linea Linea (light blue) which earned the highest revenue in the pre price drop phase now is at the bottom below Arbitrum (green).
So what went wrong with Linea?
It's a Consensys product which hires the best engineers and has enough funding for growth and marketing. Well it made some critical mistakes at the beginning and hence could not sustain the growth it had after launch.
- Linea was launched along with Base who were smart to attract the new developers to build their dApps whereas Linea depended more on quests and the TVL. So valuable developers were lost at the very beginning. Those developers were also offered grants, hackathons and other support materials by Linea’s competitors whereas Linea’s approach here was not very active or aggressive rather more lacklustre. Linea has done things like brand refresh and/or fancy quests which don't appeal to the developers much so poaching those developers from the other chains would also be a challenge.
- Most L2s are popular on verticals like DeFi, NFTs, gaming and social verticals. Linea tried its best to be on the social and gaming vertical, it neglected the DeFi/CeFi space. It’s trying to do that with the new MetaMask card but it's already late.
- Delayed airdrop and TGE is also another reason. In Fact in X (formerly Twitter) there are so many jokes circulating about Linea token launch. Other chains have already done it way back while Linea is still stuck in LXPs with TGE planned in 2025.
- Linea is the best performing ZKrollup chain which has certain specific advantages, however the top chains like Base, Arbitrum and Optimum are all OProllups. They smartly sold the fact to builders that OProllups are better in terms of scalability and security. Sadly, Linea’s marketing machinery failed here to sell its positive points over OProllups.
- Issues of not being totally decentralised is also an issue for Linea. Linea’s marketing team are trying to create a narrative to move away from this buy creating Linea Association, but it’s too little and too less.
Conclusion
To sum up, Linea is technically sound and had good potential to be a leader and in the initial days it was doing a fantastic job to be one of the L2 chain leaders. But with lacklustre marketing tactics coupled with core Linea developers leaving Consensys due to “non consensus” made Linea suffer severely and shifted it away from the Top3 spot in the L2 ecosystem.
But I am personally optimistic that, though it is late for Linea it is certainly not over if Linea’s marketing team can lead the way. They need to promote Linea as more developer friendly, get more developers building on Linea, shed the false narrative about “airdrop chain”. If the marketing team is able to do that in 3 to 6 months, we can again see a strong Linea vs Base competition in 2025.
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How to choose the right auditor for your web3 project ?
Selecting a statutory auditor is a critical decision for ensuring compliance, transparency, and investor confidence in your web3 project. Here’s a guide to the key questions you should ask and what each one helps you evaluate.
Why do web3 projects need an auditor ?
A statutory auditor (CAC) ensures that your financial accounts are accurate and comply with regulations. For web3 projects, this includes unique challenges such as:
- Blockchain transaction audits: verifying on-chain transactions and ownership of digital assets.
- Regulatory compliance: Meeting global and local regulations like MiCA or PSAN.
- Valuation of Crypto Assets: Properly managing the volatility of digital assets in financial statements.
Key questions to ask to select an auditor
Not all questions are mandatory ; the goal is simply to create a dialogue to gauge their understanding of your industry. If they don’t understand web3 risks from the outset, you’ll waste a lot of time helping them catch up on what it means to handle accounting in this sector.
Don’t forget to ask yourself this question: Do I want to rely on this Partner if the company faces challenges (e.g., cash flow issues, delays in meeting legal standards)? Can I build a trusted, long-term relationship with them?
1. Expertise in Web3 and Blockchain
- Have you previously audited blockchain or crypto projects ?
- How do you handle audits for decentralized organizations like DAOs or DeFi platforms ?
2. Tools and Technologies
- What software or tools do you use to analyze blockchain transactions ?
- How do you ensure the accuracy of data from multiple blockchains ?
3. Regulatory Compliance
- How do you ensure compliance with regulations like MiCA, PSAN, or AML/KYC standards ?
- Have you audited projects involved in ICOs, token launches, or staking ?
4. References and Track Record
- Can you provide examples of Web3 projects you’ve audited ?
- What challenges have you faced while auditing web3 projects, and how did you overcome them with youn clients ?
5. Methodology and communication
- How do you adapt your auditing approach for innovative startups or DAOs ?
- How do you ensure your findings are clear and actionable ?
Big Four vs. Independent Firms
- Advantages:Credibility : Trusted by investors worldwide.Global Expertise : Teams specialized in blockchain and international regulations.Advanced Tools : Proprietary solutions like Halo for Blockchain (PwC) enhance audit precision.
- Credibility : Trusted by investors worldwide.
- Global Expertise : Teams specialized in blockchain and international regulations.
- Advanced Tools : Proprietary solutions like Halo for Blockchain (PwC) enhance audit precision.
- Drawbacks:High Costs : Premium services come with a steep price.Less Flexibility : Standardized processes may not suit dynamic Web3 startups, you’re just a client in a middle of hundreds of other clients
- High Costs : Premium services come with a steep price.
- Less Flexibility : Standardized processes may not suit dynamic Web3 startups, you’re just a client in a middle of hundreds of other clients
2. Independent Firms
- Advantages:Personalized Services : Tailored approaches that meet unique project needs.Flexibility : Better suited for small, agile teams.Cost Efficiency : Often more affordable than Big Four firms.
- Personalized Services : Tailored approaches that meet unique project needs.
- Flexibility : Better suited for small, agile teams.
- Cost Efficiency : Often more affordable than Big Four firms.
- Drawbacks:Limited Recognition : May carry less weight with global investors.Resource Constraints : Smaller teams might lack infrastructure for highly complex audits.
- Limited Recognition : May carry less weight with global investors.
- Resource Constraints : Smaller teams might lack infrastructure for highly complex audits.
Conclusion
Choosing the right auditor is about more than just credentials. Asking the right questions ensures they understand your project’s unique needs, from blockchain intricacies to regulatory compliance. Whether you opt for the prestige of a Big Four firm or the tailored approach of an independent specialist, clarity on their expertise and methods will help you make an informed decision.
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Disclaimer : The goal of this newsletter is to inform and produce content related to management in the world of Web3. It is not investment advice. Investments in crypto-assets and NFTs are risky and can result in the loss of your entire capital. Always conduct your own research and exercise caution.
