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Mode (MODE): Analysis of the new L2 in the Optimism ecosystem
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How it works, its unique features, strengths, weaknesses, opportunities... Independent study of Mode and its token by our team of analysts.
What you need to know 🐳
Mode is a layer 2 of Ethereum.
The project has quickly established itself as a high activity blockchain thanks to its integration within the Ethereum ecosystem and the Optimism Superchain.
The points-based airdrop system is very useful for accelerating the growth of a chain, however activity can also drop sharply once rewards diminish.
It is not known how much the project has raised or who has been involved.
Overview 🧬
Mode is an Ethereum Layer 2 launched on 31 January 2024. Mode is based on the OP Stack, the development tool set up by Optimism (the second largest Layer 2 in the sector behind Arbitrum).
Mode is part of Optimism's Superchain, it is a set of Layers 2 and Layers 3 based on the OP Stack. Each project that uses it has the option of joining the Superchain, in which case it undertakes to donate part of its revenue to the Optimism collective. In the future, the Superchain aims to create a set of chains with shared security and high interoperability.
Mode is the 3rd chain with the most locked value on the Superchain behind Optimism and Base (Coinbase's blockchain).
Mode's specific feature is that it redistributes 25% of the profits generated by its blockchain to the developers of the applications on its network. This approach creates a real incentive to bring activity to the blockchain in a sustainable way.
Since the launch of its mainnet in January 2024, Mode has offered a points system to reward users who bring liquidity to the applications on its network.
The first MODE tokens were distributed on 7 May in the form of an airdrop to its users based on their points. A new season is running until 6 September.
This strategy, inspired by the Layer 2 Blast, is enabling the network's business to grow rapidly. As a result, Mode has seen very strong growth and has caught up with older, well-established blockchains in just a few months.
Financing 💰
The team has yet to reveal how much the project has raised, or who its investors are. This point is extremely strange.
In January 2024, Mode received a grant of 2 million OP tokens from the Optimism Foundation, that was $5.6 million at the time of the announcement.
Team and community 👾
James Ross is the founder and CEO of Mode. He has worked for a decade in marketing at various companies, including four years in the crypto sector.
Patrick Woo is Mode's CTO. He has worked for 12 years as a developer, including a year and a half on the Near blockchain development team.
The team has around ten employees according to LinkedIn.
The Mode ecosystem has built a relatively large community despite its young age, with 285,000 followers on X (ex-Twitter) and over 166,000 members on its Discord.
Functioning ⚙️
Transactions in a rollup are executed outside the Ethereum network so as not to be subject to the network's limitations and therefore allow for higher throughput and lower costs. The data from these transactions is then published on Ethereum.
A so-called "optimistic" layer 2 (like Mode) assumes by default that all transactions carried out on its network are executed correctly and therefore does not seek to prove their validity.
In return there is a seven-day period during which it is possible to submit proof of fraud in order to cancel a dishonest transaction. Because of this, you have to wait until the end of this period to consider a transaction officially validated.
Note that this system is not yet fully operational: not all projects using the OP Stack can challenge transactions yet (but the seven-day period is already active).
Each rollup has a sequencer that orders, executes and publishes transactions on Ethereum. The sequencer collects all the transaction fees paid by users and uses part of them to pay Ethereum's fees.
Thus, the fees collected by the sequencer exceed its expenses, allowing each layer 2 to generate profits from activity on its network. These profits can be recovered by the company developing the project, redistributed to the DAO, etc.
Mode thus redistributes 25% of these profits to the developers on its network, distributed according to the activity of the smart contracts they have published.
Risks and limitations 😨
Layer 2s are technologies that are still under development, and their security currently depends very largely on the teams operating them. As yet, there have been no major hacks or thefts directly linked to a layer 2 project (apart from Zkasino, but that one is not representative).
As with almost all Layer 2s, the smart contracts that ensure Mode's security can be updated instantly by the project team, which means it can technically steal all of users' funds.
The proof-of-fraud system is not yet in place on OP Stack-based chains. If fraudulent transactions were to be executed, it would not be possible to reverse them except by updating the smart contracts.
Moreover, Mode depends on Conduit, a company that manages the infrastructure of around ten layer 2s and can also instantly update their smart contracts.
The MODE token 🪙
Like most tokens associated with layers 2, the MODE token has a relatively limited use until the project gains decentralisation.
At present, the main use of the token is to boost the points accumulated by users in order to increase rewards in future airdrops.
To do this, you need to stake MODE tokens with a dollar equivalent of 25% of the value of the cryptos you hold on Mode in order to obtain a points multiplier of 1.25. You can do the same with 50% or more to get a multiplier of 1.5.
You have to wait seven days to unstake your MODE tokens.
The token has a governance function, the details of which are not yet made clear.
Mode's first airdrop distributed 5.5% of the tokens to users based on their points. The 2,000 users with the most points received half their allocation at launch and will receive the rest after 90 days as long as they leave their assets on the channel during this period.
There are a total of 10 billion MODE tokens with 1.3 billion currently in circulation.
35% reserved for airdrops for users and developers:
19% for investors from past and future investment rounds.
19% for the project team
Allocations for investors and the team are locked in for 12 months from token launch, followed by a 24-month linear release period.
27% for the DAO foundation and treasury.
System 💪
Mode is still a very young blockchain but already has several native applications and supports the two most important liquid restaking protocols: EtherFi (read the analysis) and Renzo (read the analysis).
Ionic Protocol is the application that collects the most stranded value (TVL), with around $80 million. It is a lending protocol that works in a similar way to Aave. The protocol is running a points campaign as part of the launch of its own token. Ionic promises to redistribute to its users the fees redistributed to it by Mode's sequencer.
Kim is Mode's main decentralised exchange. It has launched its KIM token which can be staked to receive a share of the returns generated by the protocol and to increase its returns if liquidity is provided.
Sturdy is a lending protocol that allows users to borrow and lend in isolation, reducing their risk and maximising their returns in a similar way to Fraxlend.
Velodrome, the flagship protocol of the Optimism blockchain, recently launched on Mode as part of its expansion into the Superchain. It is a decentralised exchange in the style of Kim or Uniswap.
Competition ⚔️
Mode describes itself as a layer 2 dedicated to decentralised finance. However, it is in competition with a number of generalist layer 2s based, like it, on the Ethereum Virtual Machine. They have few real differentiators, apart from their respective application ecosystems.
Arbitrum remains the leading rollup in terms of locked value and exchange volume. What's more, it has already completed its airdrop and is not hyping a second one. Its activity is therefore far more organic and sustainable than most other rollups where users hope to make themselves eligible for an airdrop.
Base benefits from its integration into the Coinbase ecosystem and is attracting many users, particularly with the proliferation of memecoins on its network.
Blast was the first layer 2 to launch its points system, which has enabled it to attract many users and capital as well as developers. Blast offers a native return on most assets deposited on its network and has been able to integrate its USDB stablecoin on most deployed applications.
Blast is the layer 2 most similar to Mode, but seems to benefit from stronger traction with a clearer value proposition.
Linea and zkSync are both proof-of-validity (zk rollup) based rollups. When they were launched, both were at the centre of attention thanks to their promising technology and the companies developing them: Matter Labs has raised more than $450 million and Linea is being developed by Consensys. However, they are still struggling to gain traction.
Linea will soon launch its points system, which should attract capital to its channel.
Regulation ⚖️
Like the vast majority of projects in the sector, there is significant uncertainty over how financial regulators will treat its token.
In the US, the MODE token could very well be considered a financial security, following the example of Polygon, which has already been cited as such by the SEC.
Roadmap 📝
Mode has launched the second season of its airdrop, which will distribute 5% of its tokens on 6 September. This season's points system provides an incentive to deposit liquidity on Mode's decentralised exchanges and lending protocols.
The system specifically promotes the use of the MODE token and liquid staking and restaking tokens.
Market analysis by Chadi El Adnani, Head of Content & Research at SUN ZU Lab 📈
MODE is currently trading at $0.04, down 30% since the airdrop, for a fairly low market capitalisation of $50.7m. The ratio of market capitalisation to TVL for MODE is 8.6%, compared with 306% for MANTA, for example.
On Bybit, the main centralised exchange where the token is listed, daily volumes rarely exceed the 2 million mark, and market depth does not exceed $50,000. This lack of liquidity can generate a great deal of volatility in the MODE price: caution should be exercised when trading during this token launch phase!
Where can you buy the MODE token? 🛒
MODE is available on the Bybit and Gate platforms (neither of which is regulated in Europe), or on the decentralised exchange Kim.
The Big Whale's view 🐳
Mode has been quick to attract activity and liquidity to its network thanks to its points system and its integration with Optimism's Superchain, which gives it good exposure. What's more, its rapid integration of liquid restaking protocols means it can take advantage of the buzz associated with this sector.
However, Mode's business is made up of a sizeable proportion of 'mercenary' capital that is only looking to take advantage of the rewards offered by airdrops. The risk is that this capital will gradually be reallocated to other projects that also distribute airdrops.
It's becoming easier and easier to launch a layer 2, which intensifies the competition between them. It is therefore vital to have differentiating features to stand out from the crowd. Sharing network revenues with app developers seems like a good idea, but it may not be enough in the long run.
Mode's long-term success will depend largely on its ability to attract native and truly innovative apps.
The MODE token has very limited utility at the moment.
Our other analysis 🔍
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