Blockchain-Comparison.com

Are L2s predatory to their L1s? L2s use L1s for settlement while offering much cheaper transactions to users. They act as mediators between L1s and users. In the process, they end up capturing some value in the form of fees (and MEV) from users. Are they passing on enough fees to L1 for using the precious blockspace for settlement? Let's examine four charts to understand the impact of L2s on Ethereum. 1. How do L2s help the Ethereum ecosystem? Let’s forget about the L2 tokens for a moment and try to see how much they contribute to the value of the entire Ethereum ecosystem. A way to do this is to see how much L2 tokens have added to ETH’s market cap. To see it in reference, I refer to the ETHBTC ratio as it is a good benchmark for how the Ethereum ecosystem is trending compared to BTC. To capture the value of all of Ethereum, I add the top 10 L2s by market cap to ETH and treat this as ETH (effective) or the value of the Ethereum ecosystem. Currently, the top 10 L2s barely make a dent in the ETHBTC ratio right now. With BTC dominance at more than 50%, the chart below shows that L2s aren’t helping bolster the ETH (effective) / BTC ratio (look at the black line vs. the green one). 2. So, where is the value capture taking place? Keeping it simple, value capture can be measured via two metrics – i) revenue and ii) price or market capitalisation. If value is generated, it’ll be reflected in the price. a. Where is revenue getting captured? Ethereum regularly captures ~90% of the total revenue of the Ethereum ecosystem. Base has consistently been the leading revenue, earning L2 over Q2 of 2024, followed by Blast. b. In terms of the market cap, ETH is still 95%+ of the top 10 L2s by market cap. 3. How much revenue do L2s pass on to Ethereum? L2s incur costs to store data on Ethereum. This is the cost of revenue for L2s. This cost needs to be balanced. Too high, and operating L2s becomes difficult. Too low, and Ethereum doesn’t earn much from L2s despite providing critical settlement to L2s. Ethereum’s 4844, aka Proto Danksharding upgrade, reduced the cost of revenue for L2s. Cheaper storage for L2 data meant that the revenue contribution of L2s to Ethereum dropped from ~10% to ~2%. Although this seems like a setback, it makes L2s ready for more users as the transaction costs have decreased. So far, blobs seem like a bad idea strictly from Ethereum’s POV. What’s the endgame here? Scale. In the week of 2024, Ethereum supported 7.1 million transactions for revenue of $10.6 million. The cost per transaction for users comes to ~$1.5. At the same time, five L2s, Arbitrum, Base, Blast, Optimism, and Polygon, supported over 70 million transactions for $2.75 million in fees. That is $0.03 per transaction. We can argue about the quality of transactions like if they are bots or the value, and so on. But the fact is Ethereum couldn’t have supported those many transactions. So, all in all, building L2s and lowering costs to transact on L2s by giving them cheaper data storage options on L1s has been beneficial for users but not so much for Ethereum, the L1. If most users want to transact on L2s, more data will be pushed on the L1. As L2s push more data and compete with each other for L1 blockspace, the base fees on L1 increase. This results in higher revenue for Ethereum. So, when the masses actually start using L2s, it can be a win-win for Ethereum and users. Notes by - @desh_saurabh Data – @tokenterminal and @coingecko