Can L2 undermine the position of Ethereum L1?

Recently, there is a viewpoint that with the development and expansion of the L2 ecosystem, it may have a negative impact on Ethereum L1. In this regard, we need to analyze from multiple perspectives.

First of all, the security of L2 essentially relies on Ethereum L1. Secondly, the processing capacity of Ethereum L1 itself is limited, and there is an urgent need for L2 to expand the ecosystem; otherwise, it will be difficult to cope with the challenges of other public chains. In addition, high transaction fees on L1 will reduce network effects, which is not conducive to ecological development in the long run.

Indeed, when the scale of L2 transactions is small, it may affect the fee revenue of L1. However, with the prosperity of the L2 application ecosystem, large-scale transactions will also bring more security fees to L1. Only by creating a prosperous ecosystem to attract more users and developers can we ensure a healthy direction for development.

The future of Ethereum should not be limited to the present, but should look towards a broader prospect.

L2 scaling is the inevitable choice for Ethereum

Ethereum is forming an interwoven expansion network. Vertically, it includes L2 and even L3, while horizontally there are sharding and EVM-compatible chains. This architectural model provides shared security for L2 and a loose alliance for other public chains.

In theory, this expanded network could process over 100,000 transactions per second, and in the future, it may even reach hundreds of thousands or even millions of TPS. Of course, this requires a long period of technological advancement.

Currently, Ethereum has established a Rollup-centered scaling path. L2 + danksharding can basically meet the demands of a large number of users, but this process will take at least 3-5 years.

L2 builds a stronger moat for Ethereum L1

L2 inherits the security of Ethereum while having lower fees and higher throughput, making it difficult for other public chains to form a significant advantage. Without L2 expansion, Ethereum L1 will lose its moat and network effects, and may eventually be replaced by other public chains.

L2 trading volume is expected to surpass L1 and most public chains

From the current trend, L2 has an advantage due to the significant decrease in transaction fees. In the future, the transaction volume and number of users on L2 may surpass Ethereum L1 itself, and also exceed most other public chains. This trend will significantly accelerate, especially after the implementation of EIP4844 at the end of 2023.

Although early L2 may lead to a decrease in L1 transaction activity, affecting fee income, as the scale of L2 transactions increases, the proportion of revenue from L2 will gradually rise.

It is worth noting that in the future, there will not be just a few L2s, but more participants. The L2 landscape has yet to be determined, and there may be 3-5 dominant L2s, along with many niche L2s.

Conclusion

Ethereum and L2 have a symbiotic relationship, promoting each other. L1 provides high security and settlement services for L2; the large-scale transaction activities of L2 bring more fee value to L1, forming a stronger network effect, thereby enhancing the competitiveness of Ethereum.