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Opinion: Will L2 weaken Ethereum L1?

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Ethereum L1 should not be isolated, but a sea of stars.

Original title: Will L2 Weaken Ethereum L1?

The Blue Fox Notes

Some people are concerned that Ethereum L1 will be weakened as more users and more transactions are made on L2.

To look at this problem, we should start from the following aspects:

Ethereum L2's security cornerstone is Ethereum L1;

Even without Ethereum L2, Ethereum L1 has limited processing power. Ethereum desperately needs L2 to scale to increase its ecological appeal, or it will be eliminated by other public chains;

When the transaction of L1 hits a bottleneck and the price rises, the network effects of L1 will also decline. Too high a cost is not good for Ethereum L1 in the long run.

When the transaction scale of L2 is not large enough, it will indeed have an impact on the cost capture of L1. However, with the subsequent prosperity of L2 application ecology, when the transaction scale of L2 is large enough, it will also bring greater security costs to L1. Only by becoming a prosperous ecology and gaining the favor of more users and developers in a wider space is the organic development direction.

Ethereum L1 should not be isolated, but a sea of stars.

Ethereum L2 expansion path is inevitable

Ethereum extensions have formed horizontal and vertical networks. The idea of vertical L2, and even L3, is starting to roll out. In two ways, in a narrow sense, sharding is a horizontal extension. In a broad, less precise sense, other EVM-compatible public chains can also be considered somewhat extended networks of Ethereum.

Ultimately, the expansion of Ethereum will form a criss-cross network. From vertical L2 and L3 to horizontal shard and EVM compatible chains.

To make a poor metaphor, Ethereum combines the Polkadot+COSMOS architecture pattern, which provides shared security for L2 and loose alliances for other public chains. Of course, the actual technical design and operation vary greatly.

Once this crisscrosses scalability reaches the extreme, it will be able to support large-scale applications, it is possible that more than 100,000 TPS, and even the subsequent technological innovations on ZK Rollup (cryptography + data compression, etc.) make greater progress, theoretically could reach hundreds of thousands or even millions of TPS, of course, this will take a long time to evolve.

The previous sharding schemes of Ethereum faced great difficulties in implementation due to the technical problems of sharding data synchronization. At present, Taifang has formed a Rollup-centered expansion path. For the development of its own network, L2 expansion is an inevitable evolution path for Ethereum. L2+danksharding can basically meet the needs of large-scale users, but it will take at least 3-5 years to reach this day.

Ethereum L2 gains a larger moat for Ethereum L1

L2 is equivalent to a chain that shares Ethereum security. Its competitive advantage with other public chains lies in security. At the same time, its cost is relatively low and its throughput is relatively high, which means that other public chains do not have obvious advantages over L2. This was also mentioned in Ethereum L2 and the Pattern Evolution of Public Chains before the Blue Fox Notes.

Without the scaling possibilities of Ethereum L2, L1 would lose its moat and network effects and would eventually be replaced by other public chains.

L2 transaction volume will surpass L1 and most public chains

Looking at the current development trend, L2 has advantages over most public chains due to its significantly reduced transaction costs. In this case, L2 will surpass Ethereum L1 itself in terms of transactions and users, as well as most other public chains, a trend that will accelerate significantly once EIP4844 hits the market in late 2023.

Since L2's transaction status and data are committed to L1, L1 provides security for L2. As transaction activity moves to Ethereum L2, early on this will lead to a decrease in transaction activity on Ethereum L1, in which case Ethereum fee capture does suffer. That will change, however, as L2 deals increase in size. The proportion of revenue coming from L2 will gradually increase.

L2 will not have just a few, it will have many

L2 is mainly Arbitrum, Optimism, Zksync, Starkware, Scroll, Polygon...... There will be more L2s in the future, and new L2s are being built or on the way. The pattern of L2 is far from certain, there may be 3-5 dominant L2s, and there will be many more niche L2s.

conclusion

Ethereum and L2 are symbiotic, mutually enriching relationships. L1 provides L2 with higher security and settlement services than other public chains; Large transaction activity on L2 adds more fee value to Ethereum L1 and creates greater network effects, thus enhancing Ethereum's moat.