Can L2 undermine the position of Ethereum L1?

With the growth of L2 network users and transaction volume, some people are beginning to worry whether this will undermine the position of Ethereum L1. To objectively view this issue, we need to analyze it from multiple perspectives.

First, the security of L2 relies on Ethereum L1. Second, even without L2, the processing capacity of Ethereum L1 is very limited, and it urgently needs L2 to expand the attractiveness of the ecosystem, otherwise it may be surpassed by other public chains. In addition, when L1 transactions encounter bottlenecks leading to rising fees, it will also weaken its network effects, which is not beneficial for Ethereum L1 in the long run.

Indeed, in the early stages when the scale of L2 transactions is relatively small, it may affect the fee revenue of L1. However, as the L2 application ecosystem flourishes and the scale of transactions expands, it will also bring more security fees to L1. Only by creating a prosperous ecosystem to attract more users and developers can we achieve healthy development.

Ethereum L1 should not be limited to a small scope, but should look towards a broader future.

The expansion of Ethereum L2 is an inevitable trend

Ethereum is forming a vertical and horizontal expansion network. The vertical includes the concept of L2, and even L3 concepts are beginning to emerge. The horizontal includes expansion solutions such as sharding, and broadly, other EVM-compatible chains can even be regarded as an expansion network of Ethereum.

Ultimately, the expansion of Ethereum will form an intricate network, including vertical L2s, L3s, and horizontal sharding, as well as EVM-compatible chains.

This multi-layered scaling architecture is expected to support large-scale applications, theoretically achieving TPS of over 100,000. In the future, with advancements in technologies like ZK Rollup, it may even reach hundreds of thousands or even millions of TPS, although this requires long-term evolution.

Currently, Ethereum has formed a scaling path centered around Rollup. For the long-term development of the network, L2 expansion is an inevitable choice. L2 combined with danksharding can basically meet the needs of a large number of users, but achieving this goal will take at least 3-5 years.

L2 builds a stronger moat for Ethereum L1

L2 networks share the security of Ethereum while having lower costs and higher throughput, which makes other public chains have no significant advantage over L2. If there is a lack of L2 scaling possibilities, L1 will lose its moat and network effects, and may ultimately be replaced by other public chains.

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

From the current trend, due to the significant reduction in transaction fees, the trading volume and number of users on L2 are likely to surpass Ethereum L1 itself, as well as most other public chains. This trend will significantly accelerate, especially after the implementation of EIP4844 at the end of 2023.

Although the rise of early L2 may lead to a decrease in trading activities on L1, affecting its fee income, as the scale of L2 transactions increases, the proportion of fee revenue from L2 will gradually rise. In the future, the number of L2 will continue to increase, and the landscape is far from certain, with the possibility of 3-5 dominant L2s and numerous niche L2s.

Conclusion

Ethereum and L2 have a mutually reinforcing symbiotic relationship. L1 provides higher security and settlement services for L2; the large-scale trading activities of L2 bring more fee income to L1, creating a larger network effect, thereby enhancing Ethereum's competitive advantage.