Are layer 2s good for Ethereum, or are they ‘extractive?’

1 month ago

Layer 2s person been a large blockchain occurrence story. They’ve reduced congestion connected the Ethereum mainnet, driving down state fees portion preserving security.

But possibly they’ve go excessively successful, drafting concatenation enactment and interest income from the genitor that spawned them? At slightest that’s what immoderate are suggesting lately, astir precocious astatine Cornell Tech’s blockchain league successful precocious April.

Indeed, immoderate deliberation Ethereum should beryllium a small greedier, oregon astatine slightest combat harder for a bigger portion of the gross pie, peculiarly sequencing fees.

“People successful the Ethereum Foundation [the nonprofit that supports the Ethereum ecosystem] volition archer you that, ‘Yes, we effed up by being excessively ivory tower.’ I person heard that aggregate times,” said David Hoffman, an proprietor astatine Bankless, during a sheet treatment astatine the Cornell Tech lawsuit successful New York City connected April 25.

Elsewhere, Hoffman has urged Ethereum to marque a “strategic pivot,” noting that the crypto situation has changed successful the past fewer years. Ethereum nary longer has the “luxury of being a peace-time probe project…. exploited by its competition.”

L2s are reaping millions of dollars successful transaction bid fees (sometimes called sequencing fees), but nary of these revenues are being passed connected to Ethereum, according to James Beck, caput of maturation astatine ENS Labs and different talker astatine the New York City conference. Beck told Cointelegraph:

So, this taste furniture of podcasters and researchers are saying, ‘Well, the terms of ETH has been dropping compared to these different tokens. What bash we bash to marque Ethereum much powerful?’

In short, Ethereum is simply a neutral verification layer, but the Ethereum mainnet is not being reasonably compensated for the enactment that it is doing. Centralized for-profit L2s similar Base, Optimism and Arbitrum are gathering the lucrative sequencing fees portion enjoying the information and liveness guarantees of the Ethereum mainnet astatine comparatively small economical cost.

L2s soared aft Dencun upgrade

L2 rollups are a caller innovation; they lone emerged successful 2023. The thought was to trim concatenation congestion and state fees by moving transaction processing from the main blockchain (layer 1) to abstracted chains that beryllium atop the mainnet (L2s). But transaction processing is arguably the astir profitable portion of the gross game, particularly erstwhile users opt to wage precedence fees to get their orders processed faster.

Fee-sharing was seldom overmuch of an contented earlier Ethereum’s March 2024 Dencun upgrade, which introduced blob transactions to assistance standard furniture 2s. Blobs importantly reduced the outgo for L2s to station information to Ethereum, allowing them to run much profitably, CoinMetrics researcher expert Tanay Ved told Cointelegraph this week.

Since then, L2 idiosyncratic request has soared, particularly connected Base, the L2 launched by Coinbase successful August 2023 connected the Ethereum mainnet.

As Ved noted successful an April 8 blog, Base has earned a full of ~$98 cardinal successful revenues from user-transaction fees (including basal and precedence fees), “while paying lone ~$4.9M to the Ethereum basal layer, resulting successful a full estimated nett of $94M since the Dencun upgrade.”

Ved added:

This dynamic has led to galore questioning whether Layer-2s are nett affirmative for Ethereum, oregon whether they are ‘extractive.

Base’s response

Asked astir fees, a Base spokesperson told Cointelegraph, “Today, Base already pays Ethereum fees for each transaction connected Base. All transactions are settled connected Ethereum, and truthful far, Base has paid Ethereum much than $20 cardinal successful colony fees since Base’s inception.” One tin spot these fees connected Token Terminal nether “cost of revenue,” the spokesperson added.

“Overall, Base makes getting onchain much accessible with accelerated and inexpensive transactions and helps turn the Ethereum ecosystem by onboarding much users, builders, apps and assets, each of whom are transacting successful ETH and driving demand,” said the spokesperson.

However, successful many, if not astir months, Base’s wide fees are astir 10 times the magnitude paid to Ethereum for settling trades, according to introspection of the referenced Base financial statement. In April, for instance, the astir caller afloat month, Base reaped $3.7 cardinal successful fees, but lone $305,000 was delivered to Ethereum arsenic colony fees — astir 8% of full fees.

Still, possibly things aren’t rather truthful dire. Even if fees are retired of kilter now, the imbalance whitethorn not last, others caution. Ethereum hard forks similar Pectra, which went unrecorded yesterday (May 7), and Fusaka, scheduled for precocious 2025, volition summation blob throughput. “This means L2s volition beryllium capable to station much blobs, perchance driving higher full blob fees to mainnet,” Ved told Cointelegraph.

Ethereum is already consistently hitting the existent blob people of 3 per block, arsenic the illustration beneath shows. “Pectra volition rise this to six blobs per artifact — with a max of 9 — creating country for accrued interest seizure arsenic L2 enactment scales,” added Ved.

Are “based rollups” the answer?

Some Ethereum researchers, podcasters — and adjacent L2s — person been leaning into “based rollups” arsenic a much imperishable mode to hole the interest occupation and supply amended information successful the bargain. Here, transaction ordering (i.e., sequencing) would beryllium done connected the mainnet, not connected L2s.

The sequencers utilized by Optimism, Arbitrum One, Base and others are much prone to onslaught oregon failure, fixed that they are centralized, with a azygous constituent of failure, immoderate researchers say. Polygon’s Jarrod Ward writes:

If a centralized sequencer goes down, the rollup efficaciously stops doing its occupation entirely. It stops handling transactions from users connected the L2 and besides stops sending batch information backmost to Ethereum.

“Layer-2 sequencers person go dangerously centralized,” added Tom Ngo, enforcement pb astatine Metis — an Ethereum layer-2 blockchain.

Last June’s $2.6-million hack of Ethereum layer-2 blockchain Linea drove location to Ngo and others the value of decentralization and the perils of centralized sequencers.

Several based-rollup L2s person launched this past year. Taiko Alethia, the archetypal and largest, went unrecorded successful May 2024. A twelvemonth later, it had $148.3 cardinal successful full worth secured — ranking 14th connected L2Beat’s database of L2s, though acold down person Base’s $12.06 billion.

Speedwise, Taiko was averaging a respectable 20.3 idiosyncratic operations per 2nd (UOPS) connected May 7, a acold outcry from Base’s 86.3 UOPS, but connected par with Arbitrum One’s (21.6 UOPS) and importantly amended than Optimism’s (10.3 UOPS).

A taxation connected L2s?

Another thought floated successful the Ethereum assemblage is imposing a benignant of taxation connected L2s. But doing this could person immoderate unintended consequences, according to Ved. It could marque L2s little competitive. It besides risks “leakage of enactment to competing furniture 1s extracurricular the Ethereum ecosystem.” Activity that flows to Base contiguous could travel alternatively to Solana oregon different L1s, Ved said.

There could beryllium philosophical issues, too, were Ethereum to laic a surcharge connected its L2s. Ved noted:

A taxation could beryllium seen arsenic contrary to Ethereum’s ethos of decentralization, which would opt for market-driven forces alternatively than enforcing a tax.

Generally speaking, the Ethereum Foundation seems to beryllium prioritizing semipermanent maturation implicit short-term revenue, Ved explained. Proposals similar EIP-7762, though, which raises the minimum blob basal interest to velocity up terms find during request surges, could thrust much interest income to Ethereum mainnet, having an effect similar a tax.

Social pressure?

According to ENS Labs’ Beck, it whitethorn instrumentality immoderate societal unit to get the starring centralized L2s to voluntarily springiness up their sequencing fees. Other L2s similar Linea whitethorn request to measurement successful and accidental to centralized L2s thing on the lines of: “Look, you guys person these risks inherent successful a much centralized design, and here’s the accidental to cook [the bid processing] into Ethereum, which is much decentralized.”

Along these lines, ENS took portion successful a three-day store successful the UK successful January with starring researchers and developers from entities similar Linea, Status, OpenZeppelin, Titan, Spire Labs and the Ethereum Foundation. The contiguous task was however to make scalable, decentralized infrastructure for ENS Labs’ Namechain, but besides to bring unneurotic assorted Ethereum ecosystem teams to collaboratively lick L2 interoperability challenges with based rollups.

It’s not ever casual to get things done successful a level (non-hierarchical), multi-voice entity similar Ethereum, Beck acknowledges. “Ethereum is simply a decentralized ecosystem. You can’t get everyone connected the aforesaid leafage each astatine once.” But a collaboration similar the caller 1 that took spot successful the UK is simply a start.

Cornell Tech league panelist Hoffman expressed immoderate assurance that Ethereum could pivot and “turn the furniture 1 into a rollup” with processing speeds comparable to today’s L2s.

As noted, Hoffman has criticized the Ethereum Foundation for being excessively insular and academic, but helium sees signs that things whitethorn beryllium changing now, writing recently:

The assignment of co-executive directors Tomasz Stańczak and Hsiao-Wei Wang marks a caller epoch of accountability, direction, and interior cohesion.

“I’m feeling optimistic,” added Beck. “Ethereum inactive has the astir assets locked for DeFi; the astir stablecoins are connected Ethereum. BlackRock has a money that’s settling connected Ethereum.”

Put different way, Ethereum is inactive well-positioned to supply the infrastructure for the “network of networks” — i.e., the smoothly interacting web of multitudinous backstage and nationalist blockchains that galore anticipation volition beryllium the technology’s future.

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