L2 is the user's savior, but L1's predator?

Author: Decentralised.Co

Compiler: Deep Tide TechFlow

Is L2 taking advantage of L1? **

L2 uses L1 for settlement while providing cheaper transaction services to users. They act as an intermediary between the L1 and the user, and capture a portion of the value by charging fees, including MEV. So, are they paying enough for the use of L1’s valuable block space? Let’s look at four charts to analyze the impact of L2 on Ethereum.

1.How does L2 help the Ethereum ecosystem?

Leaving L2 tokens aside, let’s take a look at their contributions to the Ethereum ecosystem as a whole. One way to measure this is to look at the increase in ETH market cap from L2 tokens.

For comparison, I use the ETHBTC ratio as a trend benchmark for the Ethereum ecosystem relative to Bitcoin.

To capture the value of Ethereum as a whole, I add the top 10 L2 tokens by market capitalization to ETH and consider them as “valid ETH” or the value of the entire Ethereum ecosystem.

Currently, the top 10 L2s have little to no effect on the ETHBTC ratio. With Bitcoin’s market dominance exceeding 50%, the chart below shows that L2 does not significantly increase the ETH (effective)/BTC ratio (see black line vs. green line).

2.So, where does value capture take place?

In simple terms, value capture can be measured by two metrics: revenue and market capitalization. If value is generated, it is reflected in the price.

a. Where is the revenue captured? Ethereum regularly captures about 90% of the total revenue of the Ethereum ecosystem. In the second quarter of 2024, Base has been the leading L2 in terms of revenue, followed by Blast.

b. In terms of market capitalization, ETH still accounts for more than 95% of the top 10 L2 market capitalization.

3.How much revenue does L2 pass to Ethereum?

L2 incurs costs for storing data on Ethereum. This is the operating cost of L2. This cost needs to be balanced. If the cost is too high, L2 operations will become difficult; The cost is too low, and although Ethereum provides a critical settlement service, it doesn’t earn much revenue from L2.

Ethereum’s 4844 upgrade, also known as Proto Danksharding, reduces the operating costs of L2. The reduction in L2 data storage costs has reduced L2’s revenue contribution to Ethereum from about 10% to about 2%. While this may seem like a setback, it prepares L2 for more users because transaction costs are reduced.

So far, blobs seem like a bad idea from an Ethereum perspective. So what is the end goal? Extend.

In a week in 2024, Ethereum supported 7.1 million transactions and generated $10.6 million in revenue. The cost per transaction for users is around $1.5. Meanwhile, five L2s (Arbitrum, Base, Blast, Optimism, and Polygon) supported more than 70 million transactions with a fee of $2.75 million. Each transaction costs only $0.03.

We can discuss the quality of the trades, such as whether they are bot trades or their value, and so on. But the truth is that Ethereum can’t support so many transactions.

Overall, by building L2s and reducing the transaction costs of L2 by providing them with cheaper data storage options on L1, this is good for users, but not so much for Ethereum (L1). If the majority of users choose to trade on L2, more data will be pushed to L1. As L2s push more data and compete with each other for L1’s block space, L1’s base fees increase, boosting Ethereum’s revenue. So, when more people start using L2, it can be a win-win for both Ethereum and users.