L2 is the savior of users, but is it the predator of L1?

Compiled by Deep Tide TechFlow

Is L2 plundering the interests of L1?

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

1.How does L2 help the Ethereum ecosystem?

Let’s not talk about L2 tokens first, let’s take a look at their contribution to the entire Ethereum ecosystem. One way to measure this is to look at the increase in market capitalization of ETH that L2 tokens have added.

For comparison, I used the ETHBTC ratio as a benchmark for trends in the Ethereum ecosystem relative to Bitcoin.

To capture the value of Ethereum as a whole, I added the top 10 L2 tokens by market cap to ETH and considered this to be "effective ETH" or the value of the entire Ethereum ecosystem.

Currently, the top 10 L2s have almost no impact on the ETHBTC ratio. As Bitcoin's market dominance exceeds 50%, the chart below shows that L2 does not significantly improve the ETH (effective) / BTC ratio (see black line vs. green line).

2. So, where does value capture happen?

Simply put, value capture can be measured by two metrics: revenue and market capitalization. If value is generated, it will be reflected in the price.

a. Where is the revenue captured? Ethereum regularly captures approximately 90% of the total revenue of the Ethereum ecosystem. Base has been the revenue-leading L2 in Q2 2024, followed by Blast.

b. In terms of market cap, ETH still accounts for over 95% of the top 10 L2 market caps.

3. How much revenue does L2 pass to Ethereum?

L2 Storing data on Ethereum incurs costs. This is the operating cost of L2. This cost needs to be balanced. If the cost is too high, it will become difficult to operate L2; if the cost is too low, although Ethereum provides key settlement services, there will not be much revenue earned from L2.

Ethereum’s 4844 upgrade (also known as Proto Danksharding) reduces L2 operating costs. 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 makes L2 ready for more users because transaction costs are reduced.

So far blobs seem like a bad idea from an Ethereum perspective. So what's the end goal? Extension.

In one week in 2024, Ethereum supported 7.1 million transactions and generated $10.6 million in revenue. The cost per transaction to users is approximately $1.50. Meanwhile, five L2s (Arbitrum, Base, Blast, Optimism, and Polygon) supported more than 70 million transactions at a cost of $2.75 million. The cost per transaction is only $0.03.

We can discuss the quality of the trades such as whether they are robot trades or their value etc. But the fact is, Ethereum cannot support so many transactions.

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

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