Crypto developers have not learnt anything from traditional finance and it shows. When you enable a secondary service to function atop of you, you're supposed to charge a fee for the advantages it gains, otherwise you risks losing money, it's really so simple.
Ethereum did not do this and essentially lost not just users but also revenue. According to a September report by Cointelegraph Magazine, Ethereum's fee revenue had collapsed by 99% as L2s maximized revenue generation in expense of ETH.
This is something I've discussed a number of times and recent underperformance of Ethereum native governance token, ETH seems to have triggered people to wake up to the realities.
Now, it's important to note the market performance of ETH has a various combined factors to blame, it isn't just about L2s. That said, L2s role in extracting Ethereum's liquidity can have far more demaging effects on Ethereum as a blockchain and ETH as an investment asset in the long term.
What we see today as demages is far from what's to come if Ethereum does not fix up and reclaim control.
Ethereum's terrible position as a result of the growth of Layer 2 solutions has got me thinking about how pioneers of L2s on Ethereum were absolute geniuses.
Geniuses not because their tech offerings for scaling was ground breaking — I've occasionally talked about how L2s don't scale Ethereum in a decentralized manner — but because it was a smart marketing move for new blockchains that would essentially steal liquidity from the Ethereum ecosystem.
We see it today how some L1s are now moving to become an L2 for Ethereum and the simple truth is that none of this is because “ETH tech is good” given that L1s can be built to be compatible with said Ethereum blockchain as an appreciation of the good tech, but the choice to be an L2 is pourly a marketing strategy.
If we look at how lots of tokens launched on Ethereum and not cheaper chains like BNB, we can also draw the conclusion that most were after the exposure to a community that was very liquid.
Why build an L1 and have to compete acquire users when you can build an L2 and be literally welcomed with open arms to rob your competitor?
Ether's declining appeal as an investment comes from layer-2’s draining value from the main network and a lack of community pushback on excessive token creation, a crypto venture capitalist says.
“The #1 cause of this is greedy Eth L2s siphoning value from the L1 and the social consensus that excess token creation was A-OK,” Castle Island Ventures partner Nic Carter said in a March 28 X post.
“ETH was buried in an avalanche of its own tokens. Died by its own hand,” Carter said. He said this in response to Lekker Capital founder Quinn Thompson’s claim that Ether is “completely dead” as an investment. — Cointelegraph report
VC commenting on L2s draining Ethereum? Well that's fresh.
Every L2 token you see out there is trading at values that could have been within the Ethereum ecosystem. The liquidity bouncing across these tokens would have been in ETH and the users using these chains through centralized onboarding on exchange channels, would have been within Ethereum and fees would not be declining.
Bitcoin’s L2 adoption will be much worse in effects
It's comical to me that Bitcoin maxis will hate on Ethereum and alt-chains and coins but don't seem to see when similar flaws of these alternative solutions are slowly making it's way to Bitcoin.
Bitcoin layer 2 solutions are growing and every single one of them is after revenue, not growing Bitcoin, just as Ethereum L2s don't give two fucks about Ethereum growing.
If we can allow ourselves think about L2s as apps building atop tech ecosystems with huge value flow, then we can understand why they are building there in the first place.
Everybody wants to build where the money is flowing, it happened with Ethereum, it also happened with TON blockchain and guess what? Both ecosystems were max extracted of value and some left for dead.
Who talks about TON these days? Exactly!
An attempt will always be made to build where the money is at to maximize revenue generation, and while that isn't inherently a bad thing, blockchains enabling these developments need to have a system to capitalize on such moves.
The case is honestly a lot worse for a blockchain like Bitcoin where coin supply is fixed, and governance isn't based on stake. The further centralization of bitcoin mining of one of the things to expect because if Bitcoin DeFi and scaling solutions via L2s steal away liquidity, miners revenue will collapse, just as it did with Ethereum, but worse because Bitcoin's block rewards diminishes overtime and if fees-side of the revenue declines as less transaction happen on the parent chain, this would quickly put many miners out of business.
Stagnantion and potential crash of BTC’s price would likely follow and at this point, Bitcoin would have been an asset controlled by Wallstreet.
Certainly, there's still time to put things in place to ensure this never happens but given the track record of the influencial members of the Bitcoin community, it's debatable to expect a fight against these things because the general concensus seems to already be that Bitcoin scales with L2s.