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

Layer 2s have been a great blockchain success story. They’ve reduced congestion on the Ethereum mainnet, driving down gas fees while preserving security.

But maybe they’ve become too successful, drawing chain activity and fee income from the parent that spawned them? At least that’s what some are suggesting lately, most recently at Cornell Tech’s blockchain conference in late April.

Indeed, some think Ethereum should be a little greedier, or at least fight harder for a bigger part of the revenue pie, particularly sequencing fees. 

“People in the Ethereum Foundation [the nonprofit that supports the Ethereum ecosystem] will tell you that, ‘Yes, we effed up by being too ivory tower.’ I have heard that multiple times,” said David Hoffman, an owner at Bankless, during a panel discussion at the Cornell Tech event in New York City on April 25. 

Elsewhere, Hoffman has urged Ethereum to make a “strategic pivot,” noting that the crypto environment has changed in the last few years. Ethereum no longer has the “luxury of being a peace-time research project…. exploited by its competition.”

L2s are reaping millions of dollars in transaction order fees (sometimes called sequencing fees), but none of these revenues are being passed on to Ethereum, according to James Beck, head of growth at ENS Labs and another speaker at the New York City conference. Beck told Cointelegraph:

So, this cultural layer of podcasters and researchers are saying, ‘Well, the price of ETH has been dropping compared to these other tokens. What do we do to make Ethereum more powerful?’

In short, Ethereum is a neutral verification layer, but the Ethereum mainnet is not being fairly compensated for the work that it is doing. Centralized for-profit L2s like Base, Optimism and Arbitrum are gathering the lucrative sequencing fees while enjoying the security and liveness guarantees of the Ethereum mainnet at relatively little economic cost.

L2s soared after Dencun upgrade

L2 rollups are a recent innovation; they only emerged in 2023. The idea was to reduce chain congestion and gas fees by moving transaction processing from the main blockchain (layer 1) to separate chains that sit atop the mainnet (L2s). But transaction processing is arguably the most profitable part of the revenue game, especially when users opt to pay priority fees to get their orders processed faster.

Fee-sharing was rarely much of an issue before Ethereum’s March 2024 Dencun upgrade, which introduced blob transactions to help scale layer 2s. Blobs significantly reduced the cost for L2s to post data to Ethereum, allowing them to operate more profitably, CoinMetrics researcher analyst Tanay Ved told Cointelegraph this week. 

Since then, L2 user demand has soared, especially on Base, the L2 launched by Coinbase in August 2023 on the Ethereum mainnet. 

As Ved noted in an April 8 blog, Base has earned a total of ~$98 million in revenues from user-transaction fees (including base and priority fees), “while paying only ~$4.9M to the Ethereum base layer, resulting in a total estimated profit of $94M since the Dencun upgrade.” 

Ved added:

This dynamic has led to many questioning whether Layer-2s are net positive for Ethereum, or whether they are ‘extractive.

Base’s response

Asked about fees, a Base spokesperson told Cointelegraph, “Today, Base already pays Ethereum fees for every transaction on Base. All transactions are settled on Ethereum, and so far, Base has paid Ethereum more than $20 million in settlement fees since Base’s inception.” One can see these fees on Token Terminal under “cost of revenue,” the spokesperson added. 

“Overall, Base makes getting onchain more accessible with fast and cheap transactions and helps grow the Ethereum ecosystem by onboarding more users, builders, apps and assets, all of whom are transacting in ETH and driving demand,” said the spokesperson.

Related: Institutions break up with Ethereum but keep ETH on the hook

However, in many, if not most months, Base’s overall fees are roughly 10 times the amount paid to Ethereum for settling trades, according to examination of the referenced Base financial statement. In April, for instance, the most recent full month, Base reaped $3.7 million in fees, but only $305,000 was delivered to Ethereum as settlement fees — about 8% of total fees.

Still, maybe things aren’t quite so dire. Even if fees are out of kilter now, the imbalance may not last, others caution. Ethereum hard forks like Pectra, which went live yesterday (May 7), and Fusaka, scheduled for late 2025, will increase blob throughput. “This means L2s will be able to post more blobs, potentially driving higher total blob fees to mainnet,” Ved told Cointelegraph. 

Ethereum is already consistently hitting the current blob target of three per block, as the chart below shows. “Pectra will raise this to six blobs per block — with a max of nine — creating room for increased fee capture as L2 activity scales,” added Ved.

Are “based rollups” the answer?

Some Ethereum researchers, podcasters — and even L2s — have been leaning into “based rollups” as a more permanent way to fix the fee problem and provide better security in the bargain. Here, transaction ordering (i.e., sequencing) would be done on the mainnet, not on L2s.

The sequencers used by Optimism, Arbitrum One, Base and others are more prone to attack or failure, given that they are centralized, with a single point of failure, some researchers say. Polygon’s Jarrod Ward writes:

If a centralized sequencer goes down, the rollup effectively stops doing its job entirely. It stops handling transactions from users on the L2 and also stops sending batch data back to Ethereum.

“Layer-2 sequencers have become dangerously centralized,” added Tom Ngo, executive lead at Metis — an Ethereum layer-2 blockchain. 

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

Related: ‘Vitalik: An Ethereum Story’ is less about crypto and more about being human

Several based-rollup L2s have launched this past year. Taiko Alethia, the first and largest, went live in May 2024. A year later, it had $148.3 million in total value secured — ranking 14th on L2Beat’s list of L2s, though far behind leader Base’s $12.06 billion. 

Speedwise, Taiko was averaging a respectable 20.3 user operations per second (UOPS) on May 7, a far cry from Base’s 86.3 UOPS, but on par with Arbitrum One’s (21.6 UOPS) and significantly better than Optimism’s (10.3 UOPS).

A tax on L2s?

Another idea floated in the Ethereum community is imposing a sort of tax on L2s. But doing this could have some unintended consequences, according to Ved. It could make L2s less competitive. It also risks “leakage of activity to competing layer 1s outside the Ethereum ecosystem.” Activity that flows to Base today could flow instead to Solana or other L1s, Ved said.

There could be philosophical issues, too, were Ethereum to lay a surcharge on its L2s. Ved noted:

A tax could be seen as contrary to Ethereum’s ethos of decentralization, which would opt for market-driven forces rather than enforcing a tax.

 Generally speaking, the Ethereum Foundation seems to be prioritizing long-term growth over short-term revenue, Ved explained. Proposals like EIP-7762, though, which raises the minimum blob base fee to speed up price discovery during demand surges, could drive more fee income to Ethereum mainnet, having an effect like a tax. 

Social pressure?

According to ENS Labs’ Beck, it may take some social pressure to get the leading centralized L2s to voluntarily give up their sequencing fees. Other L2s like Linea may need to step in and say to centralized L2s something along the lines of: “Look, you guys have these risks inherent in a more centralized design, and here’s the chance to bake [the order processing] into Ethereum, which is more decentralized.”

Along these lines, ENS took part in a three-day workshop in the UK in January with leading researchers and developers from entities like Linea, Status, OpenZeppelin, Titan, Spire Labs and the Ethereum Foundation. The immediate task was how to create scalable, decentralized infrastructure for ENS Labs’ Namechain, but also to bring together various Ethereum ecosystem teams to collaboratively solve L2 interoperability challenges with based rollups. 

It’s not always easy to get things done in a flat (non-hierarchical), multi-voice entity like Ethereum, Beck acknowledges. “Ethereum is a decentralized ecosystem. You can’t get everyone on the same page all at once.” But a collaboration like the recent one that took place in the UK is a start. 

Cornell Tech conference panelist Hoffman expressed some confidence that Ethereum could pivot and “turn the layer 1 into a rollup” with processing speeds comparable to today’s L2s. 

As noted, Hoffman has criticized the Ethereum Foundation for being too insular and academic, but he sees signs that things may be changing now, writing recently:

The appointment of co-executive directors Tomasz Stańczak and Hsiao-Wei Wang marks a new era of accountability, direction, and internal cohesion.

“I’m feeling optimistic,” added Beck. “Ethereum still has the most assets locked for DeFi; the most stablecoins are on Ethereum. BlackRock has a fund that’s settling on Ethereum.” 

Put another way, Ethereum is still well-positioned to provide the infrastructure for the “network of networks” — i.e., the smoothly interacting network of multitudinous private and public blockchains that many hope will be the technology’s future.

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