Binance, Coinbase–Not Individuals–Are Taking Full Advantage of Ethereum Layer-2 Benefits, Here’s Why

Binance, Coinbase, and other exchanges are reaping massive benefits from Ethereum layer-2 features on Base, Arbitrum, and Optimism

Ethereum is a force that continues to take advantage of its first-mover advantage. However, being a legacy chain, it faces its challenges, the top of the list being the low scalability that tends to push gas fees high.

To deal with this, especially during periods of high demand, developers developed roll-ups, rerouting transactions from the main net to off-chain platforms without compromising security.

The Rise And Rise Of Ethereum Layer-2s: Billions Of USDT and USDC Locked

According to L2Beat, all Ethereum layer-2s now manage over $35 billion, highlighting their pivotal role in growing the Ethereum ecosystem.

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Although most of these platforms, like the main net, support all kinds of tokens, ERC-20 or even ERC-721, it appears that more stablecoins like USDC and USDT are being funneled to these layer-2 solutions.

A recent assessment shows that the top three Ethereum layer-2s in Arbitrum, Base, and Optimism control over $10 billion.

(Source)

Arbitrum manages $4.4 billion, Base $3.4 billion, and Optimism $1.2 billion.

However, a closer look shows that a big portion of these stablecoins are not held by individual users but by top exchanges like Binance and Coinbase.

On Arbitrum, the largest Ethereum layer-2, Binance controls over 60% of all USDT, or over $2.3 billion.

(Source)

In all, Arbitrum manages over $4.4 billion in stablecoins.

It means that the amount held by Arbitrum users is significantly lower, at just $1.9 billion.

Meanwhile, on Base, Coinbase controls over 60% of all USDC, or slightly over $2 billion. The rest, nearly $1 billion, is held by users.

(Source)

Moreover, Optimism’s users own a mere $307 million out of the over $1.2 billion controlled.

Cumulatively, less than 40% of all USDT and USDC on layer-2 platforms are controlled by users.

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Is The Dominance of Exchange Wallets on Layer-2 A Concern?

The dominance of exchange wallets owning stablecoins on layer-2s calls into question just how diversified the user base is and if there is any organic growth in these platforms.

Layer-s are designed to be scalable and, more importantly, have lower transaction fees.

With a big chunk of stablecoins concentrated on exchange wallets, they are the true beneficiaries of layer-2s, not end users who have yet to fully take advantage of their features.

However, the problem with billions of USDT and USDC held in layer-2 platforms is that if there is a technical glitch, exchanges will face liquidity challenges as they might fail to move them to the main net.

Although layer-2 sequencers have proven reliable, none of the popular layer-2s are truly decentralized.

They have yet to implement a fault-proof system to verify a transaction’s validity. The absence of this system poses a risk to the billions of USDC and USDT locked in Ethereum layer-2s.

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Disclaimer: Crypto is a high-risk asset class. This article is provided for informational purposes and does not constitute investment advice. You could lose all of your capital.