Ethereum and its layer-2 ecosystem are growing. However, there are concerns that lower L2 ETH fees make Ether inflationary—here’s why.
The past two months have not been kind to Ethereum (ETH). After breaking $4,000, supporters thought ETH would ease past $4,900 and register fresh new all-time highs, just like Ethereum.
Among the many primers behind the enormous expectations of the United States SEC approving a spot ETF in May was Dencun’s impact on Ethereum. Indeed, Dencun made layer-2 platforms like Base more attractive due to the now lower fees.
A Major Migration To Ethereum Layer-2s Or Rapid Scaling?
And, highlighting the current state of affairs in Ethereum and layer-2s, one analyst noted that off-chain activities via layer-2s have shot up drastically over the last two months. Per his assessment, the analyst notes that they now constitute a staggering 82% of all activity.
This means that more users are choosing to transact on Arbitrum and similar layers and moving away from the mainnet. Though this trend is positive and might even spur adoption, some are concerned about its long-term impact.
As activity shifts to cheaper layer-2s, it could signal that the broader Ethereum ecosystem is maturing.
In this setup, and considering Ethereum’s significance, he explained that platforms like Base are now handling the growing transaction demand, alleviating congestion on the Ethereum mainnet.
This, in turn, could lead to broader adoption and potentially drive up the value of ETH.
While the “shift”, or what supporters may describe as “migration,” is a net positive overall, there are some who think that the “migration” narrative is misleading.
Responding, he notes that layer-1 activity has not dropped. Instead, the observer argues that the overall pie of Ethereum activity is simply growing, with layer-2 solutions scaling (as expected) and handling additional transactions.
This could hold some truth in it because all layer-2 solutions on Arbitrum or Base are “batched” off-chain before being confirmed on the mainnet. The Ethereum base layer, thus, still plays a crucial role and continues to secure these thriving off-chain ecosystems.
However, not everyone is celebrating the rise of Ethereum layer-2s.
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Layer-2s Good Or Bad for ETH?
Some analysts who strongly support decentralization are worried about the increasing dominance of custodial layer-2s.
Solutions like Base, backed by the centralized exchange Coinbase, raise questions about security and potential centralization.
Of note, the big problems now are these layer-2 platforms’ ability to hold private keys and the lack of decentralized fraud-proof systems.
Moreover, layer-2 platforms are continuously “siphoning” fees away from mainnet validators tasked with securing the mainnet.
As fees drop, this undermines the concept of ETH being “ultrasound money” since fewer coins are being destroyed.
In recent weeks, Ultrasound Money data shows that Ethereum mainnet has been burning fewer coins than released, making ETH deflationary.
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.
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