- Ethereum's L2 scaling roadmap faces criticism, but similar challenges would persist even with L1 scaling solutions.
- L2 expansion has minimal impact on ETH demand. Declining total fees and rising ETH inflation stem from oversupplied block space.
- Long-term ETH utility across protocols may surpass transaction fees as its primary demand driver, with fees trending toward zero.
Ethereum's Layer-2 (L2) scaling strategy has sparked debates about its "value extraction" from ETH. The Dencun upgrade and L2 adoption drove total fees to a three-year low, seemingly discrediting ETH's "Ultrasound Money" narrative. However, these criticisms often misinterpret the inevitable outcomes of successful blockchain scaling—phenomena that would occur regardless of L1 or L2 approaches.
The Success of Scaling Solutions
Ethereum's migration to L2 demonstrates the technical success of its scaling roadmap. L2 transaction volume surged from 1M daily (35% of total) in early 2023 to 12M (92%) by mid-2024. Post-Dencun upgrade, L2 capacity doubled within weeks while maintaining mainnet throughput (see grey section in Fig.1).
Despite exponential transaction growth, total fees declined. August 2024 saw average daily fees drop to Ξ700—a fivefold decrease from 2023's Ξ3.4K average—highlighting L2's cost efficiency (Fig.2). This asymmetry is stark: while L1 handles 11% of transactions, it generates 92% of fees, with L2 fees being 100x cheaper (e.g., Base fees at 1/277th of L1 costs; Fig.3).
👉 Discover how L2 transforms Ethereum's economics
Side Effects of Scaling
L2 expansion and EIP-4844's low-cost blobs reshaped ETH's fee demand. Oversupplied block space reduced total fees—a trend visible since 2021 (Fig.4). Crucially, any scaling method that outpaces demand would yield similar results. Power-law models suggest fees could drop further if transaction growth lags behind block space expansion (Fig.5).
Fee Dynamics Revisited
Transaction activity's influence on fees has weakened since 2022. While DEX trades historically drove fees, their correlation diminished despite record-high activity shares (Fig.6). This reflects:
- Mature transaction environments reducing MEV opportunities
- Memecoin activity migrating to chains like Solana
- Lower default slippage settings and MEV protections (e.g., CoW Swap)
Notably, Solana's fee structure—where 95%+ non-vote fees come from priority transactions—resembles Ethereum's 2020-21 phase (Fig.8), suggesting similar evolution paths.
Ultrasound Money Reassessed
EIP-1559's fee burns made ETH deflationary post-Merge (2022), eliminating 440K ETH. However, Dencun reversed this: 200K new ETH entered circulation by August 2024 (Fig.4). Even if L2 fees were burned, ETH would still trend inflationary due to:
- Mainnet fee declines
- Rising staking ratios increasing net issuance
👉 Explore ETH's evolving monetary policy
Sequencer Profitability
Critics argue L2 sequencers extract value by pocketing the spread between L2 fees and L1 "rent." While Dencun cut L1 costs by 90% (saving Ξ200-300 daily), most savings passed to users—pushing L2 fees to $0.002/tx (Fig.11). Sequencer profits remain mixed, with some rollups showing declining margins post-upgrade (Fig.10).
Utility-Driven ETH Demand
Long-term, ETH's value drivers are shifting:
- Reserve balances: Users maintain small "convenience balances" as fees approach zero
Protocol utility: Dominates demand, evidenced by:
- $18B+ bridged to L2 (Fig.12)
- Ξ4.7M new ETH staked via Eigenlayer
- Ξ2.8M ETH locked in Aave V3 (Fig.13)
- ETH's role as liquidity pairs' base currency (e.g., Uniswap's WBTC/ETH pool holds Ξ80K)
Key Takeaways
- L2 "value extraction" is overstated: Fee declines stem from scaling economics, not L2-specific flaws.
- ETH's future lies beyond fees: Protocol utility and reserve balances increasingly drive demand.
- L2 enables new use cases: Low fees foster innovative applications that reinforce ETH's ecosystem role.
FAQ
Q: Will L2 scaling make ETH obsolete?
A: No—L2s enhance ETH's utility as the foundational asset for security and interoperability.
Q: Why are L2 fees so much cheaper?
A: Batch processing and optimized data storage (via blobs) reduce per-transaction costs.
Q: How does staking impact ETH's value?
A: Higher staking ratios increase issuance but also lock supply, creating counterbalancing effects.
Q: Are L2 sequencers harming Ethereum?
A: Sequencer profits are marginal compared to ETH's overall utility-driven demand growth.
Q: What's the long-term fee trajectory?
A: Fees will approach zero, with value accrual shifting to ETH's role in DeFi, staking, and ecosystem applications.