Ethereum Struggles to Sustain Relevance Amid Surging Layer 2 Network Dominance and Fee Shift

• Ethereum’s fee revenue drops as L2 networks dominate, raising concerns about the network’s sustainability.
• Layer 2 solutions are fragmenting Ethereum’s ecosystem, hindering liquidity and creating decentralized control issues.
• L2 networks absorb users and fees, posing competition to Ethereum and challenging its ability to scale Layer 1.

Ethereum’s ecosystem is witnessing notable changes, driven by the rise of Layer 2 (L2) solutions. According to Justin Bons on X, Ethereum is struggling to maintain its relevance as L2 networks dominate the scene. With Ethereum’s fees and network usage shifting toward L2s, concerns about the long-term sustainability of Ethereum’s network have emerged.

Fee Revenue Decline and Shattered Ecosystem

The introduction of Ethereum’s EIP-4844, also known as Proto-Danksharding, led to a decrease in Ethereum’s fee revenue. This decline has resulted in fee burns falling behind the rate of inflation, primarily because L2s have absorbed most of the fees. Consequently, inflation has increased over Ethereum, signaling potential issues in Ethereum’s future as it shifts away from handling transactions directly.

This shift has fragmented Ethereum’s ecosystem into different camps, creating competition within the network itself. The division has impacted liquidity and composability, making it challenging to restore Ethereum’s once-cohesive network. Potential solutions like shared sequencing are in conflict with the interests of L2 networks, leading to further division.

Centralized Layer 2 Networks and Ethereum’s Development

As Layer 2 solutions become more prominent, their control over users’ assets and transactions raises concerns about decentralization. According to Justin Bons, many top L2s have the potential to seize user funds and censor transactions. These actions contrast with the initial motivations behind Ethereum’s L2 scaling plan, which aimed to enhance decentralization.

The rejection of on-chain governance within Ethereum’s community has also led to a centralized decision-making process. This has left Ethereum vulnerable to outside influences and under centralized control, according to the analysis shared by Justin Bons.

The Future of Ethereum and Layer 2 Solutions

Layer 2 solutions now dominate Ethereum’s ecosystem, making a return to Layer 1 scaling an unlikely prospect. Hypothetically, if Ethereum found a breakthrough to scale Layer 1, it would significantly impact the token prices of L2 networks by reducing their necessity. This reality makes scaling Ethereum difficult, as it would harm the capital and revenue streams of existing L2s.

The competition between Ethereum and L2 networks is more than just technical; it highlights an evolving power dynamic. These L2 networks are now drawing away users and fees from Ethereum while positioning themselves as competitors.