Author: Ceteris, Delphi Digital; Translated by: Golden Finance xiaozou
Last year in my Infrastructure Year Outlook report, I wrote a section called “L2 Wars” where I described my thoughts on the Rollup space and how it will change in the coming year. I think the whole article is still worth reading, but the main points are as follows:
1. Blast is a complete mix of Rollup architectures and will lead to “kumbaya” (Note: Kumbaya is a transliteration of the English word Come by here, which is translated into Chinese as “gathering together,
The term is now often used by politicians to express disdain for a certain kind of harmonious scene.
2. The L2 ecosystem will become more fragmented and isolated, with its own bridge/interoperability standards and SDKs to launch new chains/L3 (Superchain, Orbit, etc.)
3. Rollups need to use alt-DA to scale
4. DA will disappear as a source of value accumulation. DA will usher in disruptive innovation, and charging a premium for DA will no longer be feasible.
5. The new favorable reason for ETH under this architecture is "global proof verification layer and currency"
6. The value accumulation of the DA layer will be limited
7. If all values are arranged in order, then the value accumulation of L2 tokens is theoretically positive
By now I think it’s safe to say that this post is out of date. ETH has been through something of a social crisis and these discussion points above have been brought up over and over again by now. You’ve even seen a large portion of the ETH crowd shift their focus to how to scale L1 without leaking all this value to rollups.
However, now that everyone is repeating this, it is no longer truly an "alpha" or contrarian view. So, what do we see today and what do we do next?
Rollups Today
First up, revenue. ETH revenue. How has it changed 4,844 years later? The beautiful chart below from Galaxy paints the picture, as DA is no longer a significant value driver for the ETH economy, a point we highlight in our report for the year ahead.
Is this an entirely bad thing? No! Ethereum has no choice. As we’ve highlighted, DAs have undergone “disruptive innovation” which means that charging a premium has become more challenging. While we do believe Ethereum will still be able to charge higher fees than other DA layers so that rollups can inherit the full security of Ethereum, the extent to which rollups will be able to do this is unclear. The main benefit of sharing any DA layer is bridging. By sharing DA layers, bridging becomes more secure, and economies of scale can be achieved this way. Again, while this is the main benefit, no one really knows how much this benefit is worth. Will rollups pay 10x the fees of other DA layers? 100x? There’s a number, I just don’t know what it is.
Therefore, this is a natural reduction in DA fee income, and Ethereum has no choice. Now, people are beginning to question the Ethereum Rollup roadmap, especially Max Resnick and Doug Colkitt.
OK, now that everyone is roughly equal about the impact of DA experiencing disruptive innovation on ETH economics, is it doomed to fail?
The Path Forward for ETH
As we’ve highlighted in our Year Ahead, the entire investment thesis for ETH now boils down to “global proof-of-stake validation layer and currency.” What exactly does this mean?
Well, that’s not entirely true, we do know what that means. Basically, Ethereum is the most decentralized and oldest base layer, which gives it a competitive advantage over all other blockchains for asset issuance and validating proofs. Even if the economics aren’t as strong, this is still a premium asset. However, offloading all the execution work would return you to the pre-EIP 1559 economic model where ETH is mostly recycled.
If Ethereum existed purely to sell cheap block space to l2s, it would revert to being a recycled asset as it was before 1559. Users would pay miners ETH, and miners would sell ETH.
It's the *exactly* same dynamic, but this time with an l2 aligner. Make L1 great again. — ceteris (@ceterispar1bus) July 23, 2024
That’s why we’re starting to see a lot of focus on scaling L1 again and getting applications to migrate back to Ethereum L1. We know that execution on L1 incurs fees. What we don’t know is whether the world will adopt ETH as money. The argument is that if every Rollup uses ETH as money, then it will become a non-state-backed currency used around the world like BTC. To me, this is an optimistic and possible outcome, the challenge is that whether Vitalik, Justin Drake, you, or I think ETH is money is largely irrelevant.
Will the world recognize ETH as money?
So we go back to why people are trying to scale L1 again and raise fees on L1. But is this correct? Felipe from Theia argues that if we do value L1 tokens based on MEV and fees, they will go to zero anyway, so the only thing that would justify their valuation is being an “emerging market reserve asset”, i.e. “currency”. I support this argument. It is not clear that applications will leak all the MEV they generate in the long term.
We shouldn’t value ETH and SOL based on cash flows unless we want them to go to zero.
Finally, Wei Dai believes that providing network effects can be achieved through the following ways:
Based sorting, providing composability and censorship resistance.
*More powerful* shared settlement, where assets issued by an L2 can also be used on other L2s to eliminate silos (e.g. via reverse canonical bridges).
is the only way to make it work long term.
Ethereum needs to provide network effects for its Layer 2
All of the above arguments are plausible to me, but the truth is I don’t really know the answer. There is an argument that if Ethereum focuses on scaling L1 again, it will just become a “worse Solana” because Ethereum will never be able to compete with Solana in terms of L1 execution.
I don't think anyone really knows, people just believe in different things. Ultimately, the market will decide what is valuable.
