Translation: Blockchain in Vernacular

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Ethereum and Bitcoin, the two major blockchains, are facing significant scaling challenges. As more users and transactions move to Layer 2 (L2) solutions, these systems may weaken the security and sustainability of the base layer (L1) while miners and validators experience reduced fees and rewards. .

Rapid L2 adoption raises concerns about base layers

Both Ethereum and Bitcoin are struggling with a fundamental problem: how to scale their networks to accommodate an ever-increasing number of users without sacrificing security or decentralization. Recently, Cybercapital founder Justin Bons put forward his theory that second-layer (L2) platforms are "parasitic" to Ethereum. Bons has long expressed concerns about the growing impact of Ethereum's L2 solutions on the main chain and other blockchains that adopt L2 expansion methods. The following is an overview of the dilemma faced by first-layer (L1) blockchains such as Bitcoin and Ethereum.

In its current state, no blockchain can process transactions at speeds comparable to centralized systems like Visa or Mastercard, and the fees for using the base layer can be prohibitively high. Since 2015, changes to Bitcoin’s consensus layer to improve its scalability have sparked an ongoing debate, with advocates increasingly leaning toward supporting L2 solutions like the Lightning Network. Ethereum’s core developers have similarly tended to push for L2 developments like Arbitrum, Optimism, Base, and Linea.

These L2 solutions promise faster transactions and lower fees, but they also bring new challenges. By design, second-layer solutions move transactions from the base layer (L1) to the second layer. For Ethereum, L2s like Arbitrum and Optimism bundle multiple transactions into a single L1 transaction, reducing costs and increasing throughput. For Bitcoin, the Lightning Network allows users to conduct transactions off-chain, settling on the main blockchain only when absolutely necessary. While these solutions are popular for increasing transaction speeds and reducing fees, they can pose a potential threat to the security and economic model of L1 blockchains.

According to growthepie.xyz, rent paid to L1 (Ethereum).

Ethereum’s first layer once benefited significantly from these second layer (L2) activities. By November 2023, L2 solutions like Arbitrum, Base, Optimism, and Linea were contributing approximately $200,000 in daily rental fees to Ethereum’s L1. By December, those charges had soared to as much as $1.5 million a day. However, this financial support subsequently began to diminish. From December 2023 to March 2024, L2 fees paid to Ethereum dropped to less than $250,000 per day, before surging to approximately $1.7 million in early March. By the end of April 2024, these fees had dropped dramatically, with less than $10,000 being paid into the Ethereum mainnet per day. This decline raises questions about the long-term sustainability of Ethereum’s L1 infrastructure, as much of the activity may be permanently moved to L2.

Bitcoin faces a similar problem. Once Bitcoin (BTC) moves to the Lightning Network or other Bitcoin sidechains, transactions bypass the main chain, depriving miners of the fees they normally earn from processing transactions. Bitcoin's economic security relies on incentives for miners, including transaction fees and block rewards, the latter of which halves approximately every four years. As fees move off-chain, concerns are growing that Bitcoin miners may lose sufficient economic incentive to continue maintaining the network, making it less secure over time.

As of October 6, 2024, Bitcoin’s Lightning Network (LN) capacity is approximately 5,360 BTC, according to bitcoinvisuals.com. Miners only receive fees when Bitcoin (BTC) is on or off a Lightning channel, meaning they do not receive fees when transacting off-chain on the Lightning Network. Similarly, Wrapped Bitcoin (WBTC) and other tokenized forms of Bitcoin do not contribute significant fees to L1 once they are converted.

Along with Bangs, Blockchair lead developer Nikita Zhavoronkov also expressed concerns about Bitcoin's shrinking security budget. The fundamental problem is that both Ethereum and Bitcoin were designed with the expectation that users would pay to use the base layer. These fees are an important part of maintaining the security of the blockchain, especially as block rewards decrease over time. If too many transactions occur on L2, L1 may suffer from insufficient fees, thereby reducing the incentive for validators and miners to protect the network.

While L2 solutions like Arbitrum and Optimism offer immediate benefits in terms of scalability and cost-efficiency, they could undermine the long-term viability of Ethereum L1 if they fail to contribute sufficiently to the base layer. Similarly, Bitcoin’s Lightning Network, while solving some of Bitcoin’s scalability issues, completely excludes miners from the transaction cycle, making BTC’s security model entirely dependent on the dwindling block rewards.

While there is no doubt that L2 solutions provide a temporary solution to the scalability issues of Ethereum and Bitcoin, they also raise important questions about the long-term health of these networks. If L1 blockchains rely on a steady stream of fees to incentivize miners and validators, and these fees are increasingly taken up by L2 solutions, then the economic models of these blockchains may become unbalanced.

Dune.com statistics on total local gas usage share for L2 and L1 benchmarks as of October 6, 2024.

The ultimate goal of Ethereum and Bitcoin has always been to create decentralized, secure networks that can meet global demand. However, if L2 solutions continue to siphon transactions off of L1 without providing adequate fees for the base layer, the security and decentralization of these networks may be at risk. Finding a balance between L1 and L2 activity is critical to the future of blockchain scalability. The question about rewards also fails to respond to criticisms of the L2 concept, which is often seen as more centralized than the main chain, making it more vulnerable to attacks and theft.

In summary, while L2 solutions offer clear benefits in terms of transaction speed and cost, they also pose significant risks to the long-term sustainability of Ethereum and Bitcoin. Without mechanisms to ensure that L2 contributes meaningfully to the security and infrastructure of the base layer, these solutions may become more of a temporary stopgap than a permanent solution. Both the Ethereum and Bitcoin communities need to carefully consider how to scale their networks without hampering the fundamental principles that make them unique in the world of decentralized finance.

As mainstream adoption approaches, the urgency for the Ethereum and Bitcoin communities to address these scaling issues intensifies. If a sustainable balance between L1 and L2 is not established soon, the security and decentralization of these blockchains may be threatened in the coming years. Solving these challenges is critical to maintaining the integrity of the network and ensuring its long-term survival.