How does the rapid growth of L2 boost the global popularity of Ethereum?

The rapid growth of Layer 2 will bring reliable cash flow to ETH.

Last night, ApeCoin’s airdrop collection activity caused the Ethereum gas fee to rise to 297gwei, and many people felt that there was an atmosphere of returning to the bull market, but after the event, the Ethereum network gas fee began to quickly fall back to 24gwei. With the slump of the broader market, we have to admit that there is still a long way to go before the next wave of bull market. According to Etherscan data, the gas fee of the Ethereum network has fallen frequently since it entered the bear market, and its gas fee fell to a minimum of 10gwei, the lowest point in more than nine months. The amount of ether required to process transactions has fallen by 94% since January.

From the above data, we can clearly see that the market demand for Ethereum block space has begun to decrease. Since May last year, with the fire of NFT and GameFi, as well as DeFi that has been active in the market, the gas fee on Ethereum has also begun to rise, and many emerging public chains have also begun to compete for different market pain points. Ethereum’s market share has fallen below 60%.

However, Ethereum developer Ryan Berckmans said: “The total gas fee for ETH is 60% lower than the 2021 average, and with Layer 2 security costs only 1% of the total fee, in a few years, the high growth of Layer 2 will be Bringing reliable cash flow to ETH.” So in the face of Ethereum, whose market share is constantly being divided up, can the growth of Layer 2 really help it regain its original market share? This starts with the analysis of the development of Ethereum London after the upgrade.

London has been upgraded for nearly half a year. How is the user experience?

We know that the Ethereum London upgrade is not to solve scalability, but to change the fee structure, dividing the original fee into a base fee and a priority fee, of which miners can only get the priority fee, because the base fee will be destroy. After that, the gas price will also increase or decrease according to the utilization of the previous block, thereby reducing the waste caused by paying too much gas.

How does the rapid growth of L2 boost the global popularity of Ethereum?

Source: Footprint Analytics

From the above chart, we can see that in the past 6 months, there has been no obvious trend change in the average gas fee price and base fee price of Ethereum. In terms of transaction methods, more users began to choose EIP-1559 transaction methods. According to Footprint Analytics, in the past 6 months, the proportion of users who choose EIP-1559 has increased from less than 50% to nearly 80%. This also means that after the London upgrade, EIP-1559 helps more users save gas fees.

How does the rapid growth of L2 boost the global popularity of Ethereum?

Source: Footprint Analytics

In addition, the upgrade of Ethereum in London also greatly promoted the expansion of Layer 2 and the development of Ethereum 2.0. Based on the continuous development of the encryption market, the demand for transactions on the chain will increase greatly in the future. Under such a rapid growth, the insufficiency of supply will also drive up the gas fee. This has also become an important reason for the rapid development of Layer 2 expansion.

How does the rapid growth of Layer 2 drive the value of Ethereum?

To figure out how Layer 2 boosts the value of ETH, we first need to clarify what changes Layer 2 has made to Ethereum.

The Layer 2 chain using ZK-Rollups is clearly more advantageous than the Layer 1 chain using Proof of Validity/ZK (Zero Knowledge). ZK-Rollup inherits ZK’s highest security, sustainability and liquidity attributes, while also having greater flexibility to focus on building the best execution layer.

In addition, all Rollups are fully composable, and the potential for scalability is higher than Layer 1 chains, so Rollups are less fragmented. At the same time, the bridge between Rollups is very secure. Through the new sharding design of Danksharding, ZK-Rollups will be able to operate synchronously with Layer 1.

But while we lament the benefits of Layer 2, it’s undeniable that it comes with some risks.

Polynya, an Ethereum researcher, once said in an interview that currently, many Rollup networks have multi-sig upgradability. Multisig can collude to steal funds in Rollups. More likely, regulators ordered enough multisig signers to shut down a certain Rollup. Also, most Rollups now have a centralized sequencer, so the biggest risk is probably the downtime of the sequencer, during which transactions can be very difficult, expensive, or impossible. But these risks will eventually become less of a hindrance as technology develops.

According to Etherscan data, the total gas fee of Ethereum in the current price segment is 60% lower than the 2021 average, although a large part of this data is due to the current bear market. Among them, the security cost of Layer 2 only accounts for 1% of the total gas fee of Ethereum, which means that as Layer 2 continues to grow rapidly, the cost for users to choose Ethereum is still very low. This shows that for billions of end users, Layer 2 is the real bargain.

As users continue to choose Layer 2, the trustless bridging of Ethereum’s asset network from Layer 1 to Layer 2 and between Layer 2 will continue to drive Ethereum’s network effects. At the same time, individual Layer 2s are expected to develop their own Layer 2 network effects to support the valuation of Layer 2 native tokens. In other words, Ethereum will gain general market share through the rapid growth of Layer 2 in the next few years, bringing reliable cash flow.

Are Layer 2 Tokens Killing ETH’s Rally?

When the rapid and stable development of Layer 2 gradually began to be recognized by the public, a voice calling for the launch of its own native token against ETH also began to appear in the community. Discussions have also begun on whether Layer 2 tokens will replace ETH, or even surpass BTC.

From a network perspective, Layer 2 has its own network effects, while ETH has network effects from the asset network, but there is a bond between the two and a very positive relationship.

There is a positive correlation between Layer 2 tokens and ETH. Layer 2 tokens can maintain a premium such as the Layer 2 network effect, and pay ETH from this premium. The two sides are a win-win relationship. Of course, some people say that Layer 2 will not pay a huge fee to ETH in the end, and only pay a low ETH settlement fee for a small amount of batch Gas. Of course this statement is incorrect.

When Layer 2 is built on Ethereum, Layer 2 can access applications, tokens and liquidity from a decentralized chain bridge between Layer 1 and Layer 2. As Ethereum grows, these bridges accumulate into the asset network, where any Layer 2 can be trustless accessible and programmable.

In short, the good ecological development of Layer 2 will well boost the development of Ethereum to global popularity, and bring considerable value to Layer 2 tokens and ETH. As for whether a new Layer 2 token will be launched to benchmark ETH in the future, or will it become an Ethereum killer? It’s all an unlikely thing.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

Like (0)
Donate Buy me a coffee Buy me a coffee
Previous 2022-03-18 09:27
Next 2022-03-18 09:30

Related articles