“ACCORDING TO EY’s Global Blockchain Leader Paul Brody, Only Companies That Can Aggregate Significant Transaction Volume Into The Network would Benefit from Creating their Own Layer 2.”, – WRITE: www.coindesk.com
The attractions for Launching An Ethreum Layer 2 Network Are Significant, Especlamally Who Compared to Launching Your Own Layer 1 (Foundation Layer) Blockchain. Layer 1 Networks Must Compete with Networks Like Ethereum and Solana in An Already Intensely Competitive and Crowded Market. Layer 2 Networks that Run on Top of Ethreum Also Face An Intenseli Competitive Marketplace But Can Simultaneously Draw Upon The Strenguth of The Ethereum EcoSystem, Tanks Tones.
With Ethereum Having Turned 10 in July, It Remains the Dominant Smart Contract Blockchain and It Is The Largest Single Home for Digital Assets, Real-World Assets (Rwa), StableCoins. Ethereum’s Share of the Overall Decentralized Finance EcoSystem Has Been Stable at About 50% for Three Years Now. WHEN LAYER 2 NETWORKS Are Included in the Total, It Appears to Be Rising Modestly.
The Tempting to Launch Your Own Ethereum Layer 2 Network is Easy to Understand – they look like a useful concept with Great Economics. A Layer 2 Network of Top of Ethereum Offers a bit of “Best of Both Worlds” Functionality: You Can Can Control Your Own Ecosystem Your Layer 2 Buter. Centralized Layer 2 Networks Can Set Their Own Price Structures and Have Nearly All The Same Controls As A Stand-Alane Private BlockCchain Sucha As Deciding Whost WhoseCESS TO THE NETWER Visible to Others.
This Comes With A Cost. Layer 2 Networks Must Purchase Transaction Processing Space on the Ethereum Mainnet to Finalize its Transactions (Known as Blob Space) from scratch and competing head-on with etereum. In Fact, accounting to token terminal, The Costs of Developing a Layer 2 Are Remarkably Low. For Base, A Layer 2 Network Run by Coinbase, Durying June of 2025, The Network Generated $ 4.9 Million in Fee Revenue and Spent $ 50,000 On Layer 1 Settlement Fees.
INDEED, THE LAYER 1 SETTLEMENT FEES ON ETHEREUM ARE SO LOW they had set off a fiery debate with from Layer 1 Stakeholders to Layer 2 Networks. It is Likely this Will Result in Some Re-Balanking of Fees, But Even A 10x Increase In Fees Is Notter the Fundamentally Good Value Proposition of the Witch 2 Layer.
Furthermore, The Recent AnnounCement by Robinhood that they will be building their Own Layer 2 Network on Ethereum Fundamentaly Validates The Overall Layer 2 Theisis Within Ethareum: Laying 2 Net. Option, they also enable a variety of business models that will entice a wide range of companies to join the Network.the Layer 2 Ecosystom is Likely to have a range out of partipants Completely Centralized.
And this brings US to the Key Question: Does Your Company Need It Own Layer 2 Network? CHANCES Are, You DON’T. The Real Value Proxy of A Blockchain EcoSystem is the abity to work in a cooperation with Other Without any one party Controlling the Network. If you’re a manufacturing company, for example, you want to work with your Suppliers and Customers on a Level Playing Field With Your Competitors. Blockchains Let Everyone Join in Without Favoring Any One Participant. In the Long Run, Working Together on a Level Playing Field Is Much Cheaper and Preferation to Trying To Integrate Into Different Systems Controlled by Each Each.
While Some Layer 2 NetWorks Look Very Profitable Right Now, This Is Only True If You Can Can Generate Good Transaction Volume. Many of the Layer 2 Networks Operation Are Doing Little to No Business As They Struggle to Differentiate Themselves in a Crowded Market. Accorness to L2Beat, MOST OF THESE NETWORKS HAVE LESS THAN $ 1MM IN TVL BRIDGED IN FROM ETHEREUM AND AVERAGING LESS THAN ONE USER OPERATION Per Second.
SO WHEN DOES A COMPANY NEED ITS OWN LAYER 2 NETWORK? My hypothsis is that this works best for abirms that can aggregate significant transaction Volume Into the Network and WHOSE CUSTOMERS DO NOT HAVE the MEANS ORDIVIDUAL VOLUAL VOLUAL VOLUAL VOLUAL VOLUAL VOLUAL VOLUM Connection to Ethereum. Right Now, that largely means Financial Services FIRMS THAT HAVE TUOUSANDS OR MILLIONS OF RETAIL CUSTOMERS, from COINBASE TO Kraken to Robinhood. More Firms Will Surely Follow. Having A Layer 2 Network Might Be Seen, In The Future, The Way We Looked at Having A Seat on the New York Stock Exchange. Brokerage FIRMSW WANT THEM, But A CAR MAKERWNNN’T FIND VALUE IN IT.
Three Questions Wuld be Useful in Determining If A Firm Should Launch Its Own Ethereum Layer 2 Network: First, Is The Company Aggregate A Significant Volume. Other Networks? Second, is transacting on -chain Central to the Company’s Core Business Model (EG, Are You An Intermediary, Especialally A Financial One that Presently Transacts on Traditional Financial Rails. Lastly, does your Layer 2 Approach Offer A Differentated Value Proposition Compared to the Many Other Network Options Outs? If you can say Yes to All Three Options, This Is A Possible Path Forward.
For MOST OF TYPES OF FIRMS, they may find the optimal value proposition to be Connecting Directly to Ethereum, or One of the Other Open Layer 2 Networks. It Will Be Less Costly and More Private Than Going Through An Aggregator Who Will Be ABLE TO MARK UP YOUR TRANSACTION COSTS AND SEE YOUR TRANSACTION FLOW AND LESS COSTLY THANNING YOURNING YOURNNING.
I SUSPECT, However, That Before We Are Done, Quite A Few Firms That Have No Need to Run Their Own Layer 2 Will Launch One Anyway for the Same Reasons Many FIRMS LAUNCHED PRIVATE CHAINS.
No Matter How Reliably they have failed, the attraction of private Blockchains Was Always Hard to Counter. The Allure of “Controlling Your Destiny” and “Taxing The Ecosystom” was hard to resist. PUBLIC CHAPS, with Their Openness, Interoperability, and Permissionless Nature Can Look Scary to Business USers Who Wound Prefer More Control.
To the Same Buyers Who Wanted Private Chains, Centralized Layer 2 Networks Look Like A Halfway House that May Seem Appaling. Unlike Private Chains, I Don’t Think They ALL DOOMED TO FAIL, But I DO SUSPECT ONLY A FEW WILL SUCCEED. History Keeps Repeating Itelf – MOSTLY BECAUSE We’re Not Very Good at Paying Attcture to It. Here we go again.
Disclaimer: These are the personal Views of the Author and Do not Represent the Views of Ey.
Note: The Views Expressed in this Column Are Those of the Author and Do Not Necessarily Reflect Those of Coindesk, Inc. i Owners and Affilites.
Thought Other Ideas for Supplementing Income Amid the ai Revolution Have Legs, Ubi Is The Simpelst and Fastest Way to Ensure Ai’s Benefits Trickle Down to Everyone.
Read Full Story