Ethereum Layer 2 Scaling Solutions: Impact on Mainnet Revenue and Price

According to Cointelegraph, concerns about Ethereum layer 2 scaling solutions affecting the mainnet’s revenue and price may be premature, as suggested by industry analyst Katalin Tischhauser, Head of Research at Sygnum Bank. Tischhauser explained that it is too early to determine whether Ethereum's strategy of scaling through layer 2s is cannibalistic or will lead to net growth. The term 'cannibalistic' refers to layer 2s potentially taking business away from the Ethereum mainnet, which has seen a significant drop in fees over recent years. While the Ethereum mainnet losing revenue share to layer 2s was expected, optimizing scalability in this manner could enable the base layer to generate revenue in previously impossible ways. Tischhauser believes that the long-term view is that the net effect will be growth for Ethereum Layer 1 (L1) because the affordable layer 2s can facilitate new types of transactions. Layer 2s still need to settle the final state on L1, so substantial growth in layer 2s should ultimately benefit Ethereum. Data from Crypto Fees indicates that Ethereum daily fees range between $1 million to $5 million, significantly lower than the $30 million consistently reached in 2021 and 2022. Concerns over Ethereum’s revenue resurfaced on October 10 when decentralized exchange Uniswap, one of Ethereum’s largest fee drivers, announced its pivot to the new layer 2 Unichain. A complete pivot could result in Ethereum validators losing between $400 million and $500 million in annual revenue. Matthew Sigel, Head of Digital Asset Research at VanEck, suggested that continued scaling to layer 2s could hinder Ether’s (ETH) price appreciation. Upon discovering that the transaction revenue ratio between Ethereum and layer 2s has been 10:90 over the last four months, Sigel lowered VanEck’s $22,200 Ether price prediction by 2030 to $7,300 if the 10:90 ratio persists. Tischhauser noted that sentiment over Ethereum has been 'terrible' partly due to the revenue drop, which is likely reflected in Ether’s poor performance relative to Bitcoin (BTC), Solana (SOL), and other crypto assets. Ethereum also faces strong competition from other layer 1 blockchains offering cheaper fees and faster finality, according to Leena ElDeeb, Research Analyst at 21Shares. However, Henrik Andersson, Chief Investment Officer at Apollo Capital, believes Ethereum’s scaling strategy has helped it remain the leading layer 1 blockchain. Andersson stated that without the progress seen on the layer 2 front in recent years, Ethereum would quickly lose mindshare. By enhancing Ethereum, long-term revenue generation is expected as users would otherwise migrate to other chains. Andersson also suggested that Ether might be viewed as the 'higher beta crypto bet' over the next six months, potentially narrowing its falling price ratio with Bitcoin. He predicted that Ether could push for a new all-time high sometime in 2025 or soon after. Currently, Ether is trading at $2520, 48.4% off its all-time high price of $4,878 set on November 10, 2021.