L2 Scaling Challenges Could Undermine Long-Term Security of Ethereum and Bitcoin

Author: Bitcoin.com

Ethereum and Bitcoin, two of the world’s largest blockchains, are facing significant challenges in scaling their networks. As more users and transactions move to Layer 2 (L2) solutions, these systems could undermine the security and sustainability of the base layer (L1), with decreasing fees and rewards for miners and validators.

Increasing L2 adoption raises concerns about the base layer

Ethereum and Bitcoin are both struggling with a fundamental problem: how to scale the network to accommodate a growing number of users without sacrificing security or decentralization. Recently, Cybercapital founder Justin Bons put forward his theory that Layer 2 (L2) platforms are “parasitic” on Ethereum. Bons has long warned of the growing influence of Ethereum L2 solutions on the main chain, as well as other blockchains that adopt L2 scaling methods. Here’s an overview of the dilemma facing Layer 1 (L1) blockchains like Bitcoin and Ethereum.

In their current state, neither 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, modifying Bitcoin’s consensus layer to improve scalability has sparked an ongoing debate, leading supporters to increasingly favor L2 solutions such as the Lightning Network. Similarly, Ethereum core developers have favored the flourishing of L2s such as Arbitrum, Optimism, Base, and Linea.

These L2s promise faster transactions and lower fees, but they also introduce a host of new challenges. Layer 2 solutions, by design, conduct transactions outside the base layer, or L1. For Ethereum, L2s such as Arbitrum and Optimism bundle multiple transactions into a single L1 transaction, reducing costs and increasing throughput. For Bitcoin, the Lightning Network allows users to transact off-chain, settling on the main blockchain only when absolutely necessary. While these solutions have been praised for increasing transaction speeds and reducing fees, they pose a potential threat to the security and economic model of L1 blockchains.

Rent paid to L1 (Ethereum), according to data from growthepie.xyz.

Ethereum’s layer 1 has benefited significantly from these L2 activities. In November 2023, L2 solutions like Arbitrum, Base, Optimism, and Linea contributed an estimated $200,000 in daily rent to Ethereum L1. By December, these fees reached as much as $1.5 million per day. However, economic support has since declined. From December 2023 to March 2024, L2 payments to Ethereum fell to less than $250,000 per day, before surging to around $1.7 million by early March. By the end of April 2024, these fees had fallen sharply, with less than $10,000 per day paid to the Ethereum mainnet. This decline raises questions about the long-term sustainability of Ethereum's L1 infrastructure if the majority of activity permanently shifts to L2.

Bitcoin faces similar issues. Once Bitcoin (BTC) moves to the Lightning Network or other Bitcoin sidechains, transactions bypass the main chain, depriving miners of the fees they would normally earn from processing transactions. Bitcoin's economic security relies on incentives given to miners, including transaction fees and block rewards that halve approximately every four years. As fees move off-chain, concerns are growing that Bitcoin miners may not continue to have enough economic incentive to secure the network, potentially making it less secure over time.

Like Bons, Blockchair lead developer Nikita Zhavoronkov has expressed concerns about Bitcoin’s shrinking security budget. The fundamental problem is that both Ethereum and Bitcoin were designed with the assumption that users would pay to use the base layer. These fees are a critical part of maintaining the security of a blockchain, especially as block rewards decline over time. If too many transactions are conducted on L2, L1 could suffer from insufficient fees, reducing the incentive for validators and miners to secure the network.

While L2 solutions such as 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 enough revenue to the base layer. Similarly, Bitcoin’s Lightning Network solves some of Bitcoin’s scalability issues but completely excludes miners from the transaction chain, making BTC’s security model entirely dependent on ever-decreasing block rewards.

While there is no doubt that L2 solutions provide a temporary fix to Ethereum and Bitcoin’s scalability issues, they 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 captured by L2 solutions, the economic models of these blockchains may become unbalanced.

The ultimate goal of Ethereum and Bitcoin has always been to create decentralized, secure networks capable of handling global demand. However, if L2 solutions continue to siphon transactions off L1 without providing adequate fees to the base layer, the security and decentralization of these networks may be threatened. Finding a balance between L1 and L2 activity is critical to the future scalability of blockchains. The question of rewards also does not address criticisms directed at L2 concepts, which are often seen as significantly more centralized than the main chain, making them more vulnerable to attacks and theft.

In summary, while L2 solutions offer clear benefits in terms of transaction speed and cost, they also introduce 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 prove to be more of a temporary fix than a permanent solution. The Ethereum and Bitcoin communities will need to carefully consider how to scale their networks without compromising the fundamental principles that make them unique in the decentralized finance space.

With mainstream adoption on the horizon, 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 immediately, the security and decentralization of these blockchains may be threatened in the coming years. Addressing these challenges is critical to maintaining the integrity of the network and ensuring its long-term viability.