As a seasoned researcher with over two decades of experience in the financial industry, I find myself intrigued by the ongoing debate surrounding Ethereum layer 2 scaling solutions and their potential impact on the mainnet’s revenue. While it is too early to definitively say whether this strategy will be cannibalistic or lead to net growth for Ethereum, my personal perspective leans towards the latter.
According to an industry expert, it might be too soon to worry that Ethereum layer 2 scaling solutions are reducing the mainnet’s income and affecting its price.
In a recent interview with CryptoMoon, Katalin Tischhauser, the Head of Research at crypto bank Sygnum Bank, stated that it’s still uncertain whether Ethereum’s approach to scaling through layer 2 solutions is potentially harmful (cannibalistic) or will ultimately result in overall growth.
In simpler terms, Tischhauser’s reference to “cannibalistic” means that Layer 2 solutions have been taking transactions and activities from the Ethereum main network, thus reducing the demand for it and consequently lowering Ethereum transaction fees significantly over the past few years.
Although it was inevitable that the Ethereum mainnet would start losing some revenue to layer 2 solutions, enhancing scalability in this way might enable the primary layer to generate income through methods that weren’t feasible before, according to Tischhauser.
“The long term view is that the NET effect will be growth for the Ethereum L1 because the cheap L2s can catalyze new types of transactions previously not possible.”
Tischhauser stated that L2 systems are yet to reach a definite stage regarding L1, and if the development of L2 significantly increases, it could potentially lead to an upturn in Ethereum’s overall growth.
Crypto Fees data shows Ethereum daily fees hover between $1 million to $5 million — far less than the $30 million that was consistently reached throughout 2021 and 2022.
On October 10th, discussions about Ethereum’s income sources were reignited due to the announcement made by Uniswap, a significant contributor to Ethereum’s fees, that they are planning to shift towards their layer 2 platform, Unichain.
A significant shift (pivot) could result in Ethereum validators potentially losing around 400 million to 500 million dollars annually from their earnings.
Continued scaling to layer 2s could stunt Ether’s (ETH) price appreciation, according to VanEck’s Head of Digital Asset Research, Matthew Sigel.
After discovering that the transaction revenue ratio between Ethereum and layer 2 platforms has been approximately 10:90 for the past four months, Sigel adjusted VanEck’s prediction for Ether’s price by 2030 from $22,200 to $7,300 if this ratio persists.
As a researcher, I’m sharing an observation made by Tischhauser: The sentiment surrounding Ethereum has been quite grim, partly because of the decline in revenue. This negative sentiment might be influencing Ether’s underperformance compared to Bitcoin (BTC), Solana (SOL), and other cryptocurrencies in the market.
Ethereum also continues to face fierce competition from other layer 1 blockchains offering cheaper fees and faster finality, Leena ElDeeb, Research Analyst at crypto asset management firm 21Shares told CryptoMoon.
On the other hand, according to the Chief Investment Officer of Apollo Capital, Henrik Andersson, Ethereum’s approach to scaling has been instrumental in maintaining its position as the foremost layer 1 blockchain.
Andersson mentioned to CryptoMoon that if Ethereum doesn’t continue making advancements similar to those observed in recent years, it could rapidly become less relevant or popular.
“By making Ethereum great, you will ultimately generate a lot more revenue long term as users would have otherwise left for other chains.”
Andersson believes that Ether may be perceived as the “preferred higher-risk cryptocurrency investment” in comparison to other digital currencies within the next six months, potentially reducing its decline relative to Bitcoin’s price.
Ether could even push for a new all-time high sometime in 2025 or soon after, Andersson predicted.
At the moment, Ether’s value is at $2520, which represents a decrease of 48.4% compared to its record high price of $4,878 that was reached on November 10, 2021.
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2024-10-25 08:16