Cryptocurrencies

Just over 50% of all Ethereum-based transactions took place on the layer

Just over 50% of all Ethereum-based transactions took place on Layer 2 (L2) during the first half of June 2024. This was the first time that Ethereum (ETH) L2 layers exceeded the 1 (L1) in terms of number of transactions. .

The pool-centric Dencun upgrade (EIP-4844) played a major role in driving the growth of Ethereum L2. The L2 ecosystem TVL reached $48.2 billion – an all-time high – shortly after mainnet implemented EIP-4844. More than 90% of this TVL came from value pools.

But while Dencun provides a wider range of data to collect, it won’t solve the inherent problems. Most batch clusters still use centralized sequencers to achieve higher throughput and performance.

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This negates the spirit of decentralization of blockchain. Users face potential censorship and serious security risks. Vitality is also at stake. It is possible for a single entity to extract all the accumulated value from the network.

Ethereum Layer 2 usage by number of transactions from June 2023 to June 2024. Source: Dune

Yesterday’s FUD is a problem solved today on Ethereum, and blockchains cannot afford to settle for chain decentralization. There is an urgent need here as users increasingly prefer L2 over L1, which increases the risks.

Ethereum creator Vitalik Buterin believes that “the FUD that happened yesterday is a problem solved today” for his blockchain. Source:

Lessons from Linnea

Users lost over $2.6 million in ETH on Linea – the Consensys-backed zkEVM pool – due to a third-party exploit on June 2 on a decentralized exchange.

However, what is even more troubling is the team’s unanimous decision to suspend the sequencer and “moderate attacker addresses to protect users and creators” in the ecosystem.

The Linea team shut down its project’s sequencer after the exploit on June 2. Source:

Alex Gluchowski, CEO of Matter Labs, commented on the situation saying: “Sequencer decentralization is not optional. Any serious Tier 2 group should strive to do this first.

They should indeed act quickly in this direction. The Linnea incident revealed a naive complacency.

The senior officials of the Linea team justified their position by comparing themselves to their older peers, who were far behind in the decentralization process. “Given that many of the cumulative frameworks that are more than two years old are no longer further along than we are, I’m very happy with the pace at which we’re moving forward,” product manager Declan Fox wrote on X.

The attitude that “we are better because others are worse” is dangerous for our industry. This hinders progress and lengthens the risk window for users, investors and builders.

Yes, L2 levels are still at the “training wheel” stage and require special protection measures. But unilateral decisions to shut down the network for hours can no longer be a “last resort”.

Things have changed rapidly in recent years. We are now technically capable of implementing at least basic versions of decentralized chaining and community incentivization frameworks.

The question therefore became a question of intentions and priorities, and not a question of capacity.

No more excuses

If the L2s don’t start taking their training wheels off now, they never will. Centralization is profitable because it primarily serves the interests of the operator and makes life easier from an implementation point of view.

On the other hand, decentralization is challenging and requires innovative efforts. But when the initial obstacles are overcome, the business/project and its community benefit greatly.

While direct involvement in network security and governance fosters a deeper sense of community, users also benefit from new revenue streams such as on-chain mining.

At the same time, the “self-reinforcing model” reduces security costs for organizations and entrepreneurs. This also starts a cycle in which higher community engagement means more security and improved security, and thus more dApps and innovators enter the space. This creates positive network effects and overall prosperity.

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Without the incentives of MEV extraction, most compilation operations would delay sequencer decentralization due to latency issues and its impact on user experience. Rollup users want faster transactions and centralization is the price they pay for it. Such arguments may suit companies like Visa, but not native Web3 users.

As builders of the future, it is our responsibility to change the mindset of society. Live exchanges that experience consistent liquidity flows after on-chain decentralization show that users can accept a slight increase in latency with the right incentives and rewards.

In addition to improving security through liquidity staking, etc., blockchain decentralization aligns the disparate goals of short-term L2 investors (speculators) and long-term shareholders.

Revenue sharing models like streak mining prevent users from leaving the network shortly after receiving airdrops or other freebies. In addition to creating a direct relationship between community engagement, network security, and ecosystem growth, this solves the industry-wide user retention problem.

Daily active users of a number of blockchains before and after airdrops. Source: Hitesh.eth, Dune, Token Terminal, Artemis

From technical primitives like Liquid Storage Tokens (LST) to working examples, everything is now at our fingertips – so much so that even Bitcoin L2s are preparing to offer mining rewards via decentralized serializers.

The OGs in the L2 space need to catch up or it’s over for them. Excuses and immature promises of decentralization will not work. Users have real alternatives and will vote with their tokens.

And those who are ahead in this adventure will reap the legitimate benefits. But since the strength of the ecosystem lies in inclusive growth – not fragmentation – it is best for all stakeholders and the aggregation project to evolve in synchrony and adopt progressive standards.

Short-term gains must give way to long-term sustainable innovation. This is the path to a more decentralized future for all.

Tom Ngo He is the executive director of Metis, an Ethereum layer 2 blockchain. He previously served as CFO at Eon Advisory and Partner at Katana Tomi Group.

This article is intended for general information purposes and is not intended and should not be relied upon as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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