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- Critics accuse Ethereum’s layer 2s of being “parasitic.”
- Arbitrum co-founder argues that the existence of Layer 2s is justified.
- Ethereum lags behind other blockchains that don’t require Layer 2 to scale.
“Parasitic” Layer 2 networks are not the reason Ethereum has underperformed other cryptocurrencies this year.
That’s according to Steven Goldfeder, co-founder and CEO of Offchain Labs, the company behind the largest layer-2 network, Arbitrum.
He defends blockchains built on Ethereum against attacks from crypto analysts and venture capitalists who accuse them of profiting at the network’s expense.
“We’re not out of alignment,” Goldfeder said in an exclusive interview with DL News.
According to Goldfeder, creating a multi-tiered architecture—that is, building networks upon networks—is how the most powerful systems are built.
“Ultimately, our goal is to grow Ethereum,” he said.
Adverse effect
Layer 2 blockchains, built on top of Ethereum to help it scale, offer much cheaper transactions than the main Ethereum network.
Layer 2 networks represent a huge amount of money. The top 40 Layer 2 tokens alone are worth nearly $12 billion in total.
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But it’s hard to ignore the deleterious effect they’ve had. An exodus of activity from Ethereum to its layer 2s means the network is no longer destroying — or “burning” — more Ether tokens than it’s creating, making it inflationary.
At the same time, profits generated by Layer 2 have exploded.
Since its launch in 2021, Arbitrum has made $32 million by offering cheaper transactions than Ethereum and pocketing a portion of the difference. Other tier-2 platforms, like Coinbase’s Base, are just as profitable.
This has led some to take a hard line against Layer 2s.
“Anything that doesn’t happen on Layer 1 that could have happened on Layer 1 is by definition parasitic,” Kyle Samani, managing partner at crypto VC Multicoin Capital, told X.
“You actually have to increase capacity, open the new lanes before every car is there.”
— Steven Goldfeder, Offchain Labs
Layer 2 detractors’ arguments are fueled by Ethereum’s poor performance relative to other crypto assets this year.
While Bitcoin has jumped more than 42% since January 1 and Ethereum’s main competitor Solana has risen 31%, Ethereum is up just 3% over the same period.
Solana is capable of facilitating many more transactions per second than Ethereum, meaning it does not yet need Layer 2 to increase its capacity.
Adding capacity
Proponents argue that Layer 2s are needed to meet the demand for blockchain transactions that the Ethereum mainnet cannot handle without charging users prohibitive transaction fees.
“People might ask why we need this today. Let’s wait until Ethereum has more traffic,” Goldfeder said. “We can’t wait. We actually need to increase capacity, open up new lanes before every car is there.”
Many Tier 2s seem to be content to compete for the same existing user pool.
And Layer 2s have certainly increased their capacity. There are now 78 Ethereum Layer 2s according to data platform L2Beat. Each is theoretically capable of handling at least thousands of transactions per second, which is a huge increase from Ethereum’s 20 to 40 transactions per second.
Yet, most of these Layer 2 blockchains are ghost towns with few users and very little activity. Yet, more and more Layer 2 blockchains are being launched, with Japanese tech giant Sony’s Soneium blockchain being the latest.
And it’s no surprise. Setting up Layer 2 requires minimal upfront costs. Once they’re up and running, all transactions made by users easily generate profits.
Perhaps a key way for Layer 2s to avoid being labeled as parasites is to prioritize the growth of the broader Ethereum ecosystem.
But attracting new cryptocurrency users is difficult. Many Layer 2 players seem content to compete for the same existing pool of users.
Goldfeder said he does not believe that competition between Layer 2s is a zero-sum game, referring to the game-theoretic situation where one group’s gain is another’s loss.
Very optimistic
But at the same time, facilitating Arbitrum’s growth isn’t a top priority. “The first priority is security, the second is decentralization, and somewhere down the list is growth,” Goldfeder said.
Still, Goldfeder said he’s very optimistic that growth will eventually come — and that it will solve Ethereum’s current problems.
“We’re going to have so much capacity that all the Tier 2s are going to be saturated,” he said. “That’s how we’re going to compete with these other ecosystems.”
However, it is unclear what exactly will trigger such growth, at least for now.
Tim Craig is DL News DeFi correspondent based in Edinburgh. Feel free to share your tips with us at tim@dlnews.com. Ben Weiss introduces TOKEN2049 this week. Contact him at bweiss@dlnews.com.
