ethereum is a legacy chain that has scaled over time to address the needs of the increasingly demanding global user base. To relieve the mainnet from the onslaught of transactions, more layer 2 platforms have emerged.
They are cheaper to transact and scalable, allowing users to deploy intensive decentralized applications that will not be feasible at the base layer.
ethereum Layer-2 are a success, but there is a problem
According to L2Beat, Layer 2 platforms on ethereum currently manage over $39 billion in total value locked (TVL). Still, Nikita Zhavoronkov, lead developer at Blockchair, is concerned and believes Layer 2 is a “huge liability waiting to happen.”
Taking x, Zhavoronkov x.com/nikzh/status/1791160014494699909″ target=”_blank” rel=”noopener nofollow”>argues that layer 2 protocols on ethereum and bitcoin are vulnerable to regulatory crackdown. In the developer's opinion, these platforms resemble money services businesses (MSBs), considering how they are designed to operate. Since they are not regulated, the developer said they could be operating illegally.
Topping the list, Zhavoronkov argues that most existing Layer 2 solutions are not truly decentralized. They point to the use of multi-signature contracts or “emergency boards” controlled by limited groups as evidence of centralized control.
Additionally, the developer highlighted the custodial nature of many Layer 2s. Users do not directly control user funds based on how these scalable platforms operate. The analyst says this nuance of centralization presents a vulnerability if regulators target these entities.
Zhavoronkov adds that while Layer 2 platforms are facilitators and operate on a trustless basis, they operate as for-profit companies that generate revenue from transaction fees. Because some of them, such as Optimism and Arbitrum, issue tokens, the accumulated income can affect the prices of the tokens.
The developer maintains that this is the reason why Layer 2 platforms do not differ from traditional companies on truly decentralized platforms.
More headwinds for eth, investigation reported by the US SEC
Given its mode of operation and model, Zhavoronkov's claim that Layer 2 solutions could be classified as MSBs under US law is concerning. Such classification could subject these protocols to strict regulations, compliance requirements, and potential penalties.
This Not only does it threaten to stifle innovation, it also has the potential to severely hamper ethereum's scalability..
While some have dismissed Zhavoronkov's view as “distorted,” the fact that ethereum is reportedly under investigation by the United States Securities and Exchange Commission (SEC) adds a layer of complexity to the situation.
Analysts say the SEC's classification of eth as a security rather than a commodity like btc could further delay the approval of spot ethereum exchange-traded funds (ETFs).
Featured image from Canva, TradingView chart
