In a charged statement on x, Justin Bons, founder and chief investment officer of Cyber Capital, one of the oldest cryptocurrency funds in Europe, has x.com/Justin_Bons/status/1828092357163815006″ target=”_blank” rel=”noopener nofollow”>voiced a critical view of ethereum’s current trajectory, stating that “ethereum is dying while L2 dances on its grave.” Bons argues that ethereum (eth) is struggling to maintain its fee revenue due to inadequate network capacity, while Layer 2 (L2) solutions are capitalizing on this limitation by keeping ethereum’s capacity restricted.
Bons claims that “eth cannot sustain high fee revenue because it lacks capacity. At the same time, L2s are seeing all-time highs in usage and fees while pushing to keep eth capacity low.” He characterizes this dynamic as parasitic, where L2s benefit at the expense of ethereum, particularly following the implementation of EIP-4844 (Proto-Danksharding), which Bons says has precipitated a collapse in ethereum fee revenue. His comment suggests that the fee burning mechanism, meant to offset inflation by making ethereum deflationary, can no longer keep pace due to the diversion of fees to L2s.
Is ethereum Dying Because of L2?
Bons argues that this scenario has created a “parasitic relationship” between ethereum and its L2 counterparts. He believes that L2s, while designed to scale ethereum’s capacity by handling transactions off the main chain, are now operating almost independently, thus fragmenting the ecosystem. This fragmentation, according to Bons, is breaking down liquidity and composability, crucial elements that facilitate seamless operations across the ethereum network.
In Bons’ view, the shift towards L2 solutions has led to an increase in centralized tendencies within platforms that were originally touted as decentralized. “This also pushes users towards centralized L2s, as every single L2 in the top 10 (it stopped counting after 10) can now steal user funds and censor. This is ironic, considering the entire ‘L2 scaling’ roadmap was justified in the name of decentralization… A bait and switch,” Bons explained.
The criticism extends to ethereum’s governance model, which Bons says eschews on-chain governance, leading to what he perceives as centralized control over its development. “The eth community’s complete rejection of on-chain governance could only have one outcome: capture, resulting in what is effectively centralized control over eth’s development!” he stated, suggesting that this governance model has allowed L2 entities to exert disproportionate influence over the network.
If ethereum were to scale to the L1 level with new technological advancements, Bons speculates that it would “crash the price of tokens and shares of all L2s overnight by rendering them obsolete and unnecessary,” illustrating a conflict of interest where L2 entities may prefer to suppress L1 advancements to maintain their market position.
In his contribution to the discussion, Pengu Aaron, head of the ICP center in Singapore, commented: “In my opinion, L2s need to find a way to contribute to eth or else we will see a potential collapse in value.” Bons’ response highlighted a systemic problem: “L2s only need to contribute to eth from an eth perspective. From an L2 perspective, it makes much more sense to keep all that value for themselves. That’s the problem, as you’re creating a system with opposite and perverse incentives, which makes it totally unfixable and broken.”
Taking an opposing view, a user named @bowtied3hbt drew an analogy with the United States, where the federal system allows states considerable autonomy and yet remains functional. Bons refuted this comparison, highlighting the historical conflicts that were necessary to maintain the federation, such as the Civil War, illustrating the challenges of enforceability in decentralized systems that lack overarching enforcement mechanisms.
“Multiple wars were fought to keep the American federation together, from the Civil War to the Utah War, to name a few. The difference is that in crypto no one can force an L2 to stay in eth if that goes against the L2’s interests. That’s where your analogy completely falls apart!” Bons concluded.
At the time of writing, eth was trading at $2,687.
Featured image created with DALL.E, chart from TradingView.com