Ethereum is making more money than ever from Layer 2 Networks

Ethereum Makes Profits From Layer 2 Extension

Record amounts of gas are being used by Layer 2 networks to support Ethereum mainnet.

On-chain data as of Dune, Layer 2 networks are now spending more gas than ever to settle or prove transaction batches on Ethereum’s mainnet, with spending consistently surpassing 10 billion gas since the beginning on May.

For instance, the highest amount of gas ever used on the Ethereum mainnet to settle Layer 2 network transactions occurred this Wednesday—immediately after Optimism launchedIts OP governance token was issued late Tuesday. Particularly, the combined spending of all Layer 2 networks on Ethereum was around 3.95 Billion of the 100 Billion daily limit. This accounts for approximately 3.95% of the gas used on the network that day. For a better understanding of the growth rate, Layer 2 networks spent approximately 5 billion per month on Ethereum in May 2021, while it was 52 billion in May 2018. This marks a more than tenfold increase in absolute gaz usage terms.

All ETH holders gain value when Ethereum traffic rises. This is because Ethereum base gas fees are burned. It reduces the overall ETH supply, and increases the value of all remaining tokens. In this way Ethereum “profits” as Layer 2 networks use its blockspace to settle transactions more efficiently than can be done directly on mainnet.

Layer 2 is a term that describes blockchain scaling solutions that manage transactions on distinct networks, then send them back over to the Ethereum mainnet. Optimism, Aribrum and others are Layer 2 networks based upon a cryptographic technology called Optimistic Rollups. These bundle transactions off-chain on their respective networks and then settle them in one transaction on the Ethereum mainnet. This reduces the network’s transaction load. 

Unlike so-called sidechains like Polygon’s Matic blockchain, which have their own consensus mechanisms, Layer 2 networks take the transactional load off of Ethereum but borrow or inherit its security by ultimately settling their batches on mainnet. This leads to an interesting dynamic where Layer 2 transactions become increasingly cheaper for users, but mainnet transactions remain sufficiently expensive to pay for Ethereum’s considerable security expenditure. 

Sandeep Nailwal (Polygon co-founder) commented on the rise in Layer 2 usage today on Twitter. He suggested that Ethereum might shift from being user-focused to becoming a network-focused blockchain where it settles more batched Layer 2 network transactions than individual, user-generated mainnet transaction. “As I also said before that #Ethereum is transitioning from a B2C(user to chain) business model to B2B(chain to chain) model,” he said, adding that eventually, “majority of the Eth’s gas would be used by L2 chains.”

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