How will layer two impact Ethereum?


Layer two solutions significantly impact Ethereum by enhancing its scalability, reducing fees, and potentially increasing the asset's demand and value. Here are the key impacts discussed by experts:

1. Economic Activity and ETH Burning

Layer twos act as "solar panels for economic activity," increasing block space demand on Ethereum. This leads to a higher ETH burn rate, which directly impacts the value of Ethereum. For instance, notable layer twos like Arbitrum and Optimism have already shown a significant increase in ETH burning due to increased economic activities 1.

2. Demand for Ether

Layer twos contribute to the demand for ETH by requiring Ether for Layer 1 transactions and creating "reservation demand" — the need to hold ETH as a reserve currency. As layer twos unlock new use cases with lower transaction fees, the reasons for holding and using Ether increase 2.

3. Impact on Ethereum's Network Effects

Layer two solutions reinforce Ethereum's network effect by necessitating the use of Ethereum's base infrastructure and development tools. This entrenches Ethereum's dominance, as layer twos depend on its security and compatibility features 3.

Layer Two Impact

Explore how layer twos directly impact the value of ether as an asset, including the ETH burn rate and stake rate. Discover how layer twos act as solar panels for economic activity, increasing block space demand and resulting in the burning of ether. Dive into the early days of layer twos and their potential for even greater impact.


The Trillion Dollar L2 Opportunity | Part One

4. Competitive Position

While layer twos like Optimism and Arbitrum issue their own tokens, they continue to rely on and settle transactions on Ethereum, positioning Ethereum as a crucial settlement layer rather than being cannibalized by its own layer twos 4.

5. Value Creation vs. Competition

Layer twos are not necessarily competitive but can be value-adding to Ethereum. They increase the usability and attractiveness of Ether by expanding its functionality and reducing congestion and costs on the main chain 5.

These points suggest that layer twos are integral to Ethereum's scaling strategy, enhancing its functionality and potentially increasing the demand and value of Ether.