Categories: Blockchain

Polygon And Other Scaling Solutions Pose A Threat To Ethereum

Crypto exchange Coinbase the impact scaling solutions could have on the Ethereum (ETH) blockchain, including Polygon, a layer-2 solution on Ether.

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Coinbase claims in a study report that layer-2 scaling solutions (L2s) could eat into Ethereum’s earnings.

“The future of L2s could very well be a zero-sum game, as whichever L2 houses the majority of decentralized applications could one day power the entirety of the Ethereum ecosystem. That suggests that L2s could eventually divert revenue away from Ethereum itself.”

According to Coinbase, scaling solutions such as Polygon (MATIC), Optimism (OP), and Arbitrum have generated less than one percent of the revenue that Ethereum has.

Source: Coinbase

According to the crypto exchange, once Ethereum converts to a proof-of-stake (PoS) consensus, scaling solutions would likely cause a decline in staking yields, which might negatively affect the price of ETH.

“If more user activity migrates to L2s and those L2s require their own tokens to facilitate transactions, that could potentially reduce the staking yields to validators who will earn less on those net transaction fees. If that discourages staking on the platform, that could increase the size of the ETH liquid circulating supply, possibly hurting ETH prices.”

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However, scaling solutions could, in the long run, benefit Ethereum as they will increase network activity.

“If L2s facilitate more transactions by making them cheaper, faster and easier, the initial revenue impact could be mitigated by the increased activity that eventually takes place on the network.”

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Harold

CoinCu News

Harold

With a passion for untangling the complexities of the financial world, I've spent over four years in financial journalism, covering everything from traditional equities to the cutting edge of venture capital. "The financial markets are a fascinating puzzle," I often say, "and I love helping people make sense of them." That's what drives me to bring clear and insightful financial journalism to the readers of Coincu.