Layer 2 Networks Are Earning More Money For Ethereum

With Layer 2 networks gaining traction in terms of user activity, Ethereum’s gas prices for renting its security are shattering records.

Expansion of layer 2 benefits Ethereum

On the Ethereum mainnet, layer 2 networks are consuming unprecedented quantities of gas.

Layer 2 networks are currently paying more gas than ever to settle or prove transaction batches on Ethereum’s mainnet, according to on-chain data from Dune, with spending continuously exceeding 10 billion gas since May.

For example, on the Ethereum mainnet this Wednesday, the biggest quantity of gas ever utilized to settle Layer 2 network transactions occurred—shortly after Optimism debuted its OP governance token late Tuesday. All Layer 2 networks combined spent roughly 3.95 billion of the total 100 billion daily gas limit on Ethereum that day, accounting for about 3.95% of the gas spent on the network.

To put the growth rate into context, the total monthly gas spent by Layer 2 networks on Ethereum in May 2021 was roughly 5 billion, whereas it was around 52 billion in May this year, representing a tenfold increase in absolute gas usage.

When Ethereum traffic increases, all ETH holders gain value. Because Ethereum’s base gas costs are burned, the overall ETH supply is reduced, raising the value of all remaining tokens.

Ethereum “benefits” in this sense because Layer 2 networks use its blockspace to settle transactions

Layer 2 refers to scaling options for blockchains that handle transactions on other networks before sending them back to the Ethereum mainnet for settlement. Optimism and Aribrum, for example, are Layer 2 networks built on Optimistic Rollups, a cryptographic method that bundles transactions off-chain (on distinct networks) and then settles the bundles in a single transaction on the Ethereum mainnet to reduce transaction load.

Layer 2 networks, unlike so-called sidechains such as Polygon’s Matic blockchain, which have their own consensus processes, take the transactional load off of Ethereum yet borrow or inherit its security by settling their batches on mainnet. This creates an interesting dynamic in which users’ Layer 2 transactions become increasingly cheaper, while mainnet transactions stay sufficiently expensive to cover Ethereum’s significant security investment.

On Twitter today, Polygon co-founder Sandeep Nailwal predicted that Ethereum may transition from a user-focused to a network-focused chain in the future, where it largely resolves batched Layer 2 network transactions rather than individual, user-generated mainnet transactions. “As I previously stated, #Ethereum is shifting from a B2C (user to chain) to a B2B (chain to chain) business model,” he tweeted, adding that “the majority of Eth’s gas would be used by L2 chains” in the future.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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