Introduction
Ethereum, as the world's second-largest cryptocurrency and smart contract platform, has always faced scalability issues. To address the high transaction fees and network congestion on the Ethereum network, Layer 2 solutions have emerged. However, although Layer 2 technology has achieved significant results in improving network efficiency and reducing transaction costs, it has also negatively impacted the price of ETH to some extent. This article will analyze various aspects of Layer 2 technology and explore how it has dragged down the price of ETH.
Background of Layer 2 technology
Layer 2 technology aims to alleviate the burden on the main chain by processing some transactions outside of the Ethereum main chain. Common Layer 2 solutions include State Channels, Plasma, Optimistic Rollups, and ZK-Rollups. These technological solutions improve transaction processing speed and network efficiency by handling a large number of transactions on Layer 2 and then submitting the results to the Ethereum main chain.
Main advantages of Layer 2
1. Lower transaction fees: Layer 2 technology significantly reduces users' transaction fees by processing transactions in batches, thereby attracting more users and developers.
2. Increased network throughput: By processing transactions on Layer 2, the congestion issue of the Ethereum main chain is alleviated, significantly improving network throughput.
3. Enhanced user experience: Faster transaction confirmations and lower fees improve the user experience, promoting further development of the Ethereum ecosystem.
Negative impact of Layer 2 on ETH price
Although Layer 2 technology plays an important role in improving the performance of the Ethereum network, it has also negatively impacted the price of ETH to some extent, mainly reflected in the following aspects:
1. Decrease in transaction fee revenue: With the large-scale adoption of Layer 2 solutions, the number of transactions on the Ethereum main chain decreases, and the transaction fee revenue obtained by miners and validators declines accordingly. This reduction in revenue may affect their investment in maintaining and securing the network, thereby impacting market confidence in ETH.
2. Decrease in locked assets: The application of Layer 2 solutions means that more transactions and smart contract operations are completed on Layer 2 rather than on the Ethereum main chain. This has led to a decrease in the amount of ETH locked on the Ethereum main chain, negatively impacting demand and price.
3. Market decentralization: The widespread application of Layer 2 technology has made the Ethereum ecosystem more decentralized, with users and funds flowing to different Layer 2 solutions. This decentralization may weaken the position of the Ethereum main chain as a value storage and transaction platform, thereby affecting the price of ETH.
4. Increased competitive pressure: Layer 2 solutions not only exist within the Ethereum ecosystem, but other blockchain platforms are also actively developing and promoting their own Layer 2 technologies. This competitive pressure may lead to a decrease in market demand for Ethereum, thus affecting the price of ETH.
5. Selling pressure from Layer 2 team gas fee revenue: Simply put, the operators of nodes on Layer 2 chains have not implemented a gas destruction strategy similar to Layer 1, but instead have obtained a large amount of ETH through gas fee revenue. The fees for compressing and packaging transactions on Layer 1 are very low. They gain significant revenue in this process but fail to timely reinvest it into the Ethereum ecosystem, opting instead to sell, which has contributed to the continued sluggishness of ETH prices.
For example, the Base chain has recently been questioned for selling a large amount of ETH income through the Coinbase exchange, resulting in selling pressure of hundreds of millions of dollars.
Addressing the root cause
The sluggish price of ETH is not entirely caused by the negative impacts of Layer 2, but is based on multiple issues, such as the chaos within the foundation and the constant selling pressure from Vitalik Buterin. There has been considerable criticism in the market because ETH's price directly affects the delayed bull market for altcoins, forcing investors to turn to MEME and other plays. Additionally, there has been no significant innovation in the ETH ecosystem over the past year, which is another reason for people's disappointment with ETH.
For ETH, the bull market is already halfway through (according to the bull market from 2024 to 2025), and the next period is critical for ETH. The main key factor in solving the problems is the establishment of confidence, including strengthening support for ecological projects and promoting wealth generation effects. For example, the bull market caused by the DeFi Summer in 2020 was primarily driven by wealth generation effects, and last year's MEME was also a result of wealth generation effects. EF claims to spend tens of millions of dollars in 2024 to support the ecosystem, but people have not seen results. This issue must be resolved; only then can funds shift from SOL to ETH, and altcoins may usher in a spring of development.
Of course, the market believes that the planned Pectra upgrade in March is unlikely to bring significant changes to Ethereum. The main goals of the Pectra upgrade are to increase transaction speed, reduce network congestion, enhance data availability sampling, improve Layer 2 efficiency and security, optimize staking pools, and adjust blobs. In the short term, these changes are difficult to have a decisive impact on the current status of ETH, and thus are not well-received by the community.
For example, the recent reduction in gas fees has led to a decrease in destruction, maintaining ETH in an inflationary state, while the operational costs for nodes are very low. The cost of ETH obtained by stakers is lower compared to ETH during the POW era, which also causes a tendency for many staking users to sell.
Conclusion
Layer 2 technology has played an important role in solving the scalability issues of the Ethereum network, but while improving transaction efficiency and reducing costs, it has also had a certain negative impact on the price of ETH. The decline in transaction fee revenue, decrease in locked assets, market decentralization, and increased competitive pressure are all factors contributing to the pressure on ETH's price. In the future, the Ethereum community and developers need to find a balance between improving network performance and maintaining ETH value to ensure the healthy development of the Ethereum ecosystem.
