————————————————————
Last week, something significant happened in the cryptocurrency space—but only a small portion of people truly understood its importance.
Celo announces the transformation from an independent Layer 1 blockchain to an Ethereum Layer 2 network.
At first glance, this looks like a regular technology migration. But in reality, it hints at a bigger shift, a trend that Ethereum has been quietly promoting—it is reshaping the way we think about building things in the crypto world.
Let's break this down.
1) The industry is starting to seriously consider costs and revenue 🔻
The crypto market is currently undergoing an adjustment that has long been overdue. The market is starting to revalue fundamentals. Of course, storytelling is still very important, but now people are asking a few more questions:
🔹 How much can this chain actually earn?
🔹 What are the operational costs?
🔹 Where has all the value gone?
Some new metrics, like REV, are starting to become increasingly important. These indicators can clearly demonstrate how different blockchains that appear similar on the surface can actually differ significantly.
At this moment, Celo’s decision makes perfect sense.
2) Layer 1 cannot retain money, but Layer 2 can 🔻
In economic discussions, one often overlooked point is that Layer 1 blockchains cannot retain income sustainably.
Why? Because all the value goes directly to the stakers or miners. Layer 1 collects transaction fees, but those fees are immediately distributed as block rewards or staking returns. No profits are left behind, and there’s no extra money for innovation or protocol development.
This creates a paradox: Layer 1 can be a super valuable platform, but operating it is like public infrastructure, with no built-in funding mechanism to support its evolution.
Looking at Layer 2.
Layer 2 can retain income and redistribute that money. Fees from sorters, MEV, and even custom charges for block space can be collected and then reinvested into R&D, developer subsidies, marketing, or public services. This model can truly achieve long-term sustainability and aligned interests.
This is also why many new ecosystems choose to start building directly on Layer 2. It's not just about the technical architecture; it's also about economic design.
3) Layer 1 is the mainframe of Web3 🔻
Here’s a simple analogy: Layer 1 blockchains are like mainframes in the crypto world.
In the early internet, if you wanted to run a legitimate application, you had to buy a mainframe. You had to maintain the hardware yourself, write network protocols, and be responsible for uptime, security, and performance—you had to bear it all yourself.
This thing is powerful, but also incredibly expensive.
Current Layer 1 is quite similar. You need your own consensus mechanism, your own validators, and your own token incentives to protect network security. To keep the system running and secure, you have to spend millions every year.
Take Celo, for example; they have to spend 4-6% of their token issuance each year—approximately $15 million to $25 million—just to maintain basic security and activity.
This is not something unusual. Ethereum is doing this, and Solana is doing it too (on a larger scale). Every independent Layer 1 has to bear this cost. But the key is: this cost cannot be reduced. If you are a small chain, this burden feels particularly heavy.
4) L2 is a hosted server—same capabilities, lower costs 🔻
Now imagine that you no longer have to run the mainframe yourself, but instead switch to hosted servers.
You can still control your environment, customize how the chain operates, and make decisions at the execution level. But you no longer have to protect that physical machine yourself.
That’s what it feels like to do Layer 2 on Ethereum.
After Celo becomes L2, the user experience remains the same. However, the heavy lifting regarding security—such as fraud proofs, consensus mechanisms, and underlying confirmations—has now been handled by Ethereum. The cost of maintaining this chain has suddenly decreased.
Originally, spending $20 million a year on security is now only necessary to cover state fees and data availability costs—potentially reduced further through compression techniques or other DA layers.
5) Why this is Ethereum's strategic move 🔻
This is not just a matter for Celo. It is a reflection of Ethereum's long-term strategy finally beginning to materialize.
Ethereum is no longer trying to be 'the one server to rule them all.' The idea of 'one chain to dominate them all' has long been proven unfeasible, whether in Web1, Web2, or now in Web3.
On the contrary, Ethereum is becoming a foundational layer that other chains can rely on—providing security, decentralization, and interoperability, like a service.
At first glance, it seems like self-sabotage, as Ethereum lowers the 'premium' of its Layer 1. But in reality, it’s capturing a larger market—by becoming the infrastructure for other projects.
You can stubbornly hold onto the old notion of 'only one server,' or you can help build the future with billions of servers.
Just like no one runs their own mainframe anymore, few projects will run their own Layer 1 in the future.
They will use hosted servers and become Layer 2.
And all of this will happen on Ethereum.
6) The inevitable appeal of efficiency 🔻
Celo's transition from Layer 1 to Ethereum Layer 2 is not just a technical adjustment; it signifies a fundamental economic shift in the cryptocurrency world. Independent Layer 1 blockchains cannot retain income because the money they earn flows directly to the stakers, leaving little for R&D or development.
Layer 2 networks are different; they can retain income and reinvest it into innovation and sustainability. As projects increasingly focus on economic viability, more blockchains are expected to follow Celo's lead, significantly reducing costs by leveraging Ethereum's security.
As projects face market pressure to reduce costs and increase revenue, they will arrive at the same conclusion as Celo:
"Why spend tens of millions to secure a chain when Ethereum can provide stronger security at a lower cost?"
This may not happen overnight. But it will happen—because economic laws always favor the winners.
🔹 Original article compilation link: htps://x.com/0xkydo/status/1906050837186584983?t=Eg0rKM8Vsp8yA1KDb1SzKg&s=19
