Crypto exchange Coinbase has analyzed the impact of scaling solutions on the Ethereum (ETH) Blockchain. He also warned about altcoins like Polygon (MATIC) that offer such a solution. Rather, Coinbase argued that these would negatively impact Ethereum. Here are the details…
Warning for MATIC and other L2 solutions
In a research report, Coinbase says that layer 2 scaling solutions (L2s) can reduce Ethereum’s revenue. However, according to the exchange, the revenue of L2s in the last year is 1 percent of what Ethereum makes. Coinbase used the following statements in its report:
The future of L2s could be zero. Because whatever L2 hosts most decentralized applications, it could one day power the entire Ethereum ecosystem. This suggests that L2s could eventually drive revenue away from Ethereum itself.
Coinbase says that over the past 12 months, scaling solutions like Polygon (MATIC), Optimism (OP), and Arbitrum have accounted for less than one percent of Ethereum’s revenue. Token Terminal in the last 12 months; Arbitrum revealed that Ethereum generated $9,971 billion in total revenue, compared to only about $78 million in total revenue in Polygon and Optimism.
Will L2s hurt Ethereum price?
The crypto exchange argues that when Ethereum transitions to a proof-of-stake (PoS) consensus mechanism, scaling solutions will potentially cause a drop in staking returns. He says that this, in turn, could negatively affect the price of ETH. As more users switch to L2 solutions than the exchange, the returns of ETH staking validators may decrease. Coinbase uses the following phrases:
If more user activity moves to L2s and those L2s need their own tokens to facilitate transactions, this could potentially reduce the staking returns of validators who will earn less than net transaction fees. If this discourages staking on the platform, this could increase the size of the circulating supply of liquid ETH. It will probably hurt ETH prices.
Adverse factors can be mitigated by network activity
However, Coinbase says that scaling solutions could benefit Ethereum in the long run as it will increase network efficiency. In other words, the stock market takes both situations into account, positive or negative. Overall, he notes, the long-term impact of L2s convenience by providing cheaper, faster transactions may be mitigated as network activities increase. Coinbase uses the following phrases:
Also, the effect of L2s consuming Ethereum’s revenues could be a short-term phenomenon. In the long run, revenues depend on more activity in the overall crypto ecosystem and whether Ethereum becomes the dominant (or mainstream) Blockchain globally. If L2s facilitate more transactions by making them cheaper, faster and easier, the initial revenue impact can be mitigated by increased activity that eventually happens in the network.
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