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Trusted Editorial Content, reviewed by industry leaders and experienced editors. Ad DisclosureAlex Thorn, the head of research at Galaxy Digital, recently sparked a new conversation about Ethereum’s roll-up ecosystem. He criticized major Layer-2 networks for extracting value from the main chain while offering minimal benefits to ETH holders, stating that “after all these years, the Ethereum community seems okay with most users operating on centralized L2s controlled by single companies or foundations… very little value is returned to ETH holders. It’s sad.”

Ethereum L2s: Centralized, Profitable, and Draining ETH

Thorn pointed out that roll-ups currently generate between $100,000 and $400,000 in daily fees but have spent less than a penny per day on buying blob objects since May, contributing under $10,000 daily to Ethereum for data availability. He specifically highlighted Base, Coinbase’s OP-Stack roll-up, as a prime example: over the past 180 days, Base paid just $3.05 million to Ethereum L1, while sending $4.4 million to the Optimism Collective, which licenses its code. “Base pays more daily to the Optimism Collective than all L2s combined (including Base) pay to Ethereum L1,” Thorn noted, calling this arrangement “a nice business.”

Further details from Coinbase’s filings support Thorn’s argument. In Q2 2025, Base generated $14.9 million in user fees, spent only $443,000 on Ethereum data costs, and $2.16 million on Optimism royalties—while the exchange also disclosed a quarterly purchase of 2,509 BTC valued at $247 million.

“Is Coinbase siphoning value from Ethereum and using it to buy Bitcoin?” he asked, suggesting that roll-ups could shift economic focus away from ETH toward other assets. A July 31 X post from Coinbase confirms this trend, showing 11,776 BTC held at a $740 million cost basis, now worth $1.26 billion.

Buterin Outlines Technical Roadmap

While Thorn focused on economic and governance issues, Ethereum co-founder Vitalik Buterin shared a technocratic roadmap aimed at improving the L2 user experience. He praised the progress of many major L2s, noting they have reached stage 1. However, he emphasized that the next key milestone should be sub-one-hour native withdrawals, eventually reducing to a single slot. This would be enabled through validity proofs (ZK) rather than optimistic schemes that require week-long challenge periods.”Waiting a week to withdraw is far too long… This creates incentives to use solutions with unacceptable trust assumptions that undermine the purpose of having L2s,” he wrote. Buterin encouraged developers to adopt hybrid proof systems (ZK + OP + TEE or similar variants) that offer speed without compromising security.

Ethereum Layer 2 (L2) Solutions – These are scaling solutions built on top of Ethereum to improve transaction speed and reduce fees.

Ethereum Layer 2 (L2) Solutions

Ethereum, one of the most popular blockchain platforms, has faced challenges related to scalability and high transaction fees, especially during periods of high network congestion. To address these issues, developers have created Ethereum Layer 2 (L2) solutions—scaling technologies that operate on top of the Ethereum blockchain to improve transaction speed, reduce costs, and enhance overall user experience.

What Are Layer 2 Solutions?

Layer 2 solutions are protocols or frameworks built on top of the Ethereum mainnet (Layer 1) to handle transactions more efficiently. Instead of processing every transaction directly on the Ethereum blockchain, L2 solutions batch multiple transactions together and only submit a single transaction to the Ethereum network. This approach significantly reduces the load on the mainnet, resulting in faster confirmations and lower gas fees.

How Do Layer 2 Solutions Work?

Most Layer 2 solutions use a concept called “off-chain computation” to process transactions outside the main Ethereum blockchain. These solutions typically rely on smart contracts on the mainnet to settle final results, ensuring security while improving throughput. Common mechanisms include state channels, rollups, and sidechains, each with its own trade-offs between security, decentralization, and performance.

Types of Ethereum Layer 2 Solutions

State Channels: These allow users to conduct multiple transactions off-chain and only settle the final result on the Ethereum blockchain. Examples include Raiden Network and Lightning Network (though the latter is primarily for Bitcoin). Rollups: A popular class of L2 solutions that bundle multiple transactions into a single transaction on the Ethereum chain. There are two main types: Optimistic Rollups and ZK-Rollups. Optimistic Rollups assume transactions are valid unless challenged, while ZK-Rollups use zero-knowledge proofs to verify transactions before they are submitted to the mainnet. Sidechains: Independent blockchains that interact with the Ethereum mainnet through a bridge. Sidechains like Polygon (formerly Matic Network) offer faster transactions and lower fees but may sacrifice some level of decentralization and security compared to the mainnet.

Benefits of Layer 2 Solutions

Improved Scalability: L2 solutions can process thousands of transactions per second, far exceeding the capabilities of the Ethereum mainnet. Lower Transaction Costs: By reducing the number of transactions processed directly on the mainnet, L2 solutions significantly cut down on gas fees. Faster Confirmation Times: Users benefit from near-instant transaction confirmations, making Ethereum more viable for real-time applications. Enhanced User Experience: With lower fees and faster speeds, DApps and DeFi platforms become more accessible and practical for everyday users.

Popular Ethereum Layer 2 Projects

Several projects have emerged as leading L2 solutions for Ethereum:

Polygon (Matic Network): A framework for building and connecting Ethereum-compatible blockchain networks, offering fast and secure transactions. Arbitrum: An optimistic rollup solution developed by Offchain Labs, known for its compatibility with Ethereum’s tooling and programming languages. Optimism: Another optimistic rollup platform that aims to make Ethereum more scalable and cost-effective for developers and users. StarkNet: A ZK-Rollup solution powered by StarkWare, focusing on privacy, scalability, and efficiency. zkSync: A ZK-Rollup protocol that supports both general-purpose smart contracts and token transfers, with a focus on user-friendly interfaces.

Challenges and Considerations

While Layer 2 solutions offer significant advantages, they also come with certain trade-offs:

Security Trade-offs: Some L2 solutions may not be as secure as the Ethereum mainnet, depending on their design and implementation. Interoperability: Ensuring seamless interaction between different L2 solutions and the Ethereum mainnet remains an ongoing challenge. Adoption and Ecosystem Development: Widespread adoption requires continued development, user education, and integration with existing dApps and tools.

Conclusion

Ethereum Layer 2 solutions represent a critical step forward in addressing the scalability limitations of the Ethereum blockchain. By enabling faster, cheaper, and more efficient transactions, L2 technologies are helping to unlock new use cases and drive broader adoption of decentralized applications. As the ecosystem continues to evolve, we can expect even more innovation and improvements in the coming years, further solidifying Ethereum’s position as a leading blockchain platform.

ETH Drainage in L2s – This refers to the movement of ETH from the main Ethereum blockchain to Layer 2 networks, often due to lower costs and faster transactions.

ETH Drainage in L2s

One of the most significant trends in the Ethereum ecosystem in recent years has been the phenomenon known as “ETH drainage in L2s.” This term refers to the movement of Ether (ETH) from the main Ethereum blockchain, also known as Layer 1 (L1), to Layer 2 (L2) networks. This shift is driven by a combination of economic incentives, technological advancements, and user demand for more efficient and cost-effective transactions.

Understanding Layer 2 Solutions

Layer 2 solutions are secondary protocols built on top of the Ethereum blockchain that aim to enhance scalability, reduce transaction fees, and improve throughput. These solutions operate off the main chain but still rely on Ethereum’s security and finality. Popular L2s include Optimism, Arbitrum, Polygon (formerly Matic), and StarkNet, among others.

Why ETH Moves to L2s

The primary reason for ETH drainage is the high cost of transactions on the Ethereum mainnet. During periods of high network congestion, gas fees can skyrocket, making it prohibitively expensive for users to interact with decentralized applications (dApps), transfer assets, or execute smart contracts. In contrast, L2s typically offer significantly lower fees and faster confirmation times, making them an attractive alternative for users and developers alike.

Additionally, many L2s support Ethereum-compatible smart contracts, allowing users to deploy and interact with the same dApps they would on the mainnet—just at a fraction of the cost. This compatibility has further accelerated the migration of ETH and other assets to L2 networks.

Impact on Ethereum

The movement of ETH to L2s has both positive and negative implications for the Ethereum ecosystem. On the one hand, it reduces the load on the mainnet, potentially improving its performance and reducing congestion. It also fosters innovation and adoption by enabling more users to participate in the DeFi, NFT, and Web3 spaces without being hindered by high fees.

On the other hand, the draining of ETH from the mainnet could be seen as a sign of decentralization challenges, as users may move their funds to centralized or less secure L2s. However, many L2s are designed with strong security measures and are often backed by the same underlying Ethereum infrastructure, ensuring a balance between efficiency and safety.

Future Outlook

As Ethereum continues to evolve with upgrades like the Merge and future improvements such as sharding and further L2 integration, the dynamic between L1 and L2 networks is expected to become even more fluid. The concept of “ETH drainage” may eventually become a normalized part of the ecosystem, where users and developers choose the most appropriate layer based on their needs, rather than being forced to use the mainnet due to lack of alternatives.

In summary, ETH drainage in L2s represents a critical shift in how users interact with the Ethereum blockchain. It highlights the growing importance of scalability solutions and underscores the ongoing efforts to make blockchain technology more accessible, efficient, and sustainable for a broader audience.

Centralized Control Concerns – Some L2 solutions may introduce centralized elements, raising concerns about security and decentralization.

Centralized Control Concerns

While Layer 2 (L2) solutions are designed to enhance the scalability, speed, and cost-efficiency of blockchain networks, they can sometimes introduce elements of centralized control. This is a significant concern for many in the decentralized finance (DeFi) and broader blockchain communities, as it may compromise the core principles of security and decentralization that underpin blockchain technology.

Many L2 solutions rely on off-chain processing to reduce the load on the main chain (Layer 1). However, if the governance or operation of these L2 systems is controlled by a single entity or a small group of participants, it can lead to a concentration of power. This centralization can manifest in various ways, such as the ability to censor transactions, alter consensus rules, or even manipulate the system for personal gain.

For example, some L2 solutions use a centralized sequencer or validator set to process and batch transactions. If these entities are not transparent or accountable, users may be at risk of being subjected to unfair practices, such as front-running, transaction delays, or even data manipulation. In extreme cases, a single point of failure could lead to the collapse of the entire L2 network, undermining user trust and the reliability of the system.

Moreover, the security of an L2 solution is only as strong as its weakest link. If the system relies on a centralized component, such as a trusted third party or a private key holder, it becomes vulnerable to attacks or misuse. This is particularly concerning in the context of DeFi, where large amounts of value are often locked in smart contracts and other on-chain assets.

To mitigate these risks, many L2 projects are working to implement more decentralized architectures. This includes using decentralized validators, open-source governance models, and cryptographic proofs to ensure transparency and immutability. Additionally, users and developers are encouraged to carefully evaluate the governance structure, technical design, and community involvement of any L2 solution before adopting it.

In conclusion, while L2 solutions offer promising improvements to blockchain scalability, the potential for centralized control remains a critical issue that must be addressed. Ensuring true decentralization and robust security is essential for maintaining the integrity and trustworthiness of the broader blockchain ecosystem.

Galaxy’s Role in L2s – Galaxy, a major crypto investment firm, has been involved in funding and supporting various L2 projects, which can influence their development and direction.

Galaxy’s Role in L2s

As one of the most prominent investment firms in the cryptocurrency and blockchain space, Galaxy has played a significant role in shaping the development and trajectory of Layer 2 (L2) solutions. With its deep expertise in blockchain technology and a strong focus on innovation, Galaxy has been actively involved in funding, advising, and supporting a wide range of L2 projects that aim to enhance scalability, reduce transaction costs, and improve the overall user experience on blockchain networks.

Layer 2 solutions are critical for the long-term viability of blockchains like Ethereum, as they address the limitations of on-chain throughput and gas fees. By investing in these projects, Galaxy not only provides financial backing but also helps guide their strategic direction, ensuring they align with broader industry trends and technological advancements.

One of Galaxy’s key contributions has been its support for L2 platforms that prioritize decentralization, security, and interoperability. This includes investments in projects such as Optimism, Arbitrum, and others that have emerged as leading contenders in the L2 space. These projects benefit from Galaxy’s network, technical insights, and market understanding, which can accelerate their growth and adoption.

Moreover, Galaxy’s involvement extends beyond mere capital. The firm often acts as a strategic partner, helping L2 startups navigate regulatory landscapes, build community engagement, and integrate with other parts of the broader crypto ecosystem. This holistic approach ensures that the projects it supports are not only technically sound but also commercially viable and sustainable in the long run.

The influence of Galaxy on the L2 landscape is evident in the way it has helped shape the narrative around scaling solutions. By backing promising L2 initiatives, Galaxy contributes to the ongoing evolution of blockchain infrastructure, paving the way for more efficient, user-friendly, and scalable decentralized applications.

In summary, Galaxy’s role in the L2 space is multifaceted, encompassing financial investment, strategic guidance, and ecosystem building. As the demand for scalable blockchain solutions continues to grow, Galaxy’s contributions will likely remain instrumental in driving the next phase of blockchain innovation.

Thorn in the Side of Decentralization – The term “thorn” suggests that issues like centralization or mismanagement in L2s can pose challenges to the broader Ethereum ecosystem.

Thorn in the Side of Decentralization

While Layer 2 (L2) solutions have emerged as a critical component of the Ethereum ecosystem, offering scalability, lower transaction fees, and faster confirmations, they also bring with them challenges that can threaten the very principles of decentralization that underpin blockchain technology.

The term “thorn” is apt here, as it suggests an uncomfortable but persistent issue. In the context of L2s, this thorn often takes the form of centralization risks, mismanagement, or governance inefficiencies. These issues, if left unchecked, can undermine the trust and resilience of the broader Ethereum network.

Centralization Risks in L2 Solutions

Many L2 protocols rely on centralized entities or small groups to validate transactions, manage state updates, or enforce rules. While this approach can improve performance and user experience, it introduces a single point of failure and reduces the level of decentralization that users expect from blockchain systems.

For example, some rollups use trusted sequencers—centralized nodes responsible for ordering transactions. If these sequencers are compromised or act maliciously, they could disrupt the entire system or even censor certain transactions. This centralization risk is a direct contradiction to the ethos of open, permissionless blockchains.

Mismanagement and Governance Challenges

Beyond technical centralization, L2 projects may also suffer from poor governance or mismanagement. In many cases, the development teams or funding bodies hold disproportionate influence over the direction of the protocol, leading to decisions that may not align with the interests of the broader community.

This lack of transparent and inclusive governance can lead to conflicts of interest, slow decision-making, and even the potential for malicious behavior. When L2s fail to establish robust governance models, they risk becoming isolated silos rather than true extensions of the Ethereum ecosystem.

Impact on the Broader Ethereum Ecosystem

The challenges faced by L2s do not exist in isolation. As more users and developers migrate to these scaling solutions, the health and integrity of the underlying Ethereum network become increasingly intertwined with the stability and security of its L2 counterparts.

If an L2 becomes compromised due to centralization or mismanagement, it could indirectly affect Ethereum’s reputation and adoption. Users may lose confidence in the entire ecosystem, fearing that their funds or data could be at risk simply because they chose a particular L2 solution.

Looking Ahead: Balancing Scalability and Decentralization

As the Ethereum ecosystem continues to evolve, the challenge lies in finding a balance between scalability and decentralization. Developers and researchers are actively exploring ways to enhance L2 security, promote decentralized governance, and reduce reliance on centralized actors.

From innovations like decentralized sequencers and on-chain governance models to increased transparency and community involvement, the path forward requires vigilance, collaboration, and a commitment to the core values of blockchain technology.

In the end, the “thorn” of centralization and mismanagement in L2s serves as a reminder that scaling solutions must not come at the cost of the foundational principles that make blockchain so powerful. Only by addressing these challenges head-on can the Ethereum ecosystem continue to grow in a secure, fair, and truly decentralized manner.

Common Questions About Ethereum’s Roll-up Economy

Common Questions About Ethereum’s Roll-up Economy

Question 1: What is Ethereum’s roll-up economy?

Answer 1: The roll-up economy refers to the ecosystem of Layer-2 solutions built on top of the Ethereum blockchain. These solutions aim to increase scalability and reduce transaction costs by processing transactions off-chain and then submitting a summary (or “roll-up”) back to the main chain.

Question 2: Why are some people concerned about Layer-2 networks?

Answer 2: Some critics, like Alex Thorn from Galaxy Digital, worry that Layer-2 networks might centralize control over Ethereum’s ecosystem. They argue that if too many users rely on centralized L2s, it could undermine the decentralization and security principles of the Ethereum network.

Question 3: How do Layer-2 networks affect ETH holders?

Answer 3: Critics claim that Layer-2 networks may siphon value away from the Ethereum main chain, potentially leaving ETH holders with less economic incentive or returns. This is because transaction fees and other benefits might be captured by L2 providers rather than distributed to ETH holders.

Question 4: Are all Layer-2 networks centralized?

Answer 4: Not all Layer-2 networks are centralized. Some, like Optimism and Arbitrum, are designed to be more decentralized and open. However, concerns remain about the governance models and the potential for centralization in certain implementations.

Question 5: What does the future hold for Ethereum’s roll-up economy?

Answer 5: The future of Ethereum’s roll-up economy depends on how well Layer-2 solutions can balance scalability, security, and decentralization. Ongoing debates and innovations will likely shape whether these networks enhance or weaken the core values of the Ethereum ecosystem.