Ethereum’s Layer-2 Development: A Double-Edged Sword for Ether Value

Ethereum’s pursuit of layer-2 scalability may threaten Ether’s value due to potential cannibalism of the base layer. High transaction costs and competition from other networks like Solana may disrupt Ethereum’s dominance. Future upgrades, while promising, may not address immediate concerns about value accrual. Innovations like rollups and improved fee structures may be essential for sustaining Ether’s economic model.

Ethereum is entering an era of increased layer-2 (L2) development aimed at enhancing blockchain scalability. However, Binance Research suggests this shift may pose a risk to Ether’s value. The introduction of L2 networks, which aim to lower transaction costs and improve scalability, could detract from the value of the Ethereum base layer, potentially leading to a decrease in Ether’s price.

The report highlights that Ethereum now faces fierce competition from networks such as Solana and BNB Smart Chain, which threaten its dominance in decentralised exchange (DEX) volume and fees. Key issues contributing to this situation include high transaction costs, slow speeds, and fragmented liquidity among developers. These factors are seen as detrimental to value accrual on Ethereum’s main network, also known as Layer 1 (L1).

Despite the impending upgrades that promise cheaper transactions and enhanced incentives, Ether’s value may continue to suffer temporarily. The next major updates do not directly tackle current issues, focusing instead on improved data availability and expanded L2 networks.

Concerns over the economic incentives of Ethereum’s mainnet have gained traction after Ether’s price dropped to $1,410 on April 7, its lowest point since March 2023. This decline, representing a 61% drop over four months, started following Ether’s brief peak above $4,100 in December 2024.

The upcoming Pectra upgrade, anticipated to launch on May 7, aims to enhance Ether staking and L2 network scalability while increasing blob capacity for data management. The Fusaka upgrade, scheduled for late 2025, seeks to enhance the mainnet’s data availability and may improve developer experience through updates to the Ethereum Virtual Machine (EVM).

Binance Research identifies the commitment to L2 scaling as potentially problematic, raising concerns regarding the mainnet’s competitive standing and sustainability of value accruement for Ether as a digital asset. One potential strategy for increasing Ether’s value is developing rollups, which reportedly yield higher fee contributions than existing L2 solutions like Base, Arbitrum, and Optimism.