Why L2 Won’t Make Ethereum Deflationary?

Original author: BREAD , Crypto KOL

Original translation: Felix, PANews

There is a view circulating in the crypto community that L2s will cause Ethereum to fall into deflation again. This statement is incorrect, and there are already examples to prove it.

This is a report on L2, blobs, and why the Ultrasound Money meme will die without mainnet users.

(Note: A meme related to Ethereum that is used to highlight its potential to become deflationary in the long term. The basic concept is that if the supply of gold or Bitcoin is capped and is considered Sound Money, then the supply of Ethereum is decreasing and should be considered Ultrasound Money)

Key points:

• L2s will only deflate ETH if both blob and regular fee markets are saturated

• L2 is largely unconstrained by the specific batch release cadence of L1

• The combination of the above means that L2s will constantly coordinate with each other to avoid creating a high-fee environment for themselves

background

First a brief recap of where Ethereum stands after Dencun (the March upgrade that made L2s ~10x cheaper for users).

Dencun introduces the concept of blob space, an extension of block space on Ethereum designed to allow L2 to publish its batch data.

This new area has several noteworthy features:

• Blobspace is currently limited to 6 individual blobs per block

• This is a separate fee market from the regular blockspace, but uses similar mechanisms

Blockspace : If the utilization of the current block is > 50%, increase the base fee of the next block

Blobspace : Increase the base fee of the next block by approximately 12% if there are 4 (i.e. >50%) or more blobs in the current block

Note: L2s can decide whether to use Blockspace or Blobspace.

Given the above, it is possible to predict some of the expected behavior flows of these L2s that will lead to a destruction:

• L2s will first saturate the blobspace until it is no longer free (3 blobs/block)

• Once they reach this level, they will start calculating the release cost/reputation savings and choose between:

• a.) Using calldata

• b.) Reduce the frequency of releases/decentralize/coordinate to cool down the fee market

That said, while the top L2s are already making millions in profits each month (with profit margins approaching 100%), L2s will continually adjust their behavior to avoid creating a high-fee environment for themselves.

ETH Vampire Death Loop:

• Extending the low-cost environment

• Waiting for Ethereum to expand and reset the market

• Extending the low-cost environment

• Waiting for Ethereum to expand and reset the market...

So when does ETH plan to expand?

This could expand blob capacity by about 2-3 times as early as next year with the Pectra update.

The market does not provide many such opportunities, but there are two examples where L2s intentionally modified their behavior to save costs and avoid fees (as any business or rational actor would do).

Example 1: The Blobscriptions craze

In late March, blobs underwent “price discovery” during the blobscription phase, though: L2s and builders capped their blobs at a non-price-increasing level of 3 blobs/block on average:

Data source: Dune

They had no obligation to exceed fee increases, so they didnt.

Example 2: LayerZero Airdrop

On June 20, the ZRO airdrop caused a significant increase in trading volume on Arbitrum and led to an influx of it into the blob market.

in short:

• More blobs from ARB

• All L2s have higher blobs cost

• L2 destroyed ~$800k in ETH due to lack of proper infrastructure to switch to regular blockspace

If you want to know more, you can check out the author’s other tweet .

The biggest takeaway from this event is how teams are responding to the high-fee environment:

Scroll is a zk rollup with no publishing obligation, and has completely stopped publishing.

When looking at Scroll, they did indeed post faster than normal, but reacted much later than OP Mainnet. Interestingly, when basefees spiked and blobdata became more expensive than calldata, Scroll stopped issuing blobs altogether. This also explains why Scroll has the least fees compared to other L2s.

Taiko is a rollup with a strict rhythm that slows down batch processing.

Since Taiko is Rollup-based (i.e. once their transactions are confirmed on L1, they are confirmed on L2), they have to constantly post information to keep the chain moving. This caused them to pay 25+ ETH more in fees on L1. However, when the blob base fee spiked, even Taiko slowed down batching by 30-50%, indicating that they do have some price sensitivity at extremely high prices.

Both market participants have taken reasonable steps to reduce their overhead costs.

In the future, they will definitely adopt automated processes to avoid wasting hundreds of thousands of dollars before the conversion.

All L2s will.

What can be done?

When I set out to write this report, I simply calculated that “4 more base-level L2s would be needed to generate ETH Ultrasound Money™️ again”, but the more I dug, the more I realized that this goal would never be achieved.

L2 will constantly adjust its behavior to avoid high costs. They are businesses, of course they will do this.

So given the above, what should be done? Make the mainnet cool again and attract users and builders.

A balance must be struck between scaling via L2s and keeping power users on the mainnet, rather than pushing them indiscriminately into one of a dozen differently structured ecosystems that provide minimal economic returns to Ethereum.

Make progress by adjusting your messaging:

• Fill capacity

• Expand to appropriate level

• Tell users and applications to go away (skip this step)

• Scaling via L2s

Measures like EIP-7623 could also be implemented to prevent L1 user block space from being used as L2 cost-saving failover space.

Relying on L2s as participants and the mainnet as pure settlement, isnt it? With the current incentives, this is not the case.

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