Ethereum L2 development is ‘double-edged sword’ for ETH value

Ethereum’s push toward layer-2 (L2) blockchain scalability may be a double-edged sword for Ether, potentially weakening the value accrual of the world’s second-largest cryptocurrency, according to a new report from Binance Research.

The report suggests that Ethereum’s L2 blockchain networks — built to improve mainnet scalability and lower transaction costs — may be cannibalistic of the Ethereum base layer, negatively impacting the price of Ether (ETH).

Ethereum’s dominance in terms of decentralized exchange (DEX) volume and fees generated is “under threat” by Solana and BNB Smart Chain, Binance Research wrote.

Ethereum L2 development is ‘double-edged sword’ for ETH value

Ethereum, Solana, BNB, DEX volume. Source: Binance Research

The main factors include slow and expensive transactions, fragmented “developer mindshare and liquidity, and reduced value accrual to the L1 due to the rise of L2s,” the report said.

Ethereum’s roadmap already includes future upgrades aimed at creating cheaper transactions, additional security, and more future-proof incentives for the mainnet.

Still, Ether’s value accrual may continue to suffer in the near term since the next two major upgrades don’t immediately address these issues, but are aimed at creating more scalability around data availability and incorporating more L2 networks.

Concerns have been reignited around the Ethereum mainnet’s economic incentives since Ether’s price fell to $1,410 on April 7, marking its lowest level since March 2023.

ETH/USD, 1-year chart. Source: Cointelegraph

Ether’s price fell over 61% during a four-month downtrend, which started on Dec. 16, 2024, when ETH briefly peaked above $4,100, Cointelegraph Markets Pro data shows.

Ethereum’s Pectra, Fusaka upgrade won’t address Ether’s value accrual

After initial delays, Ethereum’s highly anticipated Pectra upgrade is set to go live on the mainnet on May 7.

The Pectra upgrade aims to improve Ether staking and L2 network scalability, increase blob capacity to enable more data handling on the mainnet and improve overall network capacity.

The Fusaka upgrade, expected in late 2025, will focus on scaling the Ethereum mainnet as a data availability layer by introducing EIP-7594. Fusaka may also bring an update to the Ethereum Virtual Machine (EVM), resulting in a “more structured approach” to smart-contract creation, reducing runtime overhead and improving developer experience.

Ethereum data capacity upgrades. Source: Binance Research

Ethereum’s commitment to L2 scaling may be a “double-edged sword” due to concerns around the mainnet’s “competitiveness as a data availability layer” and “the sustainability of value accrual to Ethereum the asset,” the report said.

“One promising path for stronger ETH value accrual is the development of based rollups,” which “contribute significantly more in fees” to Ethereum compared with L2s like Base, Arbitrum and Optimism, according to a Binance Research spokesperson.

L2s, rollups by costs paid to Ethereum mainnet. Source: Binance Research

“Another avenue is Ethereum’s evolving role as a data availability layer,” the spokesperson told Cointelegraph, adding:

“Value accrual through this model depends on external factors: L2s must continue to choose Ethereum for data availability, and blockspace demand must grow in a competitive landscape where alternatives like Solana and BNB Smart Chain are gaining traction.”

“Aligning incentive structures between Ethereum and L2s, whether through fee sharing, MEV capture, or protocol-level integrations, will be essential to ensure sustainable value flow back to ETH as an asset should Ethereum continue to commit to scaling with L2s,” he added.