Is Ethereum complacent about fees? Is rollup a long-term solution?

Author: Andrew Singer, CoinTelegraph; Translated by: Bai Shui, Jinse Finance

Layer 2 has always been a great success story in the blockchain space. They alleviate congestion on the Ethereum mainnet, reduce gas fees, and ensure security.

But maybe they’ve been so successful that they’ve siphoned off a lot of on-chain activity and fee revenue from the parent chain that gave birth to them? At least recently, some people thought so, most recently at the Cornell Tech Blockchain Conference at the end of April.

In fact, some people believe that Ethereum should be more greedy, or at least work harder to secure a larger share of profits, especially sorting fees.

“The people at the Ethereum Foundation (a non-profit organization supporting the Ethereum ecosystem) would tell you, ‘Yes, we messed up because we were too ivory tower.’ I’ve heard this kind of talk many times,” said David Hoffman, the owner of Bankless, during a panel discussion at the Cornell Tech event in New York on April 25.

Hoffman (left) attended the Cornell Tech Blockchain Conference. Image source: Andrew Singer

In addition, Hoffman urged Ethereum to undergo a “strategic transformation” and pointed out that the crypto environment has changed over the past few years. Ethereum no longer enjoys the “luxury of being a research project… exploited by competitors.”

James Beck, the Growth Lead at ENS Labs and another speaker at the New York conference, stated that L2 is charging millions of dollars in transaction order fees (sometimes referred to as sorting fees), but this revenue has not been transferred to Ethereum. Beck pointed out, “Well, compared to other tokens, the price of ETH has been declining. What can we do to make Ethereum stronger?”

In short, Ethereum is a neutral validation layer, but the Ethereum mainnet has not received fair compensation for the work it does. Centralized profit-driven L2s like Base, Optimism, and Arbitrum are charging hefty ordering fees while enjoying the security and activity guarantees of the Ethereum mainnet at relatively low economic costs.

After the Dencun upgrade, L2 trading volume soars

L2 Rollup is a recent innovation that emerged in 2023. Its intent is to reduce blockchain congestion and Gas fees by shifting transaction processing from the main blockchain (Layer 1) to an independent chain (L2) located above the mainnet. However, transaction processing is undoubtedly the most profitable part of revenue distribution, especially when users choose to pay priority fees to expedite order processing.

Before the Dencun upgrade in March 2024 on Ethereum, fee sharing was hardly a major issue. The Dencun upgrade introduces blob transactions to help scale Layer 2. CoinMetrics researcher Tanay Ved pointed out this week that blob transactions significantly reduce the cost of sending data from L2 to Ethereum, allowing it to operate more efficiently.

Since then, the demand from L2 users has surged, especially with the launch of Base trading on the Ethereum mainnet by Coinbase in August 2023.

As Ved pointed out in a blog post on April 8, Base generated approximately $98 million in revenue from user transaction fees (including base fees and priority fees), “while only paying approximately $4.9 million to the Ethereum base layer, so since the Dencun upgrade, Base’s total profit is estimated to be $94 million.”

Ved added: This dynamic has led many to question whether Layer-2 is ultimately a net positive for Ethereum or has a “extractive” nature.

Base’s Response

When asked about fees, a spokesperson for Base said: "Today, Base pays Ethereum fees for every transaction on the platform. All transactions are settled on Ethereum, and Base has paid more than $20 million in settlement fees to Ethereum since its inception. The spokesperson added that you can view these fees under “Cost of Revenue” in Token Terminal.

The spokesperson stated: “Overall, Base makes on-chain transactions easier through fast and inexpensive transactions, and helps to develop the Ethereum ecosystem by attracting more users, developers, applications, and assets, all of whom are trading with ETH and driving demand.”

However, according to the cited Base financial statements, in many months (even if not most months), Base’s total expenses are about 10 times the transaction settlement fees paid to Ethereum. For example, in the most recent full month of April, Base generated $3.7 million in fees, but only $305,000 was paid as settlement fees to Ethereum, accounting for about 8% of total expenses.

However, the situation may not be as bad as it seems. Others have warned that even if the fees are unbalanced now, this imbalance may not last. Ethereum hard forks, such as Pectra, which went live yesterday (May 7), and Fusaka, planned for the end of 2025, will increase the throughput of blobs. “This means that L2 will be able to release more blobs, which could potentially drive up the total blob fees on the mainnet,” Ved pointed out.

As shown in the figure below, Ethereum has steadily achieved the current target of three blobs per block. Ved added: “Pectra will raise this number to 6 blobs per block, with a maximum of 9, creating space for increased fees as L2 activity expands.”

The average number of Blobs per block on Ethereum and their total Blob fees (USD). Source: CoinMetrics

Is the “rollup-based” solution the answer?

Some Ethereum researchers, podcasters, and even developers of L2 chains tend to view “rollup-based” as a more sustainable solution to address fee issues and provide better security. In this case, transaction ordering (i.e., sorting) will be done on the mainnet rather than on the L2 chain.

Some researchers have stated that the sequencers used by Optimism, Arbitrum One, Base, and other companies are more vulnerable to attacks or failures because they are centralized, which creates a single point of failure. Jarrod Ward from Polygon wrote:

If a centralized sorter fails, the rollup will effectively come to a complete halt. It will stop processing transactions from users on the L2 chain and will also stop sending batch data back to Ethereum.

“Layer-2 sequencers have become very centralized and very dangerous,” said Tom Ngo, the executive head of Metis (Ethereum Layer-2 blockchain).

In June of last year, the Ethereum Layer 2 blockchain Linea was hacked, resulting in a loss of 2.6 million dollars, which made Ngo and others deeply realize the importance of decentralization and the dangers of centralized sequencers.

Last year, several aggregation-based L2 projects went live. Taiko Alethia is the first and also the largest project, launching in May 2024. A year later, its total collateral value reached 148.3 million USD, ranking 14th on the L2Beat L2 project list, but far below the leader Base’s 12.06 billion USD.

Ethereum Layer 2 tokens ranked by total collateral value. Source: L2Beat

In terms of speed, Taiko achieved an impressive average of 20.3 user operations per second on May 7, (UOPS), which is quite far from Base’s 86.3 UOPS, but comparable to Arbitrum One’s 21.6 UOPS, and significantly better than Optimism’s 10.3 UOPS.

Taxing L2?

Another idea in the Ethereum community is to impose taxes on L2. However, Ved stated that doing so could have some unintended consequences. It may reduce the competitiveness of L2. It could also lead to “activity leaking to competing Layer 1s outside the Ethereum ecosystem.” Ved mentioned that the current activities flowing to Base might flow to Solana or other Layer 1s.

If Ethereum imposes taxes on its L2, there may also be some philosophical issues. Ved points out:

Taxation may contradict the decentralized philosophy of Ethereum, which tends to be market-driven rather than enforced taxation.

Ved explained that, overall, the Ethereum Foundation seems to prioritize long-term growth over short-term revenue. However, proposals like EIP-7762, which increase the minimum blob base fee, may accelerate price discovery during periods of surging demand and could generate more fee revenue for the Ethereum mainnet, creating a tax-like effect.

Social Pressure?

According to Beck from ENS Labs, some social pressure may be needed to persuade leading centralized Layer-2 solutions to voluntarily give up their ordering fees. Other Layer-2s like Linea may need to intervene and make similar statements to centralized Layer-2s: “You see, these risks exist in more centralized designs, and now it’s time to integrate [order processing] into a more decentralized Ethereum.”

To this end, ENS attended a three-day seminar in the UK in January, with participants including top researchers and developers from entities such as Linea, Status, OpenZeppelin, Titan, Spire Labs, and the Ethereum Foundation. The urgent task is how to create a scalable decentralized infrastructure for ENS Labs’ Namechain and how to gather various teams from the Ethereum ecosystem to collaboratively address the interoperability challenges between Layer-1 and Rollup-based solutions.

Beck acknowledged that it is not easy to get work done in entities like Ethereum that are flat (non-hierarchical) and involve multiple participants. “Ethereum is a decentralized ecosystem. You can’t get everyone to reach consensus at the same time.” However, collaborations like the one recently held in the UK are a start.

Hoffman, a member of the Cornell Tech conference group, expressed confidence that Ethereum can transform and “turn Layer-1 into Rollup,” which can achieve processing speeds comparable to today’s Layer-2.

As mentioned above, Hoffman has criticized the Ethereum Foundation for being too closed and academic, but he has seen some signs that the situation may be changing. He recently wrote:

The joint appointment of Tomasz Stańczak and Hsiao-Wei Wang as Executive Directors marks the arrival of a new era of accountability, direction, and internal cohesion.

“I feel optimistic,” Beck added. “Ethereum still has the most DeFi locked assets; the most stablecoins are also on Ethereum. BlackRock has a fund that is settling on Ethereum.”

In other words, Ethereum still has the capability to provide infrastructure for the “network of networks”—a seamless interacting network composed of numerous private and public chains, which many hope will be the future of the technology.