Is Ethereum too complacent about fees? Is "based on Rollup" a long-term solution?

Written by: Andrew Singer, CoinTelegraph

Compiled by: Baishui, Golden 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 maintain security.

But perhaps they have been too successful, to the extent that they have siphoned off a large amount of on-chain activity and fee revenue from the parent chain that spawned them? At least, this is what some people have been thinking recently, with the latest instance being 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 strive harder for a larger share of profits, especially in terms of sorting fees.

“People from the Ethereum Foundation (a nonprofit organization supporting the Ethereum ecosystem) will tell you, ‘Yes, we messed up because we were too ivory tower.’ I’ve heard this 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 a research project… being exploited by competitors.”

James Beck, the Growth Lead at ENS Labs and another speaker at the New York conference, stated that L2 is collecting millions of dollars in transaction order fees (sometimes referred to as sorting fees), but this revenue is not being 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 verification layer, but the Ethereum mainnet has not received fair compensation for the work it does. Centralized profit-oriented 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 has surged.

L2 Rollup is a recent innovation that emerged in 2023. Its intention is to reduce blockchain congestion and Gas fees by transferring 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 introduced blob transactions to help scale Layer 2. CoinMetrics researcher Tanay Ved pointed out this week that blob transactions significantly lowered the cost of sending data from L2 to Ethereum, enabling it to operate more efficiently.

Since then, the demand for L2 users has skyrocketed, 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 has generated approximately $98 million in revenue from user transaction fees (including base fees and priority fees), “while only paying about $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 if it is “extractive.”

Base’s response

When asked about the cost issue, a spokesperson for Base stated: “Nowadays, Base has already paid Ethereum fees for every transaction on the platform. All transactions are settled on Ethereum, and since Base was established, Base has paid over 20 million dollars in settlement fees to Ethereum.” The spokesperson added that you can check these fees under ‘Revenue Costs’ on 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 referenced 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 warn that even if fees are currently imbalanced, this imbalance may not last. Ethereum hard forks, such as Pectra which went live yesterday (May 7th) and Fusaka planned for the end of 2025, will increase the throughput of blobs. “This means that L2 will be able to publish more blobs, which could potentially raise the total fees for blobs 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 increase this number to 6 blobs per block, up to 9, creating room for increased fees as L2 activity expands.”

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

Is the solution based on rollup the answer?

Some Ethereum researchers, podcasters, and even L2 chain developers tend to view “rollup-based” as a more lasting solution to address the fee issues and provide better security. In this case, transaction sorting (i.e., ordering) will be completed 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 and have a single point of failure. Jarrod Ward from Polygon wrote:

If a centralized sorter fails, the rollup will essentially stop working completely. It will stop processing transactions from users on the L2 chain and will also stop sending batched data back to Ethereum.

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

In June of last year, the Ethereum Layer 2 blockchain Linea was hacked, resulting in losses of up to $2.6 million, which deeply made Ngo and others 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 largest project, set to launch in May 2024. A year later, its total value locked reached $148.3 million, ranking 14th on the L2Beat L2 project list, but far behind the leader Base at $12.06 billion.

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

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

Tax on L2?

Another idea in the Ethereum community is to impose taxes on L2. However, Ved indicated that doing so could lead to some unintended consequences. This might reduce the competitiveness of L2. It could also result in “activity leaking to competing Layer 1s outside the Ethereum ecosystem.” Ved mentioned that 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 explains that, overall, the Ethereum Foundation seems to prioritize long-term growth over short-term revenue. However, proposals like EIP-7762, which accelerate the price discovery process by increasing the minimum blob base fee during demand spikes, may bring more fee revenue to the Ethereum mainnet, creating a tax-like effect.

Social pressure?

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

To this end, ENS participated in a three-day seminar in the UK in January, attended by top researchers and developers from entities such as Linea, Status, OpenZeppelin, Titan, Spire Labs, and the Ethereum Foundation. The urgent task is to create a scalable decentralized infrastructure for ENS Labs’ Namechain and how to convene various teams in 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 flat (non-hierarchical), multi-party entities like Ethereum. “Ethereum is a decentralized ecosystem. You can’t get everyone to reach a consensus at the same time.” But collaborations like the recent one held in the UK are a start.

Hoffman, a member of the Cornell Tech Conference panel, expressed confidence that Ethereum can transform and “turn Layer-1 into Rollup,” with 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 smooth interaction network composed of numerous private and public chains, which many hope will be the future of this technology.