avatarThe Pareto Investor

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Understanding the Impact of L2 Growth — Ethereum’s Economics

As Ethereum scales out as a “network of networks” similar to the internet.

Dear Investors,

Many view Ethereum as the king of shitcoins, I think it can’t be more wrong and, it’s crucial to understand its evolution as a “network of networks”, drawing parallels with the development of the internet.

The Prelude to Ethereum?

Bitcoin, known as a decentralized form of money, operates independently of traditional intermediaries like banks.

It revolutionized the concept of digital money by eliminating the need for central authority.

Also, to read:

Every transaction in the Bitcoin network is validated by a decentralized network, making the system resilient and hard to tamper with.

Blockchain technology, the backbone of Bitcoin, wasn’t known as such until Bitcoin’s advent.

It’s a fusion of cryptography, proof of work, and decentralized networking.

Bitcoin showed us that currencies could be decentralized.

Then the question arose: what else can we decentralize using this technology?

Proposed by Vitalik Buterin in 2013, Ethereum took the idea of decentralization beyond currency.

It’s a platform for creating decentralized applications (Dapps).

Unlike Bitcoin’s “turing incomplete” language, which limits its use to currency transactions, Ethereum’s programming language, Solidity, allows for complex contract creation, opening up endless possibilities.

Ethereum: Not Just a Currency, But a Platform

Ethereum itself is not a currency; it’s a platform for running Dapps worldwide.

It operates on a decentralized network of computers, ensuring that programs run as intended.

Its native currency, Ether, incentivizes network operations.

On Ethereum platform, contracts automatically enforce, manage, and execute agreements.

For instance, a rent payment contract could lock out a non-paying tenant automatically.

However, smart contracts are strictly rule-based, with no room for discretion, which can be both a strength and a limitation.

Ethereum aims to decentralize the internet, which, despite appearances, is dominated by central entities like Google and Amazon.

Ethereum opens up possibilities like decentralized file storage, direct ride-sharing services, and peer-to-peer cryptocurrency exchanges.

Transaction Fees and L2 Growth

The Ethereum ecosystem is experiencing a seismic shift, evidenced by the transaction fees on top Layer 2 solutions (L2s).

These fees have skyrocketed, showing a near tenfold increase over the last year.

This surge in L2 activity poses a vital question: how is this growth at the L2 level impacting Ethereum’s economics at the Layer 1 (L1) level?

Remarkably, this L2 growth has not yet negatively impacted Ethereum.

Why?

The answer lies in the enduring presence of crypto-native users on the Ethereum L1, who continue to pay substantial fees.

Currently, L2 fees constitute about 15% of Ethereum’s total fees in aggregate.

This scenario isn’t a migration from L1 to L2, but rather an expansion of the overall market.

Future: Cheaper Data and New Use Cases

Ethereum’s L2s are actively seeking cheaper data availability solutions.

This move is poised to reduce user fees significantly while boosting the profit margins of L2 networks.

Such a development may, in the short term, affect Ethereum’s economics.

But there’s a silver lining.

In the long run, these advancements are likely to unlock a plethora of new use cases.

I anticipate a scenario where “a rising tide lifts all boats,” ultimately benefiting the entire Ethereum ecosystem.

Path to Wealth with Ethereum

As Ethereum scales out and diversifies, the opportunities for wealth creation grow exponentially, but so does the need for informed and strategic investment decisions.

I believe Ethereum will continue to evolve as a network of networks, similar to the early internet, its value accrual mechanisms also transform.

And, as the network’s usage grows, so does the value of Ether.

It’s a network of computers revolutionizing how we think about internet services and applications.

This evolution presents a unique opportunity for investors willing to delve deep into the ecosystem’s intricacies and bet on its long-term potential.

Stay informed, stay ahead, and let’s navigate the future of Ethereum together.

Sincerely,

The Pareto Investor

paretoinvestor.substack.com

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Cryptocurrency
Cryptocurrency Investment
Ethereum
Bitcoin
Investing
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