“Breaking the entire social fabric”: Ethereum Foundation faces pressure to restrict layer-2 networks

A portion of the Ethereum community is pressuring the Ethereum Foundation to make decisions that may “break the entire social fabric” of the smart contract network

A portion of the Ethereum community is pressuring the Ethereum Foundation to make decisions that may “break the entire social fabric” of the smart contract network by restricting Ethereum's layer-2 (L2) networks, Polygon co-founder Sandeep Nailwal said.

Speaking during a March 28 episode of Cointelegraph's Chain Reaction show on X, the Polygon founder said that he has only seen this type of pressure and anti-L2 rhetoric during the current market cycle amid suppressed price action for Ether (ETH).

“Everybody understands that if Ethereum doesn't survive, the layer-2s won't survive,” Nailwal said, adding:

The Polygon co-founder praised Vitalik Buterin's leadership and his more active role in the Ethereum Foundation, saying he is the biggest force in keeping the ecosystem cohesive.

Nailwal characterized Buterin as the “DNA" of the network that has attracted many talented developers over the years who are building layers on top of the Ethereum base layer.

The total value secured across Ethereum's scaling solutions. Source: L2Beat

Related: Getting crypto out of the ‘AOL era’ — Sandeep Nailwal

Settlement layers vs execution layers

According to Nailwal, the layer-1 vs layer-2 dichotomy is the wrong way to think about blockchain networks.

The Polygon founder defined only two settlement layers in all of crypto, Bitcoin and Ethereum, with all other crypto networks being execution layers.

In the future, almost every application will have its own blockchain to avoid paying gas fees and will post final transactions to one of these settlement layers.

This will create an ecosystem of efficient and specialized application blockchains that are focused on specific use cases. For example, there may be an autonomous science collective using Optimism or a large-scale DeFi protocol operating on Polygon.

These application blockchains will interact with each other and post their final transactions to either Bitcoin or Ethereum, which will serve as the ultimate arbiters of value and security.

This scenario will benefit the base layer of both Bitcoin and Ethereum, but it seems that ultimately, more value will accrue to Ethereum due to its smart contract functionality, which will be in high demand by the application blockchains.

This will promote the long-term growth of the ecosystem, which will one day be seamlessly interoperable.

Ethereum base layer fees drop following the Dencun upgrade. Source: The Tie Terminal

This view is in contrast to the narrative that Ethereum's L2s are a threat to the base layer due to the fact that they are cannibalizing it. This claim is supported by data showing a 99% drop in Ethereum L1 revenue by September 2024.

However, this view fails to take into account the big-picture changes that are unfolding in the blockchain landscape.

As application blockchains launch and begin securing their tokens, the base layer will benefit through increased activity and network effects.

This will also lead to a decrease in gas prices, further boosting the appeal of Ethereum to developers and users.

Ultimately, the Bitcoin network could only pose a threat to Ethereum if it adopted more advanced scripting options that give it reliable, smart contract functionality like Ethereum.

However, even then, the ecosystem of application blockchains executing on Ethereum and posting their final transactions to the beacon chain will be a formidable force that Bitcoin might struggle to compete with.