In a charged statement on X, Justin Bons, founder and Chief Investment Officer of Cyber Capital, one in all Europe’s oldest cryptocurrency funds, has voiced a critical view of Ethereum’s current trajectory, asserting that “Ethereum is dying while L2’s dance on its grave.” Bons argues that Ethereum (ETH) is struggling to keep up its fee revenue as a result of inadequate network capability, while Layer 2 (L2) solutions are capitalizing on this limitation by keeping Ethereum’s capability constrained.

Bons claims, “ETH cannot sustain high fee revenue since it lacks the capability. At the identical time, L2s are seeing record highs in usage & fees while they lobby to maintain ETH’s capability down!” He characterizes this dynamic as parasitic, where L2s profit at Ethereum’s expense, particularly post the EIP-4844 (Proto-Danksharding) implementation, which Bons claims has precipitated a collapse in fee revenue for Ethereum. His commentary suggests that the fee burning mechanism, meant to offset inflation by making Ethereum deflationary, can now not keep pace as a result of the fee diversion to L2s.

Is Ethereum Dying Because Of L2’s?

Bons argues that this scenario has created a “parasitic relationship” between Ethereum and its L2 counterparts. He believes that L2s, while designed to scale Ethereum’s capability by handling transactions off the principal chain, are actually operating almost independently, thereby fragmenting the ecosystem. This fragmentation, based on Bons, is breaking up liquidity and composability, crucial elements that facilitate seamless operations across the Ethereum network.

The shift towards L2 solutions, in Bons’ view, has led to an increase in centralized tendencies inside platforms that were originally promoted as decentralized. “This also pushes the users into centralized L2s. As each L2 in the highest 10 (stopped counting after 10) can now steal user funds & censor. That is ironic, considering that your entire ‘L2 scaling’ roadmap was justified within the name of decentralization… A bait & switch,” Bons elaborated.

The critique extends to the governance model of Ethereum, which Bons claims eschews on-chain governance resulting in what he perceives as centralized control over its development. “The whole rejection of on-chain governance by the ETH community could only have one end result: Capture, leading to what’s effectively centralized control over ETH development!” he asserted, suggesting that this governance model has enabled L2 entities to exert disproportionate influence over the network.

If Ethereum were to scale on the L1 level with recent technological breakthroughs, Bons speculates that it could “crash the token & equity price of all L2s overnight by making them obsolete & unnecessary,” illustrating a conflict of interest where L2 entities may prefer to suppress L1 advancements to keep up their market position.

Contributing to the talk, Pengu Aaron, lead of the ICP Hub Singapore, remarked, “IMO the L2s have to search out a method to contribute back to Eth or else we are going to see a possible collapse in value.” Bons’ response underscored a systemic issue: “L2s only should contribute back to ETH from ETH’s perspective. From the L2s perspective, it makes much more sense to maintain all of that value for themselves. That’s the problem as you’re establishing a system with opposing & perverse incentives. Making it entirely unfixable & broken.”

In a contrasting view, a user named @bowtied3hbt drew an analogy to the USA, where the federal system allows states considerable autonomy yet stays functional. Bons countered this comparison, highlighting historical conflicts that were vital to keep up the federation, comparable to the Civil War, thus illustrating the enforceability challenges in decentralized systems which lack overarching compulsion mechanisms.

“Multiple wars were fought to maintain the US federation together! From the Civil War to the Utah War, to call just a few. The difference is that in cryptocurrency, no person can force an L2 to remain on ETH if it goes against the L2s interests. That’s where your analogy totally falls apart!, Bons concluded.

At press time, ETH traded at $2,687.

Featured image created with DALL.E, chart from TradingView.com