How This Time is Different for Ethereum
This is the point in the crypto market cycle where surging demand for on-chain activity leads to fee spikes. For users on Ethereum, it’s also the point when small-value users get priced out and defect to other chains. Even simple ETH transfers could cost over $20 at current levels of activity.
But this cycle is different because those users can simply move to a rollup. They are staying within the broader Ethereum ecosystem and their activity still accrues value back to ETH.
Most rollups charge gas fees in ETH and — at a minimum — write proofs to mainnet. Many prominently feature ETH as a collateral asset in their DeFi ecosystem, perhaps because a native asset bridged to an L2 is safer than when it’s wrapped an independent L1.
A popular critique of the modular approach to scaling — where lower value transactions are moved to secondary layers — is that it cannibalizes the base chain, hurting the value of the native asset. I’ve never agreed with this thesis for several reasons:
- Rollups often use ETH as their gas token
- Rollup sequencers still have to pay in ETH to write proofs and/or data to the base chain
- By charging significantly lower fees, rollups induce new demand that couldn’t exist on Ethereum itself
- People who can’t afford Ethereum gas fees will leave anyway
Modular scaling is a nod to the notion that blockspace is an asset, but like any other asset, has different utility for different users. People doing million dollar transactions don’t mind paying a $20 gas fee on the base chain, but someone buying coffee simply can’t.
But does a payment for coffee need the full set of assurances provided by Ethereum? Likely not.
Modularity is the most efficient way to allocate scarce resources. That’s why the traditional system is built with many layers. Banks doing billion-dollar payments use FedWire, but consumers use Venmo. FedWire is the base layer of the TradFi system, and like Ethereum, provides the greatest settlement assurances. But those assurances are overkill for friends settling a lunch bill. Consumers doing more important payments, like to buy a house, can “move down the stack” and send a wire.
Ethereum now resembles a similar stack. Users self-select which layer they use based on utility and can move up and down as needed. The design seems to be working and popular rollups like Arbitrum and Optimism are approaching previously-beloved cheap L1s like BNB Smart Chain in terms of activity. They are attracting the users Ethereum would have lost.
This change is a big deal for Ethereum and the moneyness properties of ETH. It will accelerate the inevitable march to oblivion of most other smart contract platforms, particularly the ones who sold out to EVM compatibility. They made many compromises to be “cheaper Ethereum,” but now there’s a rollup for that.
