"Ethereum's Layer 2 Shift: Sacrificing Revenue for Enhanced Security and Connectivity"

Ethereum's Layer 2 Networks Consider Based Rollups to Enhance Security and Connectivity at Potential Revenue Cost

Ethereum's layer 2 landscape is undergoing significant change, with leading networks willing to sacrifice substantial revenue to enhance base layer connectivity. This decision reflects a broader commitment to decentralization, aiming to improve security and reduce fragmentation in Ethereum's ecosystem.

Jesse Pollak, head of Ethereum layer 2 Base, emphasized that based rollups could be a "flexible and powerful tool" for improving the network's security and integration. Optimism Foundation Director Ben Jones added that base rollups would improve collaboration between Ethereum's base layer and layer 2s.

Ethereum layer 2 networks like Arbitrum, Optimism, and Base have racked up massive fees from implementing high-speed, centralized sequencers, which has come at the cost of unification. Based rollups, proposed by Ethereum core developer Justin Drake in March 2023, return this process to the base layer and thus improve the network's decentralization because the block-building process would be carried out by all Ethereum validators as opposed to a single, centralized sequencer.

Meanwhile, native rollups would improve how transactions are executed on the base layer, making the network more composable. These layer 2s would, however, be forgoing a significant portion of revenue obtained through Maximum Extractable Value (MEV)—the additional profit block producers earn by rearranging, including or excluding transactions.

Arbitrum, which is in favor of transitioning to based rollups, has made $210 million in revenue from its centralized sequencer, while Base has earned $96.2 million. However, based or native rollups could bring more revenue back to Ethereum's base layer and possibly have a positive impact on Ether's (ETH) price.

Decentralized sequencing on Ethereum's base layer would, however, mean that transactions are confirmed in 12 seconds instead of around 1 second on many Ethereum layer 2s. Several Ethereum layer 2 executives are also in favor of implementing "FABRIC"—an infrastructure that would support based rollups. Ethereum layer 2 Taiko's CEO Daniel Wang said his firm is willing to adopt the FABRIC standard to "conquer" Ethereum's interoperability problems.

Ethereum