Ethereum News Today: Regulators Turn Spotlight on L2 Instability: Can Stability Keep Up With Scale?

SEC Commissioner Hester Peirce has issued a cautionary warning that a new regulatory framework targeting centralized protocols within Ethereum’s Layer 2 (L2) ecosystem may be on the horizon. The potential development, described as a “Layer 2 regulation,” signals a broader regulatory shift aimed at addressing operational vulnerabilities and centralization risks that have recently surfaced across key L2 networks.

The warnings from Peirce come amid a string of outages and security lapses that have drawn industry attention. Starknet, for example, experienced a three-hour network freeze in September 2025 following a failed upgrade to its Grinta protocol. The outage stemmed from a sequencer incompatibility with Cairo0 code, a core execution component. Despite maintaining an impressive 99.72% uptime over 90 days, the incident exposed the fragility of deploying major upgrades without rigorous stress testing [1]. The disruption also led to a 3-5% decline in STRK’s price, underscoring investor sensitivity to operational instability [2].

Arbitrum and Base, two other major L2s, have faced similar setbacks. Arbitrum’s outage in 2025 was caused by an overwhelming surge in Bitcoin Ordinals-inspired inscriptions, which disrupted its sequencer and halted transaction processing for 1.5 hours [3]. Base’s August 2025 incident, attributed to an “unsafe head delay,” highlighted the dangers of relying on a single sequencer operator—a flaw that had previously recurred in 2023 [4]. These events reinforce concerns about centralization within L2 infrastructures, which contradicts the decentralization ethos central to Ethereum’s broader network.

In a separate yet related issue, ZKsync faced a significant security breach in April 2025 when attackers exploited leaked admin keys to mint 111 million tokens during an airdrop. Although the protocol itself remained intact, the breach led to a 20% price drop and temporary exchange suspensions [5]. The incident emphasized the urgent need for multi-signature governance and third-party audits to safeguard smart contract integrity.

Peirce’s warning raises questions about whether current L2 solutions can scale without compromising reliability or governance. While Starknet and Arbitrum have demonstrated notable progress—such as Starknet’s 99.72% uptime and Arbitrum’s 90% transaction resilience—recurrent outages indicate unresolved challenges. Regulatory scrutiny is likely to intensify as more incidents come to light, particularly as centralization risks and smart contract vulnerabilities remain prominent.

The potential Layer 2 regulation could introduce new compliance obligations for protocol operators, particularly those managing centralized sequencer infrastructure. This could shift the development focus toward decentralization and risk management, with regulatory bodies emphasizing the need for transparent governance and decentralized architectures. The implications for investors will depend largely on how effectively these protocols can balance innovation with operational stability.

Source:

[1] Ethereum News Today: Starknet's Grinta Upgrade Triggers 3-Hour Freeze Exposing Scaling Risks

[2] Starknet Is Back Online After Outage: What Happened?

[3] Arbitrum Operations “Back to Normal” After Inscriptions Surge Caused Outage

[4] Base Network Outage Raises Red Flags Over Centralized Sequencer Design

[5] ZK Collapsed: How Are the Four Kings of Layer 2 Holding Up Now?