Evaluating Risk and Resilience in Ethereum Layer 2 Projects: Why Security and Sustainable Funding Models Are Critical for Long-Term Viability

Ethereum’s Layer 2 (L2) ecosystem has emerged as a cornerstone of blockchain scalability, enabling high throughput and low-cost transactions. However, as these projects mature, two critical challenges—security vulnerabilities and sustainable funding models—threaten their long-term viability. Investors must evaluate these risks through a dual lens: technical robustness and financial sustainability.

The Security Landscape: Beyond Code, Into Systems

Ethereum L2 projects are not immune to systemic risks. Between 2023 and 2025, over $2.2 billion was lost to smart contract exploits, with Euler Finance and the Nomad bridge suffering losses of $197 million and $190 million, respectively, due to implementation flaws and operational missteps [2]. These incidents highlight the dangers of “exploit chains”—complex combinations of human, operational, and economic design flaws that attackers exploit [2].

Arbitrum, a leading L2 solution, faced a 78-minute network outage in December 2023 when its centralized sequencer stalled during a traffic surge [3]. While the project has made strides toward decentralization, its early reliance on a centralized sequencer operated by the Arbitrum Foundation introduces centralization risks [4]. Similarly, a critical bridge vulnerability in 2022—a potential $250 million exploit—was responsibly disclosed and patched, underscoring the importance of proactive security audits [3].

The broader Ethereum ecosystem is not without progress. Zero-knowledge rollups like zkSync and StarkNet have prioritized instant finality and cryptographic proofs, reducing attack surfaces. However, as of 2025, no major breaches have been reported in projects beyond Arbitrum, suggesting that while security is improving, vigilance remains essential [1].

Funding Models: Balancing Decentralization and Operational Efficiency

Sustainable funding is equally vital. Arbitrum’s revenue model, for instance, generates $21.6 million in net profit annually from transaction fees, but the Arbitrum Foundation retains control over these funds, creating a tension between decentralization and operational agility [3]. The DAO’s ability to direct revenue toward ecosystem development or buybacks offers a self-sustaining path, yet governance delays could hinder responsiveness [4].

Other L2s are experimenting with diverse strategies. Optimism’s grant programs have distributed $200 million to public goods and open-source projects, fostering a decentralized ecosystem [2]. Base, backed by Coinbase, leverages its retail user base to drive liquidity, with $4 billion in TVL as of 2025 [1]. Meanwhile, zkSync’s focus on innovation has attracted 200+ projects with $1.8 billion in TVL, demonstrating the value of technical differentiation [3].

A proposed Ethereum Foundation roadmap aims to standardize funding through a three-phase strategy: a “Broad Listening” phase to identify ecosystem needs, a transparent dashboard to visualize contributions, and pre-commitment mechanisms for L2s and dApps to allocate revenue to dependencies [1]. This structured approach could mitigate fragmentation and ensure long-term infrastructure support.

The Interplay of Risk and Resilience

The interplay between security and funding is evident in Ethereum’s modular scaling strategy. Rollups now support multiple data availability (DA) layers—Ethereum L1 for security, Celestia for cost efficiency, or EigenDA for Ethereum alignment [1]. This modularity allows projects to optimize for specific needs but introduces complexity in governance and risk management.

For example, a DeFi protocol prioritizing Ethereum’s security may pay higher fees, while a gaming application might opt for Celestia’s lower costs. However, reliance on external bridges or native issuance models can expose projects to vulnerabilities [2]. Investors must assess whether a project’s funding model aligns with its security priorities and whether governance structures can adapt to evolving threats.

Conclusion: A Call for Holistic Evaluation

Ethereum L2 projects are at a crossroads. While technical advancements like EIP-4844 have reduced transaction fees by over 90%, the ecosystem must address systemic risks. Security breaches and funding centralization can erode trust and liquidity, undermining long-term viability.

Investors should prioritize projects with:
1. Proactive Security Audits: Regular third-party audits and bug bounty programs.
2. Decentralized Funding Mechanisms: DAO-driven revenue allocation and transparent grant programs.
3. Modular Flexibility: Support for multiple DA layers to balance security and cost.

As the Ethereum ecosystem evolves, the resilience of L2 projects will depend on their ability to harmonize technical innovation with sustainable governance. Those that succeed will not only scale Ethereum but also redefine the future of decentralized infrastructure.

Source:
[1] A Roadmap for Funding Ethereum's Open Source Infrastructure [https://ethresear.ch/t/a-roadmap-for-funding-ethereum-s-open-source-infrastructure/22278]
[2] SoK: Root Causes of $1 Billion Loss in Smart Contract [https://arxiv.org/html/2507.20175v2]
[3] Arbitrum (ARB) Deep Due Diligence Investment Report 2025 [https://www.thestandard.io/blog/arbitrum-arb-deep-due-diligence-investment-report-2025?utm_source=chatgpt.com]
[4] Scaling Ethereum L1 and L2s in 2025 and beyond [https://vitalik.eth.limo/general/2025/01/23/l1l2future.html]