Ethereum Layer 2: A Forensic Analysis of Growth, Challenges, and Economic Impact

Ethereum Layer 2: A Forensic Analysis of Growth, Challenges, and Economic Impact

Key Points:

– Ethereum Spot ETF Performance: Ethereum spot ETFs saw significant inflows last week, with BlackRock’s ETHA and Fidelity’s FETH leading with $287 million and $97.28 million respectively, boosting their total assets to $4.4 billion and $1.51 billion.
– Layer 2 Controversy: The surge in ETF inflows hasn’t directly boosted Ethereum’s market performance. The Ethereum community criticizes Layer 2 networks for being “parasitic”, causing inflation by profiting from transaction fees while relying on Ethereum’s security.
– Layer 2 Sequencer Profits: Layer 2 networks like Arbitrum earn substantial profits from sequencer operations, highlighted by a $1.04 million daily revenue on February 4, with minimal cost to Ethereum, sparking debates over centralization and profit motives.
– Decentralization Challenges: Layer 2’s struggle with decentralizing sequencers is noted, with most still controlled by development teams. This central control is a significant point of contention, as sequencers are lucrative due to transaction fees, MEV, and interest.
– Base’s Sequencer Revenue: Base, part of the Ethereum network, has been accused of transferring all sequencer gains to Coinbase, with little transparency on how these profits are handled, leading to community suspicion about ETH sales.
– Vitalik’s Response: Vitalik Buterin has acknowledged the issues surrounding Layer 2’s economic models, calling for these networks to contribute back to Ethereum to ensure ETH’s value doesn’t diminish in a Layer 2-dominated ecosystem.

Ethereum Spot ETFs Surge, But Layer 2 Controversy Clouds Market Optimism
Ethereum spot ETFs saw a net inflow of $420 million last week, and all nine ETFs had no net outflow. Among them, the net inflow of BlackRock’s ETHA reached 287 million U.S. dollars, allowing ETHA to exceed 4.4 billion U.S. dollars. Fidelity’s FETH also received a net inflow of 97.28 million U.S. dollars, reaching 1.51 billion U.S. dollars thus far. However, despite the strong growth in capital inflows from Ethereum Spot ETFs, they have not significantly contributed to Ethereum’s market performance or quelled many controversies in the Ethereum ecosystem, especially regarding the Layer 2 operating model.
Recently, many netizens have criticised on “X” that Layer 2 network is actually “parasitic” on Ethereum, becoming the main source of its inflation. While Layer 2 brings scalability and efficiency to Ethereum, the economic model and operational mechanisms behind it are increasingly being questioned. This analysis combines current market data with community voices to take a look at the current Layer 2 controversy within the Ethereum ecosystem. Or is it actually Ethereum layer 2 or bad actors?
In the current cycle, the performance of ETH has lagged significantly behind the market as a whole, and some people attribute it to the heavy load of layer 2’s and some blame the Ethereum Foundation (EF)! This weekend, Layer 2’s became the object of community criticism. On February 9, Andre Cronje, co-founder of Sonic, posted on X, expressed significant public protest that Layer 2’s made a lot of money by continuing to sell sequencer earnings and had become a parasite on Ethereum. “Becoming Layer 2 – running a centralised sorting machine – charging a fee of $120 million – paying Ethereum another $10 million for DA and security – then selling $110 million for a profit – then claiming to be the “Ethereum Alliance.” I don’t understand how the Ethereum community convinced itself to accept this logic.Layer2 has become the main cause of Ethereum inflation again.”
Explaining Sorters & Collators Layer 2 – Layer 2’s Sorter Gains
Layer 2’s sequencer revenue controversy has become a commonplace topic. The collator has an indispensable role within Layer 2 architecture, and its main utility is as follows:
  1. Collect user transactions and package them into batches in a specific order.
  2. Provide users with instant transaction confirmation before the transaction is finally on the chain.
  3. Submission of transaction data compression to Layer 1 to reduce gas costs.
In Layer2’s decentralised vision, the decentralisation of the sorter operation is an essential step. However, the reality is that almost all of Layer2’s collators are run by the development team, which is one of the biggest criticisms about Layer 2’s.
Why are Layer 2’s unable to complete the decentralisation of the sorter?
There are certain technical and operational reasons for this, but another big reason that cannot be ignored is that in the real world, sorting machines are a very profitable business. The primary sources of direct revenue from the operation of the sorting machine include: 1) transaction fee differences; 2) MEV capture; 3) Funds deposit interest.
DeepSeek provides Oracle on the other actors to blame and the following: How profitable is business?
We can take a cursory look through data from a single day on February 4 (Arbitrum) On February 4, because of the collective volatility of the market, Arbitrum charged $1.04 million at the Layer 2 level in a single day, while paying Layer 1 a final settlement cost of less than $20,000 – meaning that in just one day, the chain made millions of dollars in gains from trading fee spreads. (DeepSeek, 2025)
A look at Base again!
First with Winter Mute now on Layer 2. As the most active Layer 2 network on the Ethereum mainnet ecosystem, Base has long been at the centre of relevant public opinion. As the debate about the benefits of Layer 2 sorters intensified, the community began to take aim at Base. Lucidity CIO ,Mr. Santisa took the lead on X, accusing Base of transferring all the sequencer gains to Coinbase since the launch of its own network, and there is reason to suspect that this ETH has definitely been sold off. “Since its launch, BASE has been transferring sorter fees to Coinbase. We don’t know if they sold it, but we do know that they didn’t deploy the funds on Base or keep them on-chain. In the absence of further transparency, we can reasonably assume that they have sold off. They don’t agree with Ethereum’s stance.” (Santisa, 2025)
The figure shows the Base sorter income address
(0xEc8103eb573150cB92f8AF612e0072843db2295F) Close analysis, combined with Coinbase’s earnings data was used to analyse whether Base had sold the ETH in question. Thorough post mortem analysis and on-chain data showed that Base had earned significant income through sorters within the past 12 months. Over $100 million in revenue, with a profit margin of over 90%, all of these fees have been transferred to the exchange via the Base-Ethereum-Coinbase network path. According to Coinbase’s public earnings data, as of June 30, 2023 Coinbase held about $230 million in ETH on its balance sheet, when the price of ETH was $1,934, which means Coinbase held 118,924 ETH; As of September 30, 2024, Coinbase held 119696 ETH on its balance sheet. Suspicious indeed.
Suspiciously since the launch of Base, Coinbase only added 772 ETH to its balance sheet, so where did the hundreds of millions of dollars of Base sequencer revenue go? There seems to be only one answer! One might question that Base’s revenue, as a (notionally) independent network, and should not be counted on Coinbase’s balance sheet, this is unreasonable, as Coinbase has highlighted Base’s increased revenue in multiple financial statements. “The Ethereum community is proud of their Layer 2, but what Layer 2 does every day is transfer fee revenue from Layer 2 to Layer 1 and then to Coinbase to sell. This is the frontrunner of the Ethereum ecosystem. The Ethereum community wake up.” Base (Coinbase) on SOL with wintermute and now with Ethereum Layer 2.
Vitalik is Overwhelmed!
As of the posting, Vitalik has not responded to the accusations made by netizens other Ethereum community members, but in his January 24 self-written article, under the pressure of public opinion, Vitalik sends out a message calling out L2 proprietors: “Back for ETH,” a permutation of Vitalik’s frustration with the current state of Layer2’s operations is visible.
Vitalik said in the article that it is necessary to clarify the economic model of ETH to ensure that ETH continues to accumulate value in a Layer2-intensive world.
On an executive level, Vitalik encourages Layer 2 to support ETH by contributing a percentage of its fees, providing a permanent support mortgage and donating the proceeds to Ethereum mainnet.

By @LarryMetaTrust CSO, HashAi and @anndylian, Blockchain Expert & Author / Graphics by @Crypt0JayBear

See also  Put ChatGPT, Bing Chat, and Bard to the Test: A Comparative Analysis

Source: https://x.com/OfficialHashAI/status/1889758949681090841

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.