Written by: Justin Bons, Founder of Cyber Capital
Compiled by: Luffy, Foresight News
Most L2s will always remain centralized because their incentives are problematic. Currently, the "solutions" to these problems are overly optimistic because L2s as for-profit companies will not give up their revenue. Ultimately, Ethereum strayed from its original purpose and gradually became a centralized service platform.
Competing L1 and L2 are eating away at Ethereum’s user base, while its leaders promote and celebrate Ethereum’s downfall. This state of affairs is tragic because it goes against the original purpose of Ethereum. They promote centralized solutions, where companies that are forced to comply with government censorship are given more power. This goes against the tradition of privacy that is the cypherpunk movement, and Ethereum is pushing most users to L2, which can monitor, freeze, steal, and censor user funds. Ethereum is on the same self-destructive path as Bitcoin, abandoning on-chain expansion in favor of L2. History is repeating itself.
L2 Centralization
The reality today is that all major L2s are centralized and can censor and steal user funds. Centralized collators can now also censor anything, as admin keys controlled via multisig can change contract rules (including theft).
However, what is more important is the potential path for change. This is the worst part, because all proposed solutions to L2 centralization are overly optimistic and require for-profit companies to give up a lot of current revenue... This completely ignores history and human nature.
Senior engineers and computer scientists often make this mistake, so blockchain researchers must be interdisciplinary, including in the humanities. As such, the criticism of solutions to the L2 centralization problem here is not technical, but rather points out the social coordination problems inherent in these proposed solutions.
Decentralization requires powerful central institutions to give up their power. Historically, this has rarely happened because it is against their interest. Sometimes, a few outstanding people do the right thing; but generally speaking, when looking at the majority group, we should always bet on incentives because this represents the masses. This is why I think most L2s will remain decentralized. Incentives will keep L2s centralized, and words like "trust me, brother" are pale in the face of interests.
Drake's rebuttal
Changing part of the system’s revenue stream is also not a suitable solution, and Justin Ðrake recently tried to put Base’s revenue in the execution layer instead of the sorter. For Base to be truly “decentralized”, all revenue must be sacrificed; keeping execution centralized is not a suitable solution at all, as Drake implies.
The harsh truth is that Coinbase may never be decentralized, and this is exactly what the “L2 scaling” roadmap is all about. Users capitulated to centralized solutions, crushing the original vision under the pressure of KYC, AML, and institutional-level scrutiny.
L2 Interoperability
L2 will always fight against universal interoperability protocols, trying to get everyone to adopt their own solutions, even if that hurts their long-term success. This is similar to the tragedy of the commons problem in political science. Twenty or so protocols trying to unify interoperability is equivalent to no unified interoperability protocol at all.
L2s competing with each other and with L1s, creating competing ecosystems instead of a single ecosystem, is not scaling L1s. The free market will continue to create competing L2s with various power groups with intertwined interests behind them. This state of affairs is good in most cases, but for blockchain scaling, it can only lead to massive fragmentation that destroys the user experience. The idea that everyone will use the same interoperability protocols; and that custodians will pack up and move on to more advanced technologies... is a fantasy that does not represent how the free market actually works, as there will always be custodians and centralized L2s.
Ironically, while Ethereum core developers are pushing for an L1-based sequencer, L2s are also pushing their own "shared sequencers", such as Arbitrum's Superchain, Polygon's Agglayer, etc. It is unrealistic to expect these major L2s to abandon their efforts for "interoperability". The same is true for Eigenlayer and other re-staking platforms, as they also implement sequencer-like functions. All of this makes true shared sequencers completely unattainable and mostly greedy fantasies. People think that if everyone uses the same L2 (their L2), user experience will no longer be an issue. This idea is technically correct in theory, but wrong in practice. It is not much different from Bitcoin maximalism.
So, fragmentation between L2s may never be resolved. Interoperability between L1s has not been resolved to this day for the same reason. However, at least L1s will not be artificially limited by this toxic L2 narrative. My problem is not with L2 itself, but with the lack of scalability of L1s.
Economic security
Leaving Ethereum behind actual usage means the decline and death of Ethereum, because cryptocurrencies rely on economic security. The bottom line of economic security is always revenue, and it is obvious that outsourcing functionality will reduce the revenue of the blockchain, which is what Ethereum is doing now, how crazy and stupid.
Misincentives
Now let’s talk about the elephant in the room: L2 tokens scale orders of magnitude more than L1 tokens in Ethereum and Bitcoin. L2 tokens are worth billions of dollars, while L1 development only requires millions of dollars. This creates a clear conflict of interest and can even be outright corruption. Due to misaligned incentives, it can cause developers to abandon L1 scaling in favor of L2.
This is how L2 has become the biggest corrupting force in the industry, because they benefit from forgoing L1 scaling, and L2 tokens and equity turn developers into multi-millionaires. Of course, this brings a strong bias towards L1 vs. L2 scaling. Because L2 makes more money by supporting limiting L1 capacity and only scaling through L2. This creates a clear conflict of interest between the long-term success of L1 and the short-term profits of L2 companies.
Another reason is that VCs can rent-seek through "L2 expansion" because L2 is a for-profit enterprise, while L1 expansion is a public interest product. It is impossible for VCs to profit from a carefully designed L1. However, this is the current norm in the L2 world. Expanding L1 will not benefit these VCs in the short term, while the "L2 expansion" roadmap will, which sows the seeds for Ethereum's future self-destruction.
L1 Scalability
So the core assumption of everything is L1 scalability. Ethereum's position depends on whether the L1 scalability tradeoff is tenable. Therefore, it is this technical limitation that justifies the "L2 scaling" roadmap in their minds. The L1 scaling paradigm is much more optimistic because it recognizes that L1 can now scale to meet demand without sacrificing decentralization. Whether it is through pure parallelization, DAG or sharding technology, all roads lead to Rome. The Ethereum community is ideologically attached to an outdated technical paradigm, much like the Bitcoin community.
Ethereum Maximalism
It is no coincidence that Ethereum supporters have gradually become the same as Bitcoin maximalists, as they have adopted the same philosophy and narrative as their coping mechanism/belief system. This is all a result of the same systemic flaws in the governance structure that led to both Bitcoin and Ethereum in the first place. Thus, environmental pressures create a particular belief system, just like convergent evolution in the biological sense. I believe that if formal on-chain governance had been implemented, abandoning L1 scaling would never have become a reality.
Governance
Ultimately, the question comes down to “who decides”. The ugly reality is that a small group of people can decide the future of Bitcoin and Ethereum. This is the essence of “off-chain governance”, a highly centralized decision-making process. Small groups with perverse incentives (such as for-profit L2) can use off-chain governance to safeguard their own interests, and these groups directly benefit from not expanding L1 in the short and medium term.
On-chain governance allows all stakeholders to vote on proposals in a completely transparent manner, which can lead to wildly different outcomes. Most importantly, this benefits L1 rather than any group that controls the centralized governance process.
From a political and philosophical perspective, these off-chain governance processes are often easily manipulated and distorted. On the other hand, an on-chain governance process with a large number of stakeholders, coupled with more complex checks and balances and division of power, is indeed more likely to stand the test of time and popularity. Therefore, on-chain governance must be seen as a mechanism to protect decentralization. Off-chain governance replicates the governance systems that predate blockchains, and in most cases, it performs very poorly. On-chain governance is something completely new that leverages the inherent advantages of blockchain technology and is aligned with L1 and collective decision-making. Therefore, it is not surprising that the idea was completely rejected by the leadership of Bitcoin and Ethereum. If on-chain governance is implemented, whoever has the most influence will lose the most.
Real Solutions
The solution lies in abandoning Ethereum, voting with our feet and supporting its scalable competitors. As stakeholders, we have no real say in Ethereum’s governance process. But we can participate in a movement against the status quo, similar to the block size debate in Bitcoin. At the time, the majority of businesses, miners, stakeholders, and users supported larger blocks. However, the core end result was that the developers won, and 8 years later Bitcoin’s block size limit is still 1MB.
The Ethereum community is nowhere near as supportive of change as Bitcoin, so I don’t see a hope for it to succeed, especially without formal on-chain governance. In the free market of cryptocurrencies, we have to take into account another demographic effect: people who support L1 scaling leave Ethereum, and those who don’t eventually join it. Who is left to fight for L1 scaling now? The same thing happened to Bitcoin, turning it into a monoculture with no real potential for change. All of these shifts start at the top of the leadership structure and gradually move the entire ecosystem away from its original goals. We used to believe in “fork governance”, but this was wrong for two reasons: 1. The threshold for “agree or fork” was too high, so it evolved into an effective tyranny. 2. The market did not actually bypass the problematic chain through forks, but chose the next generation chain.
History repeats itself
I went from being a Bitcoin die-hard supporter in 2013 to a Bitcoin supporter who sounded the alarm in 2015, but became a critic in 2017. I abandoned Bitcoin, believed in Ethereum's promise of on-chain scaling through sharding, and became a die-hard Ethereum supporter in 2015. In 2022, I sounded the alarm for Ethereum again, but by 2024, I had become a complete critic.
You can comment on my stance all you want, but one thing is clear: Bitcoin and Ethereum changed under my watch despite our protests, and I remained steadfast (and I personally remained steadfast in my stance). Radically changing the economics and purpose of blockchains by arbitrarily limiting their capacity is a radical approach that runs counter to the conservative approach; we should not allow them to use the excuse of "conservatism" or "social contract" because these principles have been completely violated. The real tragedy is that we have missed the opportunity for global adoption twice, which may well set crypto back decades. The silver lining is that we can clearly recognize the problem and implement the solution in the latest generation of blockchains, finally breaking this terrible and painful cycle.
