Base, the largest L2 on Ethereum, is now subsidizing gas costs for users who pay in USDC. This is the L2 with the highest amount of economic activity and the largest market share that is now pushing USDC to its users. If the thesis was, “we give up execution but we export ETH the money to L2s” is this encouraging?
The entire framing of “L2s are parasitic” is fundamentally misunderstood. If you are trying to capture value from fees / MEV, then certainly L2s are parasitic because now L2s capture that value, this is not a very difficult concept. But that’s not really what Ethereum was trying to do. They were trying to export *ETH the money* to these L2s.
There is one thing that matters when it comes to ascribing long term value to these “monetary” assets: do people view something as a store of value. Thats all, that is all that matters. Consider this: the US dollar is used as a medium of exchange for trillions of dollars of transactions annually but, given the choice, very few people treat dollars as a SoV (outside of countries that have currencies inflating at higher rate). A medium of exchange is not at all necessarily a good store of value. In fact, and somewhat counterintuitively, a currency can have a stable supply and still experience hyperinflation, if no one has confidence in that currency and no one wants to store their wealth in that currency. So thinking that if something is very useful as a medium of exchange it means it’s a good store of value is not true, you *must* use Nigerian Nairas in Nigeria but I would not choose to store my wealth in the Naira.
My point with all of this is to say that there is a (possible) future where Ethereum has 1000s of L2s, is settling trillions of dollars of transactions, and is used as *the* primary medium of exchange and it still is not seen as a long term store of value. The US dollar has incredible utility value but continues to inflate away. Gold conversely, is much more scarce and held to preserve wealth.
Foregoing some L1 execution / MEV was a sensible idea *IF* (and only if) Ethereum felt that the social consensus around ETH was strong enough to incentivize people to hold it as a SoV. This is also why the entire “deflationary money” concept seems very misunderstood. The issuance / burn mechanism is literally designed to create an equilibrium where there is effectively ~0 net issuance. In other words, there’s no long term equilibrium where ETH is very deflationary and ideally not very inflationary either. The “yield” again this is how the mechanism works, should always converge on the cost of capital, there’s no future where this is not the case, if “outsized yield” (economic rent seeking beyond the cost of capital) is being extracted, the system self-adjusts, it gets arbed back to a ~risk free rate~ by adding more validators or whatever. Furthermore, this implies MEV + priority fees likely trends to 0 (because execution and ordering has gone elsewhere) on the L1: it’s not a “cash flowing asset” in that sense.
So what does this leave you with? Again, just the store of value narrative. Now my original point is that Base is pushing USDC, not ETH. Everything you think about “well gas fees have to be paid in ETH” none of that matters. Those fees are paltry, Base pays Ethereum a negligible amount to settle. So when we have this circular discussion about whether L2s are parasitic, disregard the value capture from fees and MEV, that is always going to zero. Maybe Solana accrues value as a function of MEV + fees (I’m skeptical, but it probably has a better shot on one big layer). But the parasitism is in abstracting away the asset’s primary value proposition, the SoV. It’s an uphill battle but continuing to push social consensus around ETH as a store of value, if you want it to compete with BTC, is all that matters. You literally just want people to hold something forever.
The entire framing of “L2s are parasitic” is fundamentally misunderstood. If you are trying to capture value from fees / MEV, then certainly L2s are parasitic because now L2s capture that value, this is not a very difficult concept. But that’s not really what Ethereum was trying to do. They were trying to export *ETH the money* to these L2s.
There is one thing that matters when it comes to ascribing long term value to these “monetary” assets: do people view something as a store of value. Thats all, that is all that matters. Consider this: the US dollar is used as a medium of exchange for trillions of dollars of transactions annually but, given the choice, very few people treat dollars as a SoV (outside of countries that have currencies inflating at higher rate). A medium of exchange is not at all necessarily a good store of value. In fact, and somewhat counterintuitively, a currency can have a stable supply and still experience hyperinflation, if no one has confidence in that currency and no one wants to store their wealth in that currency. So thinking that if something is very useful as a medium of exchange it means it’s a good store of value is not true, you *must* use Nigerian Nairas in Nigeria but I would not choose to store my wealth in the Naira.
My point with all of this is to say that there is a (possible) future where Ethereum has 1000s of L2s, is settling trillions of dollars of transactions, and is used as *the* primary medium of exchange and it still is not seen as a long term store of value. The US dollar has incredible utility value but continues to inflate away. Gold conversely, is much more scarce and held to preserve wealth.
Foregoing some L1 execution / MEV was a sensible idea *IF* (and only if) Ethereum felt that the social consensus around ETH was strong enough to incentivize people to hold it as a SoV. This is also why the entire “deflationary money” concept seems very misunderstood. The issuance / burn mechanism is literally designed to create an equilibrium where there is effectively ~0 net issuance. In other words, there’s no long term equilibrium where ETH is very deflationary and ideally not very inflationary either. The “yield” again this is how the mechanism works, should always converge on the cost of capital, there’s no future where this is not the case, if “outsized yield” (economic rent seeking beyond the cost of capital) is being extracted, the system self-adjusts, it gets arbed back to a ~risk free rate~ by adding more validators or whatever. Furthermore, this implies MEV + priority fees likely trends to 0 (because execution and ordering has gone elsewhere) on the L1: it’s not a “cash flowing asset” in that sense.
So what does this leave you with? Again, just the store of value narrative. Now my original point is that Base is pushing USDC, not ETH. Everything you think about “well gas fees have to be paid in ETH” none of that matters. Those fees are paltry, Base pays Ethereum a negligible amount to settle. So when we have this circular discussion about whether L2s are parasitic, disregard the value capture from fees and MEV, that is always going to zero. Maybe Solana accrues value as a function of MEV + fees (I’m skeptical, but it probably has a better shot on one big layer). But the parasitism is in abstracting away the asset’s primary value proposition, the SoV. It’s an uphill battle but continuing to push social consensus around ETH as a store of value, if you want it to compete with BTC, is all that matters. You literally just want people to hold something forever.
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