Analyzing the Value of Ethereum and L2 Through a Crypto Business Model Lens

This article analyzes the value of Ethereum and L2, focusing in particular on the criticisms surrounding value accrual for both. Before diving into the details, we need to understand the business models that currently exist in the crypto space.

1. Business Models in Crypto:

1.1 The "Enterprise" Type:

• Core: Control + Monopoly (Permissioned), Profit through price discrimination
• Model: Focused on hitting revenue targets by maintaining tight control over services and protocols. Similar to managing a traditional company, decentralization isn't strictly necessary — it just needs to be acceptable to users. As a profit-oriented company, operational efficiency is paramount and ceding control is not on the table.
• Competition: Competition plays out at the business model level — price discrimination capability, speed of meeting user needs, and user acquisition. Tokens primarily serve as user acquisition tools and vehicles for financialization.
• Example: The Solana Foundation. Tight control over the ecosystem, including the ability to shut down the network. Solana, billed as the "Global Nasdaq on-chain," leans heavily into its fundamentals — particularly its business model and profitability — as the core narrative. Solana's revenue comes primarily from MEV (maximal extractable value) captured through block space monopolization and price discrimination. The SOL asset itself is a highly concentrated financialization instrument.

1.2 The "Protocol" Type:

• Core: Permissionless participation (asset issuance, business operations), open and relatively fixed fee standards
• Model: Emphasis on creating open, nearly immutable protocol standards. Although governed by DAOs and foundations, their involvement is minimal, allowing the protocol to operate autonomously. Protocol usage is permissionless, with an open and inflexible profit model that anyone can use to build markets and assets for their own business or profit. "Protocol" typically comes with an assessment of autonomy level, which can range from the team retaining upgrade rights subject to market oversight all the way to fully relinquishing upgrade rights and letting the market govern the product. There are many gradations of hard and soft decentralized governance between these two extremes. Tokens here primarily serve as dividend instruments and governance tools.
• Competition: Success depends on the sustainability of product operations, continued demand for the product, and network effects driven by time-of-entry. Early users who find product-market fit typically hold a significant competitive advantage.

1.3 The "Asset" Type:

• Core: Focused on the intrinsic value of the asset itself
• Model: Includes BTC, memecoins, decentralized algorithmic stablecoins, etc. The asset itself achieves consensus based on its specific characteristics, which continuously drives its permissioning power. The asset itself possesses three core attributes:
  • Early Adoption: Refers to the consensus and network effects that arise from being the first adopter of a specific asset — such as BTC as a store of value, USDT as a payment medium, and ETH for asset issuance.
  • Asset Mechanism Properties: Includes characteristics such as scarcity, deflationary mechanisms, and price pegging.
  • Symbolic Significance: Refers to the widespread acceptance and propagation of an asset due to its intrinsic meaning — such as BTC as "digital gold," ETH as "programmable money," and the cultural impact of memecoins.
• Competition: Success depends on the strength of consensus and the asset's ability to achieve and sustain adoption.

In the crypto world, many projects and assets map onto one of these business models or some combination of them. We can also apply this lens to assess the current state of Ethereum and L2.

2. What Business Model Do L2s Represent?

2.1 The Current Position of L2:

• The original goal of L2 was to scale Ethereum, enabling it to handle larger transaction volumes. That goal has been achieved to a meaningful degree. From the perspective of redirecting Ethereum transactions and driving growth, it has been quite successful. Today, L2 has become an essential part of the Ethereum ecosystem, accounting for 85% of transactions and 31% of transaction volume, making it a critical component of Ethereum's fundamentals.

[Image: Dune Analytics Data — L2 Transactions and Transaction Volume]

• The number of active addresses on L2 is 3–4x that of Ethereum.

[Image: Dune Analytics Data — Active Addresses on L2 vs. Ethereum]

• Because transaction costs are cheaper on L2, the actual increase in Ethereum's overall transaction data may be somewhat inflated. Nevertheless, it's clear that L2 adoption has had a significant impact.
• However, despite this surge in transactions, L2 has not translated into a corresponding increase in revenue for Ethereum. Revenue generated by L2 primarily comes from two sources:
  • DA Fees: Prior to EIP-4844, this referred to transaction data fees. After EIP-4844, it is now tied to Blob fees.
  • MEV: Except for Based Rollups, L2s have fully absorbed this revenue stream, with little expectation that it will be returned to Ethereum in the near term. This has effectively resulted in inflation for Ethereum, gradually eroding the "ultrasound money" narrative.

[Explanation of why DA fees cannot contribute revenue from L2 to L1]

 * **DA only generates priority fees when saturated. This implies monopolistic pricing power.**
* **DA is a commodity in an unsaturated state. Users can hedge or seek alternatives over the long term.**
* **DA demand growth does not scale proportionally with supply growth. L2s carry a significant share of bot transactions, which don't have the same demand characteristics as real user transactions. If DA fees impose too high a cost on users, these transactions will naturally slow down. Therefore, it's not a valid argument that transaction volume can multiply enough to saturate Blobs.**
* **Fundamentally, scaling itself is in tension with DA fees. In the pursuit of continuous scaling, monetization should not be designed around transaction congestion. This is inherently reflected in Ethereum's L2 architecture.**

• Although previously seen as a beta asset to ETH, the narrative remains intact — L2s still call themselves "Ethereum L2s." However, fundamentally, they are increasingly diverging. Going forward, L2 revenue will not necessarily equal Ethereum revenue. They should have their own separate pricing systems.

2.2 Different L2 Business Models:

2.2.1 General L2:

• General L2 refers to general-purpose L2s that aspire to become full-fledged application ecosystems in their own right. Early popular rollups typically evolved toward a federation model. Currently, the better-performing Universal Rollups have primarily innovated on their profit-sharing mechanisms, aiming to better incentivize and retain developers while ensuring user participation. The trend is for L2s to gradually become less dependent on Ethereum, achieving maximum customization through modular solutions.
• General L2s are managed by individual teams expanding outward. The competition that general L2s face comes directly from external L1s. General L2s capture close to 100% of revenue through their profit-sharing mechanisms.
• This positioning aligns more closely with the "Enterprise" model, making it appropriate to value them similarly to alt-L1s. This means their value is assessed based on their ecosystem and fundamentals — particularly revenue. Compared to alt-L1s, their advantages include leveraging Ethereum's community and ecosystem as well as ETH liquidity. However, their disadvantages include weaker token financialization and user acquisition relative to alt-L1s.

2.2.2 Federation L2:

• Federation L2s share similarities with Ethereum — both have their own Layer 1 and Layer 2 (L2/L3). The difference is that launching an L2/L3 within a federation requires permission, protecting the federation L2's business model.
• Early Universal Rollups typically evolved into Federation L2s, suggesting that such a model tends to prove to be the more profitable business choice once a certain level of market traction is achieved. Arbitrum, Optimism (in their early stages), zkSync, and Initia are examples of efforts moving toward this model. In essence, Federation L2s are fundamentally growing their own L1 ecosystem while still relying on Ethereum for security and using ETH as the payment currency. The hallmark of a Federation L2 lies in its ability to shape the business model and participants of its ecosystem through its governance capabilities.
• Therefore, it is more appropriate to view Federation L2s as "Protocols" with a higher degree of centralization.
• Federation L2s are like a more controlled version of Ethereum, with ecosystems like Optimism still delegating application development. The difference from Ethereum is that this delegation is more strategic. Through a permissioned model and centralized management, resources can be concentrated to amplify synergistic effects. This allows excellent resources to be included for shared liquidity and ecosystem benefits, while generating revenue through a fee gateway to support the nascent ecosystem once a new one launches. This explains why companies like Coinbase and Sony chose Optimism. Leveraging the "Enterprise" capabilities of L2, the hope is to see more breakthrough applications emerge.
• We mentioned earlier that "Protocol" models span varying degrees of decentralization. In the course of exploring protocol decentralization, chain or application exits are common — such as DyDx in the early days of the Arbitrum ecosystem and TreasureDAO afterward. The key to assessing the value of a Federation L2 is its ability to balance protocol decentralization while growing and consolidating its ecosystem.

2.2.3 App-Chain L2:

• App-chain L2s are like applications with new business models and value capture mechanisms. Their valuation should revert back to the application itself, augmented by the new value that the L2 business model brings to the application — regardless of whether the application itself better fits the "Enterprise" or "Protocol" model. Many App Rollups choose to build on top of Federation L2s and RaaS, benefiting from lower launch costs and stronger ecosystem spillover effects.
• The clear advantage of an appchain is more efficient token utilization and MEV capture. What they sacrifice is the stronger network effects and liquidity that come from operating on a single chain. In terms of inputs and outputs, not all applications are well-suited to becoming an appchain. Applications that are a good fit tend to have strong internal cycles — such as perp DEXes and GameFi. In the long run, once the hype around the L2 narrative fades, what matters more is a realistic assessment of ROI.

3. How Does L2 Affect Ethereum's Business Model?

• After the Merge — especially after EIP-1559 — and before the advent of widespread L2 scaling and EIP-4844, Ethereum relied on limited block space and transaction volume to capture high priority fees and MEV. With L2 scaling, Ethereum effectively gave up the MEV associated with those transactions and reduced the priority fees generated by native L1 transactions. With EIP-4844, it gave up yet another revenue source: DA fees. This deliberate sacrifice of profit is atypical for a traditional company. In fact, Ethereum was never aiming to evolve into the "Enterprise" model as we've defined it. The purpose of giving up these revenue streams is to keep the DA and settlement layers highly decentralized and autonomous, creating maximum room for L2s to grow their ecosystems and enable as many applications as possible with minimal economic burden — even at the cost of some decentralization.

3.1 Ethereum as an L2 Issuance Protocol:

• Since establishing the Rollup-Centric roadmap, Ethereum has shifted toward a "Protocol" approach rather than an "Enterprise" one. While some requirements for Rollups have been proposed — such as the L2beat Rollup stages — there has been no actual intervention. Recently, Vitalik outlined some Ethereum alignment requirements, nudging the governance model of the Ethereum "Protocol" toward tighter cohesion. However, the overall model remains highly autonomous, with its long-term function being the issuance of Ethereum L2s.
• Currently, Ethereum L1 still handles over half of the ecosystem's transaction volume. Looking ahead, Ethereum resembles a platform for issuing decentralized, autonomous, censorship-resistant, and secure L2s (the settlement layer).
• Typically, permissionless issuance platforms generate revenue by taking a percentage cut from new asset issuance and trading. Examples include Uniswap collecting a share of user trading fees, Pump.fun's initial fee for coin launches, and prediction markets taking a cut of user transaction fees.
• Therefore, despite being an L2 issuance protocol, Ethereum has not established any fee gateway through L2s in the early stages. This has led to a sprawling L2 ecosystem that relies on Ethereum's liquidity and community but contributes no revenue back to Ethereum. This indicates that Ethereum represents the most decentralization-focused variant of the "Protocol" model. Observing successful permissionless protocols like Uniswap shows that they implement fee switches on pools where they hold absolute monopoly and network effects. Once a protocol achieves network effects, it prudently introduces fees within the bounds of user acceptance. This is an advantage conferred by centralized management. Currently, Ethereum is experimenting with fee gateways through approaches like Based Rollups while not aggressively pursuing profit. This allows L2 ecosystems lacking a fee gateway to continue growing at a rapid pace.

3.2 Ethereum as a Store-of-Value Asset & Programmable Trust Currency:

• ETH has difficulty being valued through "Enterprise" or "Protocol" models due to the collapse of the original L1 business model following scaling. After all, a company willing to sacrifice its own profits and a protocol willing to permanently disable its fee switch should not be valued through the traditional fundamental lens of Enterprise and Protocol.
• The primary reason Ethereum gave up its fundamentals is to provide more room for the growth of the entire ecosystem. As the ecosystem thrives, Ethereum's value will ultimately reside in the monetary value of ETH. So, what value might a flourishing Ethereum ecosystem potentially bring to ETH, and vice versa?
• Some believe it lies in the security properties that ETH provides. However, some technical experts who believe in the value of distributed networks but are skeptical of cryptocurrency argue that peer-to-peer networks shouldn't be tied to a specific speculative currency to incentivize nodes. Some propose a less speculative approach — such as stablecoins or the original PoW mining model — to provide incentives. The continuous pursuit of decentralization and cost reduction in distributed networks doesn't naturally align with capital-intensive PoS mining, which requires frequent governance adjustments. ETH's own security value is also affected by its price, exhibiting significant reflexivity. These points were previously discussed in our article on economic security. Currently, ETH performs well in both the incentive and security models, but this may not be its strongest suit over the long term.
• So, what is ETH's most important value relative to the Ethereum network — one recognized by the market?
• We can find clues from Ethereum's historical milestones, including five pivotal moments:
  • Direct Token Issuance: This opened up a new world of asset issuance and allowed Ethereum to find its initial PMF. Since then, ETH's major growth nodes have been closely tied to asset issuance.
  • DeFi Summer Liquidity Mining: This evolved the asset issuance model into liquidity mining. ETH not only served as the backing asset for issuance but also became the liquidity pricing asset. ETH thereby found its second PMF: the liquidity pricing asset. Since then, asset issuance in the Ethereum ecosystem has incorporated considerations for improving liquidity.
  • Liquidity Staking: This addressed the need for staking while enhancing the liquidity pricing value. From there, asset issuance increasingly incorporated the attribute of mining ETH's time opportunity cost — i.e., staking. This is Ethereum's third PMF.
  • L2 Mining: This embodies the convergence of asset issuance, liquidity pricing, and time-cost mining. Connecting ETH to L2, staking, and mining native/DeFi protocol tokens, while channeling liquidity into various protocols through L2 liquidity instruments. ETH's three PMFs converge.
  • Restaking and AVS Mining: This is another demonstration of the convergence of these three aspects. Liquid restaking protocols unlock liquidity, while restaking protocols like EigenLayer provide staking and continuously mine native AVS tokens through time cost.
• Ethereum continues to iterate and improve on this model, continuously generating demand and value for ETH itself through asset issuance and DeFi use cases. It continuously reinforces ETH as the top choice for asset yield generation, asset issuance, and liquidity provision. Asset exposure and gas demand — all of this drives ETH distribution to protocols and users, making ETH the central focus of the Ethereum ecosystem's infrastructure and protocols, and the default currency of value in users' minds.
• Currently, competition for this value is not intense. For example, ETH-denominated pairs account for over 80% of the major pools on Uniswap. However, ETH still faces some latent competition, including native L2 assets and derivative assets vying for store-of-value share. This includes $cbBTC on Base and the challenge that Chainlink poses to on-chain liquidity.

[Image: Dune Analytics Data — USDC/WETH vs. USDC/cbBTC]

• But over the long run, the network effects built around ETH, combined with demand growth driven by an expanding market of economic activities, will make everything more valuable — as Myles has predicted.

4. Conclusion:

• Crypto has three viable business models: Enterprise, Protocol, and the intrinsic value of the currency itself. The first two differ primarily in the degree of protocol centralization, control, monopoly, adjustment capacity, and price discrimination capability. Protocols themselves also target varying degrees of autonomy. The intrinsic value of a currency stems from the network effects created by its early adoption in a specific traction-generating scenario.
• Given Ethereum's original positioning and its L2 strategy, it has pushed its value toward the permissionless "Protocol" and "Currency" aspects of ETH. Furthermore, due to Ethereum's vision, leadership structure, and early L2 strategy, it semi-actively and semi-passively gave up revenue from L2s, reducing the burden on L2s and opening up room for growth. While Ethereum's alignment standards from the Ethereum Foundation are becoming increasingly clear, its overall open and autonomous positioning means it is no longer merely an "Enterprise."
• The once-robust L2 ecosystem has largely evolved into Federation L2s — fundamentally more centralized and leader-driven — with "Protocols" issuing permissioned L2s continuing Ethereum's mission in a more centralized manner. General L2s have reverted to the L1 level as "Enterprises," offering early-stage advantages over L1s outside the Ethereum ecosystem, but with token disadvantages. The value of an appchain should revert back to the "application" itself, aligning more closely with "Enterprise" or "Protocol" models at varying degrees of centralization, and focusing on evaluating the ROI of launching a chain. The rapid growth of more centralized L2s has its roots in Ethereum's highly decentralized model, which sacrificed revenue to provide support and breathing room.
• Ethereum, having found DA to be an unsuitable business model, has gradually positioned itself as a permissionless L2 issuance protocol, relinquishing profit gateways. It has proactively given up its monopoly potential in the current market, hoping to achieve blood-generating capacity through an incremental market. Federation L2s and some high-enterprise-drive L2s — not burdened by paying taxes to Ethereum — are making big bets on how they can create new incremental value.
• Ethereum's value as a currency stems from the continuous asset issuance and liquidity games taking place on Ethereum. The five PMF moments have continuously brought value and usage momentum to the ETH asset itself. As the overall Ethereum ecosystem expands, ETH — as the most valuable asset in the ecosystem — plays a critical role at every stage from the inception to the operation of new ecosystems. This is due to ETH's strong network effects. As ecosystems stabilize, while some native/wrapped assets will play supplementary roles, they cannot displace ETH's dominant market share.
• If the day comes when the L2 ecosystem truly flourishes, ETH — with its network effects — will still reap enormous benefits from adoption driven by incremental gains, even if it doesn't necessarily maintain a monopoly. At that point, Ethereum will gradually crystallize its value form, dominated by the ETH asset.
• Understanding Ethereum's trade-offs for the ecosystem and the value positioning of ETH and L2 gives us greater confidence that L2s, as a new force in the Ethereum ecosystem, will advance with a coherent business model — leveraging diverse technological architecture choices, multi-directional growth, and their internal integration advantages to rapidly unlock the limits of their use cases. ETH, as an asset with strong network effects, will discover its value alongside the explosive growth of the ecosystem.