Jupiter Founder Identifies Ethereum’s Core Issue: Overinvestment in L2/3/4 Networks

UTC by staff writer · 3 min read
Jupiter Founder Identifies Ethereum’s Core Issue: Overinvestment in L2/3/4 Networks
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The Jupiter founder also mentioned that Solana, another major blockchain network, might face similar issues if competition for blockspace increases.

The founder of Jupiter, a well-known figure in the crypto space, recently pointed out a major concern about Ethereum’s current path. According to his June 13 tweet, Jupiter’s founder believes Ethereum’s main problem is the large amount of money and incentives going into Layer 2 (L2), Layer 3 (L3), and Layer 4 (L4) networks.

This focus is coming at the cost of building useful applications and value on the main Ethereum network.

Ethereum’s Liquidity and Community Fragmentation

The tweet explains that this trend is causing Ethereum’s liquidity and community to become fragmented, which is the opposite of what many in the community want. Despite calls for a more unified network, the current focus on additional layers is likely to lead to more division.

Liquidity fragmentation occurs when assets and trading volumes are spread across various Layer 2 solutions, potentially reducing overall market efficiency. It may increase transaction costs and security risks for users as they constantly have to bridge assets between Layer 2s.

On a positive note, the Ethereum mainnet will see a reduction in transaction fees as more transactions are moved to Layer 2s, reducing congestion on the mainnet. Even with this reduction, Ethereum’s mainnet fees aren’t competitive enough to match layer 2 fees or those from other new-generation layer 1s, so it’s uncertain whether fee reduction would enhance its appeal for direct usage.

Potential Issues for Solana

The Jupiter founder also mentioned that Solana, another major blockchain network, might face similar issues if competition for blockspace increases. Currently, the infrastructure for Solana Virtual Machine (SVM) app chains and L2 solutions is growing similarly to Ethereum’s early L2 stages.

However, there is still a lot of value in building directly on Solana, which might help avoid the same problems Ethereum is facing.

Previous Insights from VanEck’s Report

In line with the current discussion, analysts from the investment management firm VanEck previously provided a detailed outlook on the growth of Ethereum L2 networks. In an April 3 report, they predicted that Ethereum L2s could reach a market capitalization of $1 trillion by 2030. This report highlights the massive growth potential of L2 networks.

VanEck’s analysis suggests that thousands of specific L2 networks will emerge, each tailored to different applications. These networks are expected to revolutionize various industries, from decentralized finance (DeFi) to social media, unlocking many new possibilities.

However, despite the promising future for L2 networks, VanEck’s report advises caution. The analysts warn of intense competition among L2-related tokens, noting that the top seven Ethereum L2 tokens already have a valuation of $40 billion.

This competitive environment indicates that the market is getting saturated, with a few key players taking the lion’s share. Many new Layer 2 projects may fail, resulting in huge losses for investors, and a potential loss of confidence in the viability of Layer 2 solutions.

Cryptocurrency News, Ethereum News, News
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