The Uncomfortable Truth Regarding Ethereum & Layer 2 Solutions

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23 May 2024

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Groundhog Day
It seems as if Ethereum is consistently faced with an ongoing issue… scalability/fees. No matter the attempt, ETH finds itself having to deal with this “day” over and over again. Sadly, there’s been no meaningful progress in more than a decade. This has triggered the rise of Ethereum layer 2 solutions such as Optimism, Arbitrum, and many others. These layer 2s promise to excel where Ethereum has failed, providing legitimacy for Ethereum as a layer 1 chain.
It all sounds commendable in theory. For starters, you get to choose which layer 2 to use. An abundance of choice provides the freedom to choose. However, there is a strange twist to this relationship. Essentially, it’s a conflict of interest. Layer 2 solutions are designed and built in response to Ethereum’s failure. For layer 2s to succeed, Ethereum must fail. In other words, they are here to help Ethereum but are inherently opposed to its success.
A strange dynamic, suggests that if ETH were to resolve its issues, these layer 2s would become redundant, possibly worthless. This is yet another problematic dynamic within the Ethereum ecosystem. However, it’s unlikely that ETH resolves its issues, if it did, it would likely take years. This provides a great window of opportunity for Ethereum layer 2s in the current bull market.
With all the hype surrounding a possible ETH ETF, layer 2s are primed for parabolic price action. This guarantees some decent returns for these projects in the short term. Layer 2s benefit from a crippled Ethereum network, yet simultaneously benefit from positive price action and other bullish catalysts. It’s a complicated and less-than-perfect relationship. There are of course also the concerns of project developers
Firstly, how many projects recently decided to go with Solana rather than Ethereum? This particular data is also very revealing, especially since Solana has its issues. However, scalable, affordable, and trending blockchains bring in the masses, and that is exactly what we have seen regarding Solana. Regarding DeFi, memecoin, and NFT metrics, Solana has outperformed ETH. This is a lot more significant than many realize.

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Let’s look at Ethereum’s recent rally. The market cap valuation of that massive green daily candle is more than Solana’s entire market cap valuation, and yet Solana has more transactional activity on-chain. This could imply one of two scenarios:

Ethereum is grossly overvalued
Solana is grossly undervalued

Both scenarios could be applicable. Then there is Polkadot which is currently experiencing significant adoption within multiple sectors, especially DePIN and gaming. The fact that projects (ENJIN) are ditching Ethereum in favor of Polkadot should also be considered. It’s important to realize what leads the market regarding price action. Speculators respond to the underlying dynamics unfolding within a project.
In other words, adoption and innovation precede price appreciation and not vice versa. All the action is currently unfolding on Solana and Polkadot… not Ethereum. Yes, an ETH ETF will have an impact on the price. However, alternative chains are securing the adoption and transactional throughput to sustain and enhance future growth. If things were to change for Ethereum, I would revisit my outlook.

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Final Thoughts
Many Ethereum investors are emotional and nostalgic investors. Ethereum has become a rather fanatical investment. Why? It’s meant to be the top layer 1 project, yet up-and-coming projects choose to go with alternative chains. Why not go with the best? Perhaps, developers are beginning to analyze the underlying dynamics, rather than relying on a public opinion. Anyway, some food for thought. See you next time!

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Disclaimer
First of all, I am not a financial advisor. All information provided on this website is strictly my own opinion and not financial advice. I do make use of affiliate links. Purchasing or interacting with any third-party company could result in me receiving a commission. In some instances, utilizing an affiliate link can also result in a bonus or discount.
This article was first published on Sapphire Crypto.