[Music]
cool uh thanks for coming um I know it's
been a long day uh today I'll be talking
about the topic of R l2's extractive to
ethereum my talk I'm going to cover
three main areas um the first is um on
the topic of l2s keeping fees and not
paying enough for blobs this is quite a
nuanced topic and I'm going to dive into
it the second um what I think is a more
important question is are L2 is
generating eth denominated activity in
terms of eth being used as a gas token
eth being used as an asset and has it
generated new holders of eth and I think
the the third topic that I'm going to
touch on is what is that
dynamic between l2s and
ethereum so if you go on crypto Twitter
if you read forums blog posts Etc one of
the most popular narratives is l2s are
keeping the fees that they're generating
and they're not paying enough for
blobs and you can kind of see this when
you look at the margins for layer tws
post EIP 4844 going from 20 to 30%
margin on on on fees to upwards of
99.99% but I think the Nuance behind
this is that blobs are still in the cold
start period and what that means is that
it is a byproduct of the mechanism of
4844 and David crapus predicted the cold
start problem actually last year and he
ran a simulation from March 2023 using a
assumptions from the transaction volume
on arbitrum and optimism at that time
and it would take roughly 250 kilobytes
per block to get into price Discovery
for for blob pricing that's roughly
1.8 gigabytes per day um and in some of
the later charts what I'll show you is
that we're basically there on average
per day but not yet on a block byblock
basis
and actually there have been some
notable periods when blob pricing has
gone into price Discovery um this is an
example from earlier this year which
shows the blob fee breakdown between
blob space fees and execution fees
during the layer zero airdrop and you
can see that for a period of roughly 1
to two hours blob fees actually
dominated compared to the execution
fees and actually actually most more
recently blobs have been getting really
really close to the Target amount of
blobs past which The Blob pricing would
go into price Discovery and you would
see this drastic increase in the cost of
blobs uh faced by the
l2s but one of the interesting Dynamics
behind this is that layer twos are
fundamentally businesses um and when you
see a fee SP like for blob
pricing um we tend to see that layer 2os
actually start to uh slow down the pace
that they post blobs in order to dodge
these high high Spike
moments another way to see this is
through the distribution of blobs per
block so the gray color um are blocks
with no blobs um these are kind of these
blocks serve as a temporary buffer where
for for instance you might have a day
where the total amount of data posted
might imply that the blob fees should go
into price Discovery but if you uh but
that mechanism is actually triggered on
a block byblock basis but we're we're
going from a world where half of the
blocks had no blobs to a world where
only 20 to 30% of the blocks have no
blobs and and the same is true on a
capacity basis so in the summer of
2024 uh
roughly roughly 20 to 30% um of the data
capacity in terms of bytes um was unused
and now we're approaching a period where
only 10 to 20% is
unused and overall blobs inflow per day
are quite healthy they're actually well
above the 1.8 gigabyte Target um through
which if that were true block by block
blob fee pricing would go into price
Discovery um um so I think we're
actually well on our way to
that so now that I covered some of the
nuances be behind the blob fee market
and that it's not necessarily a
byproduct of the l2s not wanting to pay
for blob storage it's more that the way
that the mechanism is designed
um is what uh is precipitating what
we're seeing um for the blob fees at the
moment um so the second topic I want to
dive into which I think is the more
important topic is are l2s generating
activity and usage of eth the
asset so if you look at L2 beat um and
various block explorers I'm sure
everyone has seen a chart that looks
something like this where the L2
activity has grown tremendously over the
past year going from around 50 TPS um up
to 170 180 TPS across the
l2s but l2's usage of eth as a gas token
has only grown modestly due to lower L1
settlement fees despite higher activity
that's partially contributing to things
like lower burn a lot of uh concern from
the community um but again this is more
of a byproduct of the mechanism of 4844
and less about any nefarious
intention but I thought this chart was
actually pretty interesting so if you
zoom out and you look at the collective
fees in terms of eth being used as a gas
token and you compare that to uh the gas
fees used on mainnet you can barely see
the L2 line um which is great for users
in that they're transactions are quite
cheap um but potentially some concern um
around the security of of main
net on the flip side the el2 usage of
eth as an asset has grown tremendously
so what we see here is a chart of the
total value locked stacked by type uh
the purple on top is a canonical bridg e
um and that's just gone uh pretty much
up only since since l2's
launched so in summary to cover the
first half of the talk in terms of the
current state there is not enough L2
blob demand to consistently get blob
blob space into price discovery that
requires consistently block by block um
l2's consistently posting blob blobs in
order to trigger the price Discovery
mechanism behind 4844 but think think
we're almost there blob pricing today is
currently in a bootstrapping period it
has shown periods of price Discovery
this is known it's been posted on the
eth research forums in 2023 there's
nothing inherently wrong with the
network or or the way that the pricing
is working and it's actually approaching
data inflow levels that would actually
start to trigger and begin price
Discovery um and looking at activity on
the l2s we do see a lot of new usage of
e as an asset in terms of being used in
staking protocols in Defi and Etc but
very minor usage of eth as a gas token
relative to main
net so the second half of my talk I'm
going to talk about the dynamic between
l2s and
ethereum so at the limit l2s and mainnet
appear symbiotic Tim Tim Robinson had a
great post um and he actually built this
really great calculator where he shows
that he's showing a scenario under which
ethereum um for ethereum's blog Market
post surge um so what this shows is a
simulation for 10,000 TPS across l2s
which is pretty feasible and reasonable
I think 16 megabytes of blobs per block
and that would imply a 6.5% yield on eth
given some reasonable user price
sensitivity assumptions so what that
means is is when the transaction fees go
up uh a smaller percentage of the users
are willing to transact at that price
because they might be sensitive to
higher transaction
fees but I think where we are in reality
is here where um we're at this temporary
lull where the L2 fees are very low and
we're in a period where we're probably
most likely going to exit the
bootstrapping period of blob pricing and
we we'll like see a period where the LT
fees tick
up so for example in this scenario here
um this uses the current specifications
for based on
4844 um in this scenario it assumes five
rollups 300 TPS per rollup the same user
price sensitivity assumptions and what
you can see in this chart and I think
the interesting line to call out um is
the green line which is the actual TPS
um that reflects user Sensi user
sensitivity to higher transaction fees
and in my opinion five rollups and 300
TPS if you look at the number of
projects kind of in the pipeline that is
uh pretty doable in terms of what we
might expect to see over the next year
um and what we can actually see in this
chart is it implies that the ethereum
blob Market could potentially serve as a
constraining factor on the ability for
these rollups to increase their
throughput and increase
activity so in terms of in terms of the
question are l2s extractive I think I
think the question is actually very
nuanced and is actually quite
complicated and I think the true answer
is that we don't actually know and I
think there are three reasons for that
the first is the L1 settlement fees have
never actually been high enough to test
ethereum's Network effect so what that
means is we've never actually seen a
scenario where l2s have been faced with
increasing L1 settlement fees so we're
really uncertain about how the l2s might
react in that type of scenario whether
they might look to an alternative da
solution whether they might uh be forced
to decrease their margins whether they
might um potentially even become an L1
on their own so I think that first
scenario we've never actually really
seen that in practice so we don't we
don't really want to impose that
judgment um upon the layer
twos so the second point is that there's
a there's a lot of value for for l2s
being l2s and I think um Beyond just the
label of what people might say oh like
I'm going to launch an L2 on top of
ethereum what they actually get is quite
a lot so imagine having to write your
own block Explorer your own virtual
machine your own smart contract
programming language recruiting
developers to learn your smart contract
developing uh language um and I think
the reality is that the l2s are
relatively new and because they are
relatively new they benefit tremendously
from being able to bootstrap their
virtual machine tooling developers users
Community assets from ethereum and even
in terms of applications as
well and I think the third reason why we
don't actually know whether l2s are
extractive today is that most of the
analysis in terms of even Tim Robinson's
dashboard um tends to assume that you
have n equal siiz l2s um which one might
consider the current state because we're
kind of In This Moment In Time where
there isn't a clear breakout L2 winner
and whether you look at tvl whether you
look at transactions whether you look at
number of wallets whatever metric you
look at generally you tend to see
fluctuating periods where you have three
dominant l2s and they're all splitting
market share at different points in time
um and I
think and I think that type of analysis
and thinking about the current state is
probably not likely to hold into the
future so it doesn't really consider the
case where you have one or two l2s that
take 80 to 90% of activity and and and
economic value whereas the remainder
have marginal economic activity and I
think this is actually a really
important case and scenario to think
through because when you look at these
Financial networks generally you do tend
to see Power law effects and I think the
scenario in which you have one or two
very dominant l2s the question about
where does where does the market power
and The Leverage between the twos and
mean that at what point might that flip
um and I think probably more work has to
be done on that
side so in in the final few minutes here
I want to talk about some of the
hypothetical conditions uh where l2s
could become more attractive more
more um so so the first is um about if
the L1 has limited transaction
processing
capability um and I think this is
important because I think first off the
economic situation of e the asset could
become more risky if the if if the
amount of fees that are being generated
on Main net um are not high enough to uh
ensure that a large portion of the
network ends up being staked I think l2s
also tend to benefit from highly
developed Financial system on the L1
um and I think the second scenario which
I talked about a bit earlier is the case
where you have a power law effect for L2
so for example a dominant L2 would be
the majority blob purchaser and with
very clever batching they could
potentially pin blob pricing below price
Discovery that's actually happening
organically today so if you look at how
the l2s behave in periods where blob
pricing does Spike we're already seeing
uh behavior that suggest that there
willing to spread out how quickly they
syn their state across time um and the
consequence of that is that users who
might want to look for a
unilateral exit from the L2 might not be
able to do that um if the um if the l2s
are being more cautious and doing more
optimization about how frequently they
post the next hypothetical uh scenario
is a case where the incentive structures
for L2 tokens or not on E gas tokens
become more prominent so if you look at
the breakdown of activity on l2s and you
look at the split between the l2s that
are using eth as a gas token and the L
l2s in quotation marks or l3s that
aren't using eth as a gas token today
that split is actually 50/50 um so I
think the the notion that every single
rollup necessarily has to you use eth as
a gas token we're already seeing
some scenarios in which that might not
necessarily be the
case and I think that's related to one
of these other points which is the
notion of a siloed L2 with their own
settlement kingdoms for l3s or similar
types of similar types of rollups that's
another scenario in which um the l2s
might uh push for an alternative gas
token which again would not benefit eth
as an
asset um
and and I think the final point is um
potentially uh incentive structures for
l2s um in which they start to develop
competing security models in terms of
being able to use their native
governance token for things other than
just governance could potentially uh be
a condition in which the l2s could also
become more
extractive um so that concludes my talk
um I think it's still ultimately too
early to tell in terms of whether the
l2s are extractive or not the reason for
that is we've never actually seen a
scenario in which uh the l2s have been
put in a position to make a choice
whether they stay as an L2 or they use
an Alda layer or they become an L1 or
they do something else um but I think
that time is actually coming very soon
so probably likely over the next one
year we'll start to see some of these
choices being forced um just by the
nature of the blob fees going into price
Discovery
thanks all right thank You Ren uh you
feel free to come to the center over
here yeah this one would be fine so
let's go over some questions uh let's
start from the first one do you think
the exact copy of EIP 1559 mechanism
determining L1 fees is the right
approach for determining blob fees
yeah um I think this is a really tricky
question um so I think where my mind
jumps immediately is I look at the
amount of execution that has been moved
off of from the L1 to the L2 and the
amount of transactions on the L2 today
greatly outweigh uh the amount of
transactions ever in ethereum's history
in terms of like per second or per block
um but in terms of the denom or in terms
of e being used as a gas token for those
transactions um it's actually quite
minimal even compared to like the
earliest periods in like ethereum's
history so I think um one of the things
to consider is that that ratio might be
slightly off um and I think the only way
you really see that settle is blob
pricing has to go into price discovery
which means there needs to be more l2s
and that will likely happen over the
next year cool and another question
currently the L2 mainten n seems
symbiotic but what if they started
paying fees in their own tokens they
have a fair amount of incentive to keep
assets logged in their system without
interoperability yeah um I talked to
this point in the last slide about
hypothetical scenarios so I think some
of the highest forms of risk um are
exactly that so for example l2s in their
current State as having their tokens as
a governance token it's highly likely
that's it's probably more likely that
changes in the future then stays the
same so I think that is a that is a very
real
risk uh have you or others been able to
isolate the decrease in L1 execution
demand due to real transactions from the
reduction in call data demand will L1
execution demand go to
zero uh so I don't think L1 execution
demand will go to zero um so a chart
that I didn't include um just because
it's it's a very basic chart is that the
transaction the number of transactions
on ethereum has actually not gone down
and the amount of gas in terms of gas
consumed has not gone down it's that the
nature of the transactions have changed
so um historically the transactions on
ethereum had been uh transactions that
had a lot more right conflict or right
contention and right contention leads to
higher fees because people want to um
people tend to uh be rushed in terms of
those types of transactions so for
example like if people are trading uh
various forms of assets there's a high
degree of urgency that those
transactions land um um but most of that
activity at the moment at least has has
shifted to the l2s perfect and how to
prevent a single L2 from eating up all
the space or Spotlight AKA base not from
the tech perspective but from the
marketing public
perspective uh yeah so I don't
necessarily want to call out a single L2
um but I think uh the hypothetical
scenario of an L2 becoming the dominant
L2 where 80 to 90% of the economic
activity flows through there I think I
think that's a very real risk um there
hasn't NE I don't believe there's been
very many payment networks in the past
where you haven't seen a monopoly or
oligopoly type of structure just due to
the nature of network effects in in
these types of financial systems so I
think that risk is very
real perfect and I think this is a great
comment to close off the speech thank
you so much