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Galaxy’s Alex Thorn labels Ethereum Layer 2 solutions as ‘ETH extractive’ due to worries over fee retention.
Alex Thorn, head of research at Galaxy, has criticized the business model of numerous Ethereum (ETH) layer-2 (L2) blockchains, labeling them as “ETH extractive.”
In a social media update on Aug. 6, Thorn contended that L2 networks keep the majority of the fee revenue while contributing relatively little back to Ethereum L1.
Thorn pointed out that most L2s are governed by single entities or foundations, resulting in “very little value accruing to ETH holders,” and noted that “most L2s don’t even stake back the ETH they gather from fees.”
Post EIP-4844
Referring to the dynamics following EIP-4844, Thorn observed that the total costs for L2 blob confirmations and L1 gas expenditures have remained around $10,000 daily, while L2s generate between $100,000 and $400,000 each day in user fees.
This leads to L2 profits leaving “a nice margin even after accounting for chain operation.” Blobs are specialized spaces that provide data storage utilized by layer-2 blockchains built on Ethereum.
He also compared payments made from Base to the Optimism Collective, as Base employs the OP Stack, against payments from L2s to Ethereum. In the past 180 days, Base has disbursed $4.4 million to OP, whereas all L2s collectively contributed $3.05 million to Ethereum L1 for blobs and gas.
Thorn additionally asserted that Coinbase generated $14.9 million in Base fee revenue during Q2, with $443,000 allocated for L1 data costs and $2.16 million paid to OP, stating, “OP is literally making 4.8x more off Base than Ethereum is.”
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This critique led to a broader question regarding alignment, to which Thorn replied:
“…They aren’t really ‘eth aligned…’ they look pretty ‘Eth extractive’ to me.”
Long-running debate
Base achieved Stage 1 status in April on the data aggregator L2Beat, an intermediate decentralization level envisioned by Ethereum co-founder Vitalik Buterin.
Stage 1 signifies enhanced fault-proofs and governance protections, while Stage 2 is characterized by an L2 lacking any group of actors capable of posting a state root other than the output of the code, even unanimously.
The L2 supported by Coinbase was among several chains that recently updated their security protocols to prevent methods of blocking messages to the mainnet without compromising at least 75% of the network’s security council.
Thorn’s argument reignites a long-running debate regarding the extent of economic value L2s should return to Ethereum compared to their operators or upstream collectives.
The post-4844 cost structure reduced L2 data expenses by introducing blobs, yet the equilibrium between user fees retained by L2s and L1 expenditures and staking remains a point of contention.
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