Key Points
- Jupiter’s founder asserts that Ethereum’s primary issue is the overinvestment in L2, L3, and L4 networks.
- This overemphasis is leading to liquidity fragmentation and community division within the Ethereum network.
The founder of Jupiter, a prominent figure in the cryptocurrency sphere, recently highlighted a significant concern regarding the current trajectory of Ethereum. In a June 13 post on social media, he expressed that the primary problem with Ethereum is the substantial amount of resources and incentives being funneled into Layer 2 (L2), Layer 3 (L3), and Layer 4 (L4) networks.
He believes that this concentration is detracting from the development of useful applications and value on the primary Ethereum network.
Ethereum’s Liquidity and Community Fragmentation
The founder further elaborated that this trend is causing Ethereum’s liquidity and community to become divided. This is contrary to the desires of many within the Ethereum community who are advocating for a more unified network.
Liquidity fragmentation happens when assets and trading volumes are dispersed across various Layer 2 solutions. This could potentially decrease overall market efficiency and increase transaction costs and security risks for users as they frequently have to move assets between Layer 2s.
Although more transactions moving to Layer 2s will reduce transaction fees on the Ethereum mainnet, the founder argues that Ethereum’s mainnet fees still can’t compete with layer 2 fees or those from other new-generation layer 1s. Therefore, it remains uncertain whether fee reduction would boost its appeal for direct usage.
Potential Risks for Solana
The Jupiter founder also indicated that Solana, another significant blockchain network, could face similar challenges if competition for blockspace intensifies. Currently, the growth of infrastructure for Solana Virtual Machine (SVM) app chains and L2 solutions mirrors the early stages of Ethereum’s L2 development.
Nonetheless, there is still significant value in building directly on Solana, which could help it avoid the issues currently plaguing Ethereum.
Insights from VanEck’s Report
In a related discussion, analysts from investment management firm VanEck previously offered an in-depth perspective on the growth of Ethereum L2 networks. In an April 3 report, they projected that Ethereum L2s could achieve a market capitalization of $1 trillion by 2030, emphasizing the immense growth potential of L2 networks.
VanEck’s analysis anticipates the emergence of thousands of specific L2 networks, each designed for different applications. These networks are expected to revolutionize various industries, from decentralized finance (DeFi) to social media, unlocking numerous new opportunities.
Despite the promising future projected for L2 networks, VanEck’s report advises caution. The analysts warn of stiff competition among L2-related tokens, noting that the top seven Ethereum L2 tokens already possess a valuation of $40 billion.
This competitive landscape suggests that the market is becoming saturated, with a few key players dominating. Many new Layer 2 projects may fail, resulting in significant losses for investors and potentially shaking confidence in the viability of Layer 2 solutions.