Original title: The L2 vs L1 Battle that Nobody is Talking About
Original author: 0x taetaehoho, Chief Security Officer of EclipseFND
Original translation: zhouzhou, BlockBeats
Editors note: L2 has an advantage over L1 in terms of operating costs, because L2 only needs to pay the cost of a single sorter, while L1 needs to pay for the security of all validators. L2 has unique advantages in speed and reducing MEV, and can support dApp revenue maximization through innovative economic models. Although L2 cannot compete with L1 in liquidity, its potential in the dApp economy will drive the crypto industrys transformation from infrastructure to a profit-driven long-term business model.
The following is the original content (for easier reading and understanding, the original content has been reorganized):
Below is a decision matrix from a dApp perspective, analyzing whether to deploy to L1 or L2 in the current environment, assuming that both support similar types of applications (i.e. L1/L2 are not customized for specific application types).
In addition to the relatively small amount of MEV (maximum extractable value) due to the centralization of block producers, L2 has not yet fully utilized other advantages. For example, although L2 has the potential for lower transaction costs and faster throughput, Solana is currently ahead of L2 in the EVM ecosystem in terms of performance and transaction costs.
As Solana continues to increase throughput and advance the implementation of MEV tax mechanisms such as ASS and MCP, L2 needs to explore new ways to help dApps maximize revenue and reduce costs. My current view is that L2 is structurally more advantageous than L1 and can execute dApp revenue maximization strategies more quickly.
One of the key roles of the execution layer in maximizing application revenue is how fees/MEV are distributed.
Currently, the premise for achieving MEV taxation or fee sharing is honest block proposers, that is, proposers who are willing to follow the priority rules or share the revenue with the application according to the preset rules. Another way is to allocate part of the base fee of EIP 1559 to the dApps that users interact with. Canto CSR and EVMOS seem to have adopted this mechanism. This can at least allow dApps to increase their bidding power for MEV revenue, making them more competitive in the transaction inclusion market.
In the L2 ecosystem, if the block proposer is operated by a team (i.e. a single block proposer), it is inherently honest and can ensure the transparency of the block construction algorithm through a reputation mechanism or TEE (trusted execution environment) technology. Currently, there are already two L2s that use fee sharing and priority block construction, and Flashbots Builder can also provide similar functions for the OP-Stack ecosystem with minor changes.
In the SVM (Solana Virtual Machine) ecosystem, infrastructure like Jito can redistribute MEV revenue to dApps in proportion (such as calculated by CUs, Blast adopts a similar mechanism).
This means that while L1 is still working on MCP and built-in ASS solutions (Solana may advance this work, but there is no CSR-like revival plan in the EVM ecosystem), L2 can enable these features faster. Since L2 can rely on trusted block producers or TEE technology, there is no need to force the adoption of OCAproof mechanism, so the MRMC (Revenue, Cost, MEV Competition) model of dApp can be adjusted faster.
But the advantages of L2 are not just the speed of development or the ability to redistribute fees, they are also subject to fewer structural constraints.
The survival conditions of the L1 ecosystem (i.e. the conditions for maintaining the validator network) can be described by the following equation: Total number of validators × validator operating costs + staking capital requirements × capital costs < TEV (inflation + total network fees + MEV tips)
From the perspective of a single validator: validator operating costs + pledge capital requirements × capital costs > inflation benefits + transaction fees + MEV benefits
In other words, there is a hard constraint for L1 to reduce inflation or fees (by sharing with dApps) - validators must remain profitable!
This limitation will be more pronounced if validator operations are expensive. For example, Helius pointed out in the SIMD 228 related article that if inflation is reduced according to the proposed issuance curve, at a 70% stake rate, 3.4% of current validators may exit due to reduced profitability (assuming REV maintains 2024 volatility levels).
REV (MEV share of staking income) is extremely volatile: On the day of the TRUMP event, REV share was as high as 66% On November 19, 2024, REV share was 50% Currently (at the time of writing), REV share is only 14.4%
This means that in the L1 ecosystem, there is a ceiling for reducing inflation or adjusting fee distribution due to the profitability pressure of validators, while L2 does not need to be constrained by this and can therefore more freely explore strategies to optimize dApp returns.
Solana validators currently face high operating costs, which directly limits the shareable profit space, especially when inflation rate decreases. If Solana validators must rely on REV (MEV share of staking income) to remain profitable, the total proportion that can be allocated to dApps will be strictly limited.
This presents an interesting trade-off: the more expensive it is for a validator to operate, the higher the overall take-rate of the network must be.
From the perspective of the entire network, the following formula must be satisfied: Total network operating costs (including capital costs) < Total network REV + Issuance
Ethereum is in a similar situation, but less affected. Currently, the APR (annualized rate of return) for ETH staking is between 2.9% and 3.6%, of which about 20% comes from REV. This also means that Ethereum’s ability to optimize dApp revenue is also constrained by the validator’s profitability requirements.
This is where L2 has a natural advantage. On L2, the total operating cost of the entire network is only the operating cost of a sequencer, and there is no capital cost because there is no staking requirement.
Compared to L1, which has a large number of validators, L2 requires a very small profit margin to maintain break-even. This means that while maintaining the same profit margin, L2 can allocate more value to the dApp ecosystem, thereby significantly increasing the profit space of dApp.
The network cost of L2 is always lower than that of L1 of the same size, because L2 only needs to borrow the security of L1 periodically (occupying part of L1s block space), while L1 must bear the security cost of its entire block space.
The battle of L1 vs L2: Who will dominate the dApp economy?
By definition, L2 cannot compete with L1 in terms of liquidity, and because the user base is still mainly concentrated in L1, L2 has also struggled to directly compete with L1 at the user level (although Base is changing this trend).
But so far, few L2s have truly brought out their unique advantages as L2s - that is, the characteristics that come with the centralization of block production.
On the surface, the most discussed advantages of L2 are:
Mitigating malicious MEV
Improve transaction throughput (some L2s are exploring this direction)
But more importantly, the next main battlefield in the L1 vs L2 battle will be the dApp economic model.
Advantages of L2: Non-OCAproof TFM (Non-Strongly Composable TFM)
Advantages of L1: CSR (Contract Self-operated Revenue) or MCP (Minimum Consensus Protocol) + MEV Tax
This competition is the best thing for the crypto industry
Because it directly leads to:
dApp benefits are maximized and costs are minimized, thereby incentivizing developers to build better dApps.
Change the incentive mechanism of the crypto industry from the past infrastructure token premium (L(x) premium) to profit-driven long-term crypto business.
Combined with the clarification of DeFi regulation, the capture of token value at the protocol layer, and the entry of institutional capital, the crypto market has entered an era centered on actual business models.
Just as we have seen capital pouring into infrastructure construction in the past few years, driving innovation in areas such as applied cryptography, performance engineering, and consensus mechanisms, competition between chains will now bring about a huge shift in the industrys incentive structure and attract the smartest talent to invest in the Crypto application layer.
Now is the real beginning of the mass adoption of encryption!
