Ethereum and its Layer 2 (L2) solutions are evolving rapidly, making their value difficult to assess. This article breaks down three core Crypto business models and applies them to Ethereum and L2 to understand their future value. L2 embodies the "enterprise/protocol" model focused on commercial value, while Ethereum leans toward "monetary" value.
Understanding Crypto Business Models
The "Enterprise" Model
This model emphasizes control and monopoly (via permissioned systems) and price discrimination to generate profit. It prioritizes efficiency and user growth over decentralization. The token often serves as a customer acquisition tool or an asset vehicle.
Example: Solana Foundation exercises significant control over its ecosystem, even possessing shutdown rights. Its revenue largely comes from MEV (Maximal Extractable Value) income, achieved by monopolizing block space and implementing price discrimination. SOL tokens act as centralized assets for value capture.
The "Protocol" Model
Protocols are permissionless, open, and feature relatively fixed fee structures. They operate with minimal interference from DAOs or foundations, allowing market participants to build freely. Tokens here often facilitate governance and profit-sharing.
Success depends on product sustainability, persistent demand, and network effects from early adoption. Projects that achieve product-market fit (PMF) first gain significant advantages.
The "Asset" Model
This focuses on the intrinsic value of the asset itself, such as Bitcoin, Memecoins, or decentralized stablecoins. Value arises from:
- Early adoption in specific scenarios (e.g., BTC as a store of value).
- Mechanism design (e.g., scarcity, deflationary mechanics).
- Symbolic meaning and cultural resonance (e.g., Memecoins as cultural artifacts).
These assets thrive on strong consensus, adoption, and longevity.
Layer 2 Business Models
Current Positioning of L2
L2 solutions were initially designed to scale Ethereum by handling transactions off-chain. They have succeeded: L2s now process 85% of Ethereum's transaction volume and host 3–4 times more active addresses than Ethereum L1.
However, L2s haven't proportionally increased Ethereum's revenue. Their contributions come mainly from:
- Data Availability (DA) fees (post-EIP4844, these are Blob fees).
- MEV income, which L2s mostly retain without sharing with Ethereum.
This has led to Ethereum entering an inflationary phase, weakening its "ultrasound money" narrative.
DA fees aren't a reliable revenue source for Ethereum because:
- DA only generates priority fees when saturated, enabling monopoly pricing.
- In unsaturated conditions, DA acts like a commodity, allowing users to hedge or find alternatives.
- DA demand growth doesn't match supply growth; much transaction volume comes from bots, which can slow if costs rise.
Ultimately, scaling contradicts profiting from transaction congestion. Ethereum's L2 architecture reflects this. While L2s still identify as "Ethereum L2," their revenue models are diverging, necessitating separate valuation frameworks.
Types of L2 Business Models
Universal L2
These are general-purpose L2s aiming to host full application ecosystems. They often adopt alliance-like structures and innovate in profit-sharing to incentivize developers and users.
Universal L2s compete directly with alternative L1s (Alt L1s). They capture nearly 100% of their revenue, aligning with the "enterprise" model. Their valuation should assess ecosystem health and income, similar to Alt L1s.
Advantages include leveraging Ethereum's community and ETH liquidity. Disadvantages include weaker token assetization and customer acquisition capabilities.
Alliance L2
Alliance L2s operate like permissioned ecosystems within Ethereum. They require approval to launch L2/L3 solutions, ensuring controlled business models.
Examples include Arbitrum, Optimism, zkSync, and Initia. These L2s act as centralized "protocols," managing internal business models and participants strategically. They balance decentralization with control to foster synergy and resource sharing.
Alliance L2s resemble centralized versions of Ethereum, offering strategic application deployment. Partnerships with entities like Coinbase and Sony highlight their appeal for launching breakthrough applications.
Appchain L2
Appchain L2s are application-specific rollups with enhanced value capture mechanisms. Their valuation should combine application value with L2 benefits, regardless of leaning "enterprise" or "protocol."
Most Appchains rely on Alliance L2s or Rollup-as-a-Service (RaaS) for lower launch costs and ecosystem support. Benefits include better token utility and MEV capture, but they sacrifice composability and liquidity.
Suitable applications have strong internal cycles, like perpetual DEXs or GameFi. Long-term, ROI assessment is crucial beyond initial narrative hype.
How L2 Impacts Ethereum's Business Model
Post-Merge and EIP1559, Ethereum captured high priority fees and MEV from limited block space. With L2 scaling, it ceded MEV from scaled transactions and reduced priority fees from L1. EIP4844 further reduced DA income.
This profit surrender isn't typical of an "enterprise." Instead, Ethereum prioritizes decentralization and autonomy, allowing L2s to grow with minimal economic burden, even at the cost of some decentralization.
Ethereum as an L2 Issuance Protocol
Ethereum's Rollup-Centric roadmap positions it as a "protocol" rather than an "enterprise." It sets guidelines (e.g., L2Beat Rollup stages) but doesn't enforce them strictly. Vitalik's Ethereum Alignment proposals may increase cohesion, but overall, Ethereum remains highly decentralized.
Ethereum acts as a permissionless platform for issuing L2s, offering high decentralization, censorship resistance, and security. Unlike typical issuance platforms that charge fees (e.g., Uniswap's swap fees), Ethereum initially forgoes profit gates, fostering L2 growth without financial burden.
Ethereum as a Store of Value & Programmable Trust Currency
ETH can't be valued purely via "enterprise" or "protocol" models post-scaling. By sacrificing profit, Ethereum fosters ecosystem growth, ultimately deriving value from ETH's monetary role.
Some argue ETH's value lies in security. However, distributed networks don't inherently require speculative assets for node incentives; alternatives like stablecoins or PoW exist. ETH's security also has reflexivity, tied to its price.
ETH's historical value drivers include:
- Token issuance (initial PMF).
- DeFi Summer liquidity mining (liquidity denomination).
- Liquid staking (enhanced liquidity value).
- L2 mining (combining issuance, liquidity, and staking).
- Restaking and AVS mining (further combining the above).
These moments reinforced ETH's role in asset issuance, liquidity provision, and staking, making it the preferred currency for infrastructure, protocols, and users.
ETH faces competition from L2 native assets (e.g., Base's $cbBTC) and intent-based networks offering off-chain liquidity. However, its network effects and incremental demand from economic growth strengthen its position.
Frequently Asked Questions
What is the main difference between Ethereum and L2 business models?
Ethereum emphasizes decentralization and acts as a foundational protocol, often sacrificing profit for ecosystem growth. L2s focus on commercial viability, adopting more centralized "enterprise" or "protocol" models to capture value.
Why did Ethereum give up revenue from L2 solutions?
To reduce economic burden on L2s, enabling them to scale and innovate freely. This trade-off fosters long-term ecosystem expansion, which benefits ETH's monetary value.
How do Universal L2s compete with alternative L1s?
They leverage Ethereum's community and ETH liquidity but face challenges in token assetization and user acquisition compared to Alt L1s.
What are Alliance L2s?
They are permissioned L2 ecosystems that balance decentralization with control. They manage resources strategically to foster synergy and attract major partners.
Are Appchains suitable for all applications?
No. They best suit applications with strong internal economies, like perpetual DEXs or GameFi, where enhanced token utility and MEV capture outweigh lost composability.
What is ETH's primary value driver?
ETH derives value from its role in asset issuance, liquidity provision, and staking within Ethereum's ecosystem. Its network effects make it the preferred currency for economic activities.
Conclusion
Crypto business models fall into three categories: enterprise, protocol, and asset. Ethereum's early L2 strategy pushed it toward a permissionless "protocol" and ETH toward "monetary" value. By sacrificing L2 revenue, Ethereum enabled L2s to grow with minimal burden.
Alliance L2s evolved into centralized "protocols," continuing Ethereum's mission with more control. Universal L2s compete as "enterprises," while Appchains should be valued as improved "applications." L2s flourish due to Ethereum's decentralization and profit sacrifice.
Ethereum, abandoning DA as a revenue model, becomes a permissionless L2 issuance protocol without profit gates. It bets on incremental market growth from L2 alliances and enterprises.
ETH's value stems from continuous asset issuance and liquidity mechanisms within Ethereum. Its network effects ensure dominance despite competition. As the ecosystem expands, ETH will capture value from increased adoption, solidifying its role as the premier crypto asset.
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Understanding Ethereum's trade-offs clarifies L2's role: driving commercial value with technical flexibility. ETH, as the network's most effective asset, will appreciate with ecosystem growth, embodying monetary value in crypto.