What It Means for Ethereum Holders

Michael Nadeau raises critical questions on Ethereum’s L1 role amid growing L2 adoption and scalability.
Taiko’s surge in adoption highlights Ethereum L2’s increasing relevance and potential shift in value capture.

The Ethereum ecosystem faces critical challenges concerning the future of value capture and network dynamics, particularly as Layer 2 (L2) solutions gain popularity.

Michael Nadeau, founder of The DeFi Report, tweeted that he was stressing important considerations for Ethereum (ETH) holders at the core of Ethereum’s changing economic structure and the changing market sentiment on L1 and L2 values.

Nadeau claims that although ETH still commands a premium, valued at 13 times the aggregate completely diluted value of top L2s, this supremacy may be questioned if network scaling and interoperability criteria permit value to accumulate more heavily on L2s.

The market still values ETH at a 13x premium to the fully diluted value of the top L2s combined.

But if we assume the network is able to scale on L2s, with interoperability standards forthcoming, where does the most value accrue?

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If you’re holding ETH, these are some… pic.twitter.com/DlD2SVMi0E

— Michael Nadeau | The DeFi Report (@JustDeauIt) November 7, 2024

Will Ethereum Role as the Primary Settlement Layer Endure?

Nadeau raises provocative issues, implying that one could contest Ethereum’s function as a Layer 1 (L1) settlement layer. Should the market progressively prioritize execution—that is, maximizing extractable value, or MEV—over settlement—this change might fundamentally affect Ethereum’s important role in the DeFi ecosystem.

He stated, “Is it possible that L1 validators migrate to the largest Layer 2 if L2s do not feel anchored to Ethereum L1?” This begs questions regarding the direction of Ethereum’s security architecture and whether Ethereum L1 will always be strategically significant.

Furthermore, with systems like Eigen Layer providing “security as a service,” ETH’s role in producing yield outside of basic settlement fees could be changed, hence redefining the purpose of ETH inside DeFi.

Taiko’s explosive expansion on Ethereum L2 emphasizes this more still. Taiko’s total value locked (TVL), as reported by CNF, jumped over 1,000%, hitting a record $81 million along with a substantial increase in daily transactions to 5 million.