Economics of Layer 2 Scaling: Estimating Price Elasticity of Layer 2 Gas Fees

8 Pages Posted: 26 Aug 2024

See all articles by Dongryeol Lee

Dongryeol Lee

UCLA - Anderson School of Management

Date Written: August 05, 2024

Abstract

This paper examines the price elasticity of gas fees within the Arbitrum Layer 2 (L2) network to understand how transaction volumes respond to fee changes. Using a Two-Stage Least Squares (2SLS) regression methodology, we address endogeneity issues by employing Ethereum Layer 1 (L1) gas fees as an instrumental variable. Our findings reveal a significant positive relationship between L1 and L2 gas fees, and a significant negative relationship between the fitted L2 gas fees and L2 gas usage. The estimated demand elasticity is-1.11, indicating that a one US dollar increase in the Arbitrum L2 gas fee results in approximately a 1.11 million-unit decrease in gas usage. These insights are crucial for optimizing transaction fees and enhancing user adoption in decentralized ecosystems.

Keywords: Blockchain Economics, Layer 2 Scaling, Arbitrum, Demand Elasticity

Suggested Citation

Lee, Dongryeol, Economics of Layer 2 Scaling: Estimating Price Elasticity of Layer 2 Gas Fees (August 05, 2024). Available at SSRN: https://ssrn.com/abstract=4916662 or http://dx.doi.org/10.2139/ssrn.4916662

Dongryeol Lee (Contact Author)

UCLA - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

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