An Economic Model of the L1-L2 Interaction

22 Pages Posted: 4 Mar 2025

See all articles by Campbell R. Harvey

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Fahad Saleh

University of Florida

Ruslan Sverchkov

University of Warwick - Warwick Business School

Date Written: March 03, 2025

Abstract

We identify a credible economic scenario in which the value of a native Layer-1 cryptoasset vanishes over time and discuss ways to avoid this in an economic model of the interaction between a Layer-1 (L1) blockchain and an associated Layer-2 (L2). These results arise when the L2 becomes sufficiently attractive for investment relative to the L1, a situation that would occur if developers focus exclusively on improving the L2s while ignoring the L1. Crucially, our results establish that, even if the L2s are intended as the primary vehicle for scaling, developers must nevertheless continue to improve the L1 to avoid an adverse outcome for the L1.

Keywords: Layer-2, Rollups, Ethereum, Proof-of-Stake, dApps

Suggested Citation

Harvey, Campbell R. and Saleh, Fahad and Sverchkov, Ruslan, An Economic Model of the L1-L2 Interaction (March 03, 2025). Available at SSRN: https://ssrn.com/abstract=5163823 or http://dx.doi.org/10.2139/ssrn.5163823

Campbell R. Harvey (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)

HOME PAGE: http://www.duke.edu/~charvey

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Fahad Saleh

University of Florida ( email )

Warrington College of Business
Gainesville, FL 32611
United States

HOME PAGE: http://www.cryptoeconprof.com

Ruslan Sverchkov

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

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