An Economic Model of the L1-L2 Interaction

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