1. Crypto Business Models
Recently, there has been criticism regarding the value accumulation of Ethereum and Layer 2 (L2) solutions, driven by their rapid and exploratory developments. This article aims to explore some avenues for thought. Before discussing the specific business models of Ethereum and L2, let’s consider the overarching business models present in the crypto space.
1.1 “Enterprise” Models
Core: Control + Monopoly (Permissioned), Price Discrimination for Profit
These models focus on gaining significant control over services and protocols to increase revenue, akin to traditional business practices. Here, decentralization is largely expendable, provided users accept the framework. Profit-oriented entities must ensure efficient operations without ceding control.
Competition revolves around price discrimination capabilities, responsiveness to user needs, and growth potential. Tokens primarily serve customer acquisition and assetization purposes. For instance, the Solana Foundation exerts substantial control over its ecosystem, claiming to be the “Global Onchain Nasdaq” with a focus on fundamentals, particularly profit.
1.2 “Protocol” Models
Core: Permissionless Participation (Asset Issuance, Commerce), Fixed Fee Structures
This model emphasizes the creation of open and largely unchangeable protocol standards. Governance often involves DAOs or foundations, allowing for autonomous operation. The use of the protocol is permissionless, with profit models difficult to alter. Tokens typically function as governance and dividend tools.
Success hinges on sustainable product operation, demand longevity, and network effects from timing. Early pioneers that find product-market fit (PMF) gain a competitive advantage.
1.3 “Asset” Models
Core: Focus on the Value of Assets
This category includes BTC, Memecoins, and decentralized stablecoins. Assets gain consensus based on their characteristics and continue to empower themselves. Key attributes include early adoption advantages, mechanism properties (scarcity, deflation), and symbolic meanings that enhance acceptance.
Here, success depends on the strength of consensus and the asset’s ability to endure and thrive.
In the crypto world, different projects and assets align with or combine these business models, allowing for an assessment of Ethereum and L2 through this lens.
2. What Business Model Do L2 Solutions Represent?
2.1 Current Positioning of L2
Initially, L2 aimed to scale Ethereum’s transaction capacity. This goal has largely been met, as L2 now constitutes a significant portion of the Ethereum ecosystem, accounting for 85% of transactions and 31% of volume. The number of active addresses is three to four times higher on L2.
However, L2 has not correspondingly increased revenue for Ethereum. Revenue mainly comes from data availability (DA) fees and miner extractable value (MEV), with low expectations for Ethereum’s share. L2 has largely absorbed this income, pushing Ethereum towards inflation.
DA fees can only generate priority fees when saturated, while unsaturated conditions make it a commodity, limiting growth potential. L2’s expansion contradicts the profit model based on congestion.
2.2 Different L2 Business Models
2.2.1 Universal L2
Universal L2 seeks to develop a comprehensive application ecosystem. Successful models often innovate in incentive mechanisms for developers and user engagement. These L2s increasingly aim to reduce reliance on Ethereum while maximizing customization.
The management style is team-driven, with income largely retained under their control, resembling an “enterprise” model that values ecosystem and revenue assessment.
2.2.2 Consortium L2
Consortium L2s function similarly to Ethereum but operate within a permissioned framework. These models have the potential for better business outcomes due to strategic resource allocation. This form has emerged among early Universal L2s, blending ecosystem management with Ethereum’s security.
These L2s exhibit higher centralization, controlling participant dynamics and internal business models. This reflects a more centralized “protocol” model, as evidenced by Optimism’s approach.
2.2.3 Appchain L2
Appchain L2 represents a new value-capturing model, focusing on applications that blend “enterprise” and “protocol” elements. Many App Rollups rely on Consortium L2s for cost efficiency and ecosystem integration.
Despite lower setup costs, challenges remain in infrastructure development. Appchains thrive when they feature strong internal cycles, such as perpetual DEXs or GameFi.
3. How L2 Affects Ethereum’s Business Model
Post-Merge and EIP-1559, Ethereum captured significant MEV and priority fees from limited block space. With L2 scaling, Ethereum relinquished potential MEV and priority fees, which is atypical for an enterprise. This approach promotes decentralization and autonomy, fostering growth for L2 ecosystems.
3.1 Ethereum as an L2 Issuing Protocol
With a Rollup-Centric path established, Ethereum has leaned more towards a “protocol” rather than an “enterprise” model. Although some governance requirements exist, significant interference remains minimal.
Currently, Ethereum L1 hosts over half of the ecosystem’s transactions, acting as a permissionless L2 issuing platform. Unlike typical business models, Ethereum has not set profit thresholds for L2 revenue, leading to many L2s benefiting from Ethereum’s liquidity without contributing to its income.
3.2 Ethereum as a Value-Storing Asset and Programmable Trust Currency
ETH cannot be valued using traditional “enterprise” or “protocol” frameworks due to the original L1 business model’s obsolescence post-scaling. Ethereum’s decision to forgo profit margins aims to foster ecosystem growth, ultimately influencing ETH’s monetary value.
Historical highlights of Ethereum include token issuance, DeFi liquidity mining, liquid staking, L2 mining, and restaking. Each iteration reinforces ETH’s demand and utility, embedding it as a primary asset in the ecosystem.
Despite facing competition from L2 native and derivative assets, ETH maintains dominance through network effects and economic activity growth. As the ecosystem expands, ETH’s fundamental value will continue to manifest, reinforced by its pivotal role in every operational phase.
4. Conclusion
Crypto encompasses three valuable business models: enterprises, protocols, and the currency itself, distinguished by control and pricing capabilities. Ethereum’s strategic orientation towards permissionless protocols and ETH as a currency reflects its unique positioning.
With L2 ecosystems evolving into more centralized models, Ethereum remains committed to fostering decentralized growth. As a permissionless issuing protocol, it prioritizes market expansion over immediate profits, a bold wager on future growth.
Ultimately, ETH’s value as a network-effect-driven asset will thrive alongside the expanding Ethereum ecosystem, reinforcing its preeminence in the crypto landscape.
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