In this week's edition of The Protocol Newsletter, we are exploring the current landscape of the Ethereum layer-2 ecosystem.
By Margaux Nijkerk|Edited by Nikhilesh De Jun 4, 2026, 1:52 p.m. 5 min readMake preferred onKey Insights:
Welcome to The Protocol, CoinDesk’s technology newsletter that covers significant developments in blockchain. I’m Margaux Nijkerk, a reporter at CoinDesk.
We’re enhancing the newsletter to provide a more in-depth analysis of the major trends, innovations, and discussions influencing blockchain technology weekly.
This week, our focus is on the Ethereum layer-2 ecosystem.
Last month, when Zero Network announced its closure, the crypto community reacted with concern: Yet another Ethereum layer-2 project has ceased operations.
This closure added to a growing list of struggling rollups and sparked renewed discussions about the potential oversaturation of Ethereum's extensive layer-2 ecosystem. Simultaneously, Ethereum's co-founder Vitalik Buterin has urged developers to reconsider the long-term scaling strategy of the network while several significant projects have shifted from general-purpose blockchain marketing towards more specialized applications focused on payments, stablecoins, and tokenized assets.
These developments have reignited a common question: Is the Ethereum layer-2 ecosystem too congested?
However, industry insiders suggest a different perspective.
"It's essential to realize that anywhere a smart contract could run on an existing blockchain, it could also run on a layer two," remarked Ben Fisch, co-founder and CEO of Espresso Systems. "We're currently in a consolidation phase specifically for general-purpose layer twos, not for layer twos as a whole."
Over recent years, Ethereum layer-2s have surged as advancements in rollup technology have significantly lowered the cost and complexity of launching new chains. Rollups manage transactions off the Ethereum main blockchain, grouping hundreds of them, and periodically sending compressed transaction data back to Ethereum for security and settlement. This model enables applications to provide quicker transactions and reduced fees while still relying on Ethereum for ultimate trust.
This led to an influx of networks built on infrastructure stacks like Optimism's OP Stack, Arbitrum Orbit, and zkSync. However, while launching a chain became simpler, attracting users proved to be significantly more challenging.
"There are far too many general-purpose layer twos, which don't make sense as products because there is no justification for having multiple versions of the same thing," Fisch stated.
Statistics back this viewpoint. Currently, activity within Ethereum's layer-2 ecosystem is predominantly concentrated among a few networks. Base and Arbitrum collectively represent over 80% of total value locked (TVL) in layer-2 DeFi, according to data from DefiLlama.
(DefiLlama)This concentration has become more pronounced as smaller chains struggle with liquidity. In the past six months, networks such as Linea, World Chain, Starknet, and Mantle have all witnessed decreasing bridge deposits. For instance, Linea's deposits plummeted from $976 million in November 2025 to $367 million in May 2026, a drop of over 60%.
Token Terminal"I believe only a select few L2s that can demonstrate clear financial demand will manage to survive long-term," remarked Alice Hou, a former research analyst at Messari, in a conversation with CoinDesk.
For Hou, the primary concern is not whether layer-2 technology is effective, but whether a network can generate sufficient activity to warrant its existence.
"If there is inadequate blockspace demand, user activity, or developer interest, there is little rationale for maintaining an L2," she explained.
Ironically, the economics of launching a rollup have never been more favorable. The Ethereum Dencun upgrade, implemented in 2024, significantly lowered the costs associated with posting rollup data to Ethereum through blobs. Research from Messari shows that data availability costs now constitute only a small part of the operational expenses for many OP Stack chains.
"From the operator's standpoint, it is indeed cheaper to run an L2 nowadays," Hou noted. "While launching an L2 has become easier economically, the real challenge remains generating enough sustained demand to justify operating the network."
This situation has created a paradox: while the barriers to creating a blockchain continue to decrease, the challenges in attracting users are intensifying. Consequently, many teams are realizing that merely providing another Ethereum-compatible chain is insufficient.
"People have come to understand that all the various general-purpose blockchains are in competition with one another," Fisch stated. "To succeed, you must develop a differentiated application."
Shifting Focus from Infrastructure to Applications
This shift is already observable across the sector. Numerous blockchain projects that previously focused on infrastructure are now pivoting towards payments, stablecoins, tokenized assets, and other specific application markets. This trend may benefit traditional financial institutions significantly.
Fisch highlighted examples such as asset managers launching tokenized money-market funds, stablecoin issuers, and platforms for tokenized deposits as entities that have compelling reasons to operate on-chain. For these companies, a dedicated layer-2 offers lower costs, enhanced control, and more predictable performance compared to deploying directly as a smart contract.
"The decision to operate as a layer two is essentially a choice for running an application on-chain," Fisch explained.
Hou concurred, suggesting that distribution is more crucial than technology.
"Only L2s with a robust existing user base and a clear rationale for benefiting from blockchain infrastructure should consider launching their own networks," she asserted.
This perspective helps clarify why exchanges are among the most viable candidates. Coinbase's Base has emerged as a leading example, leveraging the exchange's existing customer base while integrating users into Ethereum's broader DeFi ecosystem.
"The pertinent question should not be, 'Can this company create an L2?' but rather: 'Does this business already possess sufficient distribution, financial activity, and ecosystem synergies to render an L2 genuinely beneficial?'" Hou proposed.
A New Perspective on the Layer-2 Landscape
The ongoing debate also reflects a fundamental disagreement regarding the true purpose of layer-2s. For many years, Ethereum advocates have primarily viewed rollups as a scaling solution for Ethereum itself.
Fisch, however, perceives them differently.
"I do not see layer twos as a means to scale Ethereum," he stated. "I perceive layer twos as utilizing the existing security features of layer one."
In this context, Ethereum serves less as a destination and more as a settlement layer that applications may leverage when advantageous.
"Ethereum is somewhat of a commodity that layer twos can opt to use," Fisch explained.
This vision aligns with a broader trend emerging in crypto infrastructure. Rather than striving to become the next leading blockchain, more projects are increasingly viewing blockchains as modular elements that can be combined into larger products.
If this trend persists, the future Ethereum ecosystem may differ significantly from the one anticipated during the rollup boom. Rather than a multitude of competing general-purpose chains vying for liquidity, the successful networks may consist of a smaller number tied to specific businesses, financial products, and user communities.
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