Ethereum is a legacy chain that has scaled over time to deal with the wants of the ever-demanding international person base. To alleviate the mainnet of the deluge of transactions, extra layer-2 platforms have sprouted.
They’re cheaper to transact on and scalable, permitting customers to deploy intensive decentralized purposes that received’t be possible on the bottom layer.
Ethereum Layer-2s Are A Success, However There Is A Drawback
Based on L2Beat, layer-2 platforms on Ethereum at the moment manage over $39 billion in complete worth locked (TVL). Even so, Nikita Zhavoronkov, a lead developer at Blockchair, is worried and thinks layer-2s are a “enormous authorized legal responsibility ready to occur.”
Taking to X, Zhavoronkov argues that layer-2 protocols on Ethereum and Bitcoin are susceptible to regulator crackdown. Within the developer’s evaluation, these platforms resemble cash service companies (MSBs), contemplating how they’re designed to function. Since they don’t seem to be regulated, the developer stated they is perhaps working illegally.
High of the listing, Zhavoronkov argues that the majority current layer-2 options should not really decentralized. They level to utilizing multi-signature contracts or “emergency councils” managed by restricted teams as proof of centralized management.
Furthermore, the developer highlighted the custodial nature of many layer-2s. Customers don’t immediately management person funds based mostly on how these scalable platforms function. The analyst says this tinge of centralization presents a vulnerability if regulators goal these entities.
Zhavoronkov provides that although layer-2 platforms are enablers, working from a trustless base, they perform as for-profit companies, producing income from transaction charges. As a result of a few of them, like Optimism and Arbitrum, problem tokens, income accrued can affect token costs.
The developer contends that this is the reason layer-2 platforms aren’t any totally different from conventional corporations than really decentralized platforms.
Extra Headwinds For ETH, United States SEC Reported Investigation
Given their mode of operation and mannequin, Zhavoronkov’s assertion that layer-2 options may very well be categorised as MSBs underneath United States legal guidelines is a priority. Such a classification may topic these protocols to stringent rules, compliance necessities, and potential sanctions.
This not solely threatens to stifle innovation but in addition has the potential to hamper Ethereum’s scalability severely.
Whereas some have dismissed Zhavoronkov’s viewpoint as “distorted,” the truth that Ethereum is reportedly underneath investigation by america Securities and Change Fee (SEC) provides a layer of complexity to the state of affairs.
Analysts say the SEC’s classification of ETH as a safety fairly than a commodity like BTC may additional delay the approval of spot Ethereum exchange-traded funds (ETFs).
Function picture from Canva, chart from TradingView