Coinbase Warns Polygon (MATIC) and Other Scaling Solutions Threaten Ethereum (ETH) Price – Here’s Why

Crypto exchange Coinbase analyzes the impact that scaling solutions could have on the Ethereum (ETH) blockchain.

In a research report, Coinbase says that layer-2 scaling solutions (L2s) could cannibalize Ethereum’s revenue.

“The future of L2s may very well be a zero-sum game, as whichever L2 houses the majority of decentralized applications may one day power the entire Ethereum ecosystem. This suggests that L2s may eventually divert revenue away from Ethereum itself.”

Coinbase says that over the past 12 months, scaling solutions such as Polygon (MATIC), Optimism (OP) and Arbitrum generated less than one percent of the revenue that Ethereum pulled in.

“In the last 12 months, Token Terminal reported that Ethereum earned $9.971 billion in total revenue compared to a combined turnover of only about $78 million on Arbitrum, Polygon and Optimism.”

Source: Coinbase

The crypto exchange says that when Ethereum moves to a proof-of-stake (PoS) consensus mechanism, the scaling solutions will potentially lead to a decrease in the return on stake, and this could negatively affect the price of ETH.

“If more user activity migrates to L2s and these L2s require their own tokens to facilitate transactions, it could potentially reduce the return on investment for validators who would earn less from these net transaction fees. If it discourages staking on the platform, it could increase size of ETH liquid circulating supply, possibly hurting ETH prices.”

However, Coinbase says that in the long run, scaling solutions could benefit Ethereum as they would increase network activity.

“Also, the impact of L2s eating into Ethereum’s revenue may be a short-term phenomenon. In the long term, revenue depends on greater activity in the overall crypto-ecosystem, as well as whether Ethereum becomes the dominant universal (or general-purpose) blockchain.”

If L2s facilitate more transactions by making them cheaper, faster and easier, the initial revenue impact may be offset by the increased activity that eventually takes place on the network.”

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