L1 is the large mainframe of the Web3 era, while L2 is the managed server.
Written by: Kydo
Translated by: Luffy, Foresight News
Last week, a significant event occurred in the crypto space, but only a few fully understood its important implications.
Celo announced its transition from an independent L1 blockchain to an L2 blockchain on Ethereum.
It is easy to interpret this as yet another technical migration. However, in reality, it marks a broader shift that Ethereum has been quietly promoting, reshaping our understanding of how projects in the crypto space are built.
Let’s delve deeper.
1. The industry is starting to take cost and revenue issues seriously
We are in a long-overdue adjustment. The crypto market is beginning to re-emphasize fundamentals; narratives are still important, but now people are asking:
What is the actual revenue of this chain?
What are its operating costs?
Where is the value accumulating?
A series of new metrics, such as market cap to revenue ratio (REV), are becoming increasingly important, revealing significant differences between seemingly similar blockchains.
This may be the reason why Celo decided to shift to Ethereum L2.
2. L1 cannot generate revenue, but L2 can
People often overlook this: L1 chains cannot sustainably generate revenue.
Why? Because all the value flows directly to stakers or miners. L1 charges fees, which are immediately distributed as block rewards or staking returns. There is no retained profit margin, no surplus, and thus no remaining funds to support innovation or protocol development.
This creates a strange phenomenon: L1 can be a highly valuable platform, yet it operates like public infrastructure, lacking an embedded funding mechanism for development evolution.
In contrast, L2 can retain and reallocate revenue. Sequencer fees, maximum extractable value (MEV), and even customized charges for block space can be retained and then reinvested into research and development, developer funding, growth promotion activities, or public goods. Over time, this is a model that can achieve true sustainability and keep incentives aligned.
This is why so many new ecosystems choose to prioritize building on L2. It is not just about technical architecture; it is about economic design.
3. L1 is the large mainframe of the Web3 era
Here’s a simple mental model: L1 blockchains are like the large mainframes of the crypto space.
In the early days of the internet, if you wanted to run an important application, you had to buy a large mainframe. You had to maintain the hardware, write your own network stack, and be responsible for uptime, security, performance, and all other aspects. It was powerful but costly.
Today, running an L1 blockchain faces similar challenges. You need your own consensus mechanism, your own set of validators, and your own token incentives to secure the network. To keep the system running and secure, you need to spend millions of dollars each year.
For example, Celo spends about 4% to 6% of its total token issuance annually, roughly $15 million to $25 million each year, just to maintain basic security and system uptime.
This is not uncommon. Ethereum is like this, and so is Solana. Every independent L1 bears such costs. But the key is: this cost does not decrease with scale. If you are a smaller L1 chain, the costs you bear can be overwhelming.
4. L2 is like a managed server: equally powerful, but at a lower cost
Now imagine that you no longer run a large mainframe but switch to a managed server.
You can still control your environment, customize how your blockchain operates, and retain autonomy in execution. But you no longer have to ensure the security of the physical devices; L2 on Ethereum is like this.
As an L2, Celo will still provide the same user experience. However, the heavy lifting in terms of security, such as fraud proofs, consensus mechanisms, and finality of the base layer, is handled by Ethereum. The cost of maintaining this chain has significantly decreased.
No longer is it a $20 million annual security cost; now the cost is merely that of state storage and data availability, which can be further reduced through data compression and using alternative data availability layers (Celo chose EigenDA).
5. Why this is a strategic masterstroke for Ethereum
This is not just about Celo; it signifies that Ethereum's long-term strategy is finally beginning to take shape.
Ethereum is no longer trying to be "the one server to rule them all." That vision of a single dominant chain has proven to be incorrect in every era of computing, whether Web1, Web2, or now Web3.
Instead, Ethereum is becoming the foundational layer upon which other chains can build, providing security, decentralization, and interoperability as a service.
Indeed, at first glance, this may seem self-cannibalizing. Ethereum is lowering the "premium" of its L1 chain. But in reality, by becoming the foundation that other chains rely on, it is capturing a much larger market.
You can insist that there will only be one server, or you can choose to help build the next billions of servers.
Just as no one runs their own large mainframe today, in the future, few projects will run their own L1 chains. They will run managed servers, they will become L2, and they will do all of this based on Ethereum.
Moving towards efficiency is an inevitable trend
As projects face market pressures to reduce costs and increase revenues, they will arrive at the same conclusion as Celo:
When Ethereum can provide stronger security at a lower cost, why spend tens of millions of dollars to build a new L1?
This may not happen overnight, but it will come, as economic laws do not fail.
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