Welcome to The Protocol, CoinDesk’s tech newsletter covering the most important stories in blockchain. I’m Margaux Nijkerk, a reporter at CoinDesk.
We’re revamping the newsletter to bring you a deeper look at the biggest trends, breakthroughs and debates shaping blockchain technology each week.
This week, we’re diving into the state of the Ethereum layer-2 ecosystem.
To many observers, the developments have revived a familiar question: Has Ethereum’s sprawling layer-2 ecosystem become too crowded?
Industry participants, however, argue the opposite.
“The thing to recognize is that anywhere where somebody would be running a smart contract on an existing blockchain, someone could equally run a layer two,” said Ben Fisch, co-founder and CEO of Espresso Systems. “We’re in a consolidation phase for general-purpose layer twos, not layer twos broadly.”
Ethereum layer-2s exploded over the past several years as improvements in rollup technology dramatically reduced the cost and complexity of launching new chains. Rollups work by processing transactions off Ethereum’s main blockchain, bundling hundreds of them together, and then periodically posting compressed transaction data back to Ethereum for settlement and security. The model allows applications to offer faster transactions and lower fees while still relying on Ethereum as the ultimate source of trust.
The result was a flood of networks built using infrastructure stacks such as Optimism’s OP Stack, Arbitrum Orbit and zkSync. But while launching a chain became easier, attracting users proved much harder.
“There were way too many general-purpose layer twos, which frankly don’t make sense as a product, because there’s no reason to have many, many versions of the same thing,” Fisch said.
The numbers support that view. Today, activity across Ethereum’s layer-2 ecosystem remains heavily concentrated among a handful of networks. Base and Arbitrum alone account for more than 80% of layer-2 DeFi total value locked (TVL), according to DefiLlama data.
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That concentration has only become more apparent as smaller chains struggle to maintain liquidity. Over the past six months, networks including Linea, World Chain, Starknet and Mantle have all seen declining bridge deposits. Linea’s deposits, for example, fell from $976 million in November 2025 to $367 million in May 2026, a decline of more than 60%.
Token Terminal
“I think only a few L2s with clear financial demand will be able to sustain themselves over time,” said Alice Hou, a former research analyst at Messari, to CoinDesk.
For Hou, the key issue isn’t whether layer-2 technology works, it’s whether a network can generate enough activity to justify its existence.
“Without enough blockspace demand, user activity or developer traction, there is little reason to continue maintaining an L2,” she said.
Ironically, the economics of launching a rollup have never looked better. Ethereum’s Dencun upgrade, introduced in 2024, dramatically reduced the cost of posting rollup data to Ethereum through blobs. According to Messari research, data availability costs now represent only a small fraction of operator expenses for many OP Stack chains.
“From an operator perspective, it is definitely cheaper to run an L2 today,” Hou said. “The economics of launching an L2 have become easier, but the real challenge is still generating enough sustained demand to make the network worth operating.”
That dynamic has created a paradox. The barriers to creating a blockchain continue to fall, but the barriers to attracting users continue to rise. As a result, many teams are discovering that simply offering another Ethereum-compatible chain is no longer enough.
“People have realized that all the different general-purpose blockchains compete with each other,” Fisch said. “If you want to succeed, you need to build out a differentiated application.”
From infrastructure to applications
The shift is already visible across the industry. Several blockchain projects that once emphasized infrastructure are increasingly focusing on payments, stablecoins, tokenized assets and other application-specific markets. Traditional financial institutions may become some of the biggest beneficiaries.
Fisch pointed to asset managers launching tokenized money-market funds, stablecoin issuers and tokenized deposit platforms as examples of businesses that have clear reasons to operate on-chain. For those firms, a dedicated layer-2 can offer lower costs, greater control and more predictable performance than deploying directly as a smart contract.
“The technology decision to run as a layer two is simply an option of running an application onchain,” Fisch said.
Hou said she agreed that distribution matters more than technology.
“Only L2s with a solid existing user base and a clear reason to benefit from blockchain infrastructure should launch their own networks,” she said.
That helps explain why exchanges remain among the strongest candidates. Coinbase’s Base has become the dominant example, leveraging the exchange’s existing customer base while integrating users into Ethereum’s broader DeFi ecosystem.
“The question should not be, ‘Can this company launch an L2?'” Hou said. “It should be: ‘Does this business already have enough distribution, financial activity and ecosystem synergies to make an L2 meaningfully useful?'”
“I don’t view layer twos as scaling Ethereum,” he said. “I view layer twos as leveraging the existing security properties of layer one.”
In that framework, Ethereum functions less as a destination and more as a settlement layer that applications can use when it makes sense.
“Ethereum is sort of a commodity that layer twos can choose to use,” Fisch said.
That vision aligns with a broader trend unfolding across crypto infrastructure. Rather than competing to become the next dominant blockchain, more projects are increasingly treating blockchains as modular components that can be assembled into larger products.
If that trend continues, the future Ethereum ecosystem may look very different from the one imagined during the rollup boom. Instead of hundreds of competing general-purpose chains fighting for liquidity, the winners could be a smaller number of networks tied to specific businesses, financial products and user communities.
