Ethereum. Just the name on its own used to call to mind visions of revolutionary disruption, a decentralized future powered by blockchain. A cloud of uncertainty has snuck in. As a financial analyst living in Tokyo, I’ve been keeping a keen eye on Ethereum’s move to Layer 2 solutions. This amendment is what really worries me though—it seems like less of a strategic reshuffling and more like a Hail Mary play.

The initial problem was clear: Ethereum's network was congested. The network became so congested that gas fees skyrocketed, such that even just a simple transaction became cost prohibitive. Layer 2 solutions such as Arbitrum and Optimism quickly became the solution, vowing to batch transactions and cut fees by up to 90%. On paper, that sounded like a great deal all around. And indeed, these solutions are working. I'm not denying that.

This is where the double-edged sword starts to reveal its sharp side, like the treacherous undercurrents lurking beneath an otherwise placid ocean surface. Has this never-ending pursuit of L2s unintentionally left Layer 1, the original Ethereum dream, a shell of what it once was? Are we abandoning the bedrock ideals of decentralization and security in pursuit of faster confirmation times and cheaper transactions?

Think of it like this: imagine a bustling metropolis, the heart of a nation's economy. That's Layer 1. Now, picture it happened overnight—everyone packing their bags and moving to the suburbs, leaving the city center empty. The suburbs provide more affordable housing and lower density. What happens to the city’s infrastructure, its cultural institutions and its very soul? Doesn’t the suburbs’ long-term prosperity continue to rest on the health of the urban core? That’s how I feel about Ethereum’s move to Layer 2.

The adoption of L2s has resulted in a fragmented ecosystem. Value is further dispersed, with value now on multiple chains making the original Ethereum network less relevant. Onboarding demand from Layer 1 Ether (ETH) has sunk along with transaction volume.

This, in my humble view, is why Ethereum is falling even further behind Bitcoin. Bitcoin is breaking all-time highs, fueled by big money and the unstoppable story of scarcity. In the meantime, Ethereum is struggling to get back on top of the turf it once ruled. Ethereum price discrepancy is the market’s blunt signal that it remains unconvinced by Ethereum’s pivot direction.

Bitcoin proponents are already declaring Ethereum "dead." For one, even if such pronouncements are unwarranted at this stage, they point to a rising concern regarding Ethereum’s future.

Japan is notorious for their conservative regulatory approach towards cryptocurrency. Japan takes the side of consumer protection and financial stability as opposed to the more laissez-faire approach of other Western nations. This cautiousness may seem like a roadblock to innovation but maybe it provides the best lesson of all.

Japan's regulatory environment is very strict. Therefore, crypto exchanges are expected to hold themselves to the strictest standards of security and compliance. What actually happened The pace of approval for new crypto products has been glacial. In this regard, the Japanese market can be seen as more closed to the potential risks posed by Layer 2 solutions. This will constrain the growth of the Ethereum ecosystem in Japan. It would protect Japanese investors from the downside risk of losing money on those investments.

Perhaps, a more balanced approach is needed, one that encourages innovation while mitigating the inherent risks of the crypto market. We need the "Goldilocks" approach. Not too loose, not too tight.

Many of Ethereum’s advocates either directly or indirectly call it “digital oil,” alluding to the underlying value and utility it has in powering the future digital economy. I find this analogy misleading. Beyond oil being a finite resource, it is a value that is intrinsic to oil. Ethereum, for all its technological innovation, is just a platform at the end of the day. Platforms can be disrupted. They can be replaced. Just ask MySpace users.

Ethereum could be facing its fiercest competition yet from new blockchains, chiefly Solana. Both are wrangling fiercely to win the favor of Wall Street and Big Tech. The race is certainly not over, and Ethereum’s Layer 2 gamble might be what decides its fate.

All this talk about how to improve/open up Layer 1 a few months back — that’s the real victory. Ethereum’s future depends on its ability to rejuvenate its base layer, rather than leaning fully on L2s to help bear the burden. It has to get faster, better and safer. Only then will the public Ethereum blockchain be able to fully deliver on its promise as a world computer.

In the long run though, Ethereum’s fate will depend on its flexibility and willingness to learn and progress. Doing so must not be at the expense of adaptation’s core values. The Layer 2 gamble may prove a wise decision, but it’s a high-stakes roll of the dice with fatal consequences built-in. Let’s proceed with care. By building on what’s come before, we can ensure that the next era of innovation is one marked by responsibility and progress.

What the future holds remains to be seen. How we lead today will determine whether Ethereum is a future legacy or a past warning.

Some Ethereum proponents compare it to "digital oil," suggesting its fundamental importance to the future digital economy. I find this analogy misleading. Oil is a finite resource with intrinsic value. Ethereum, while technologically innovative, is ultimately a platform. Platforms can be disrupted. They can be replaced. Just ask MySpace users.

Ethereum faces fierce competition from other blockchains like Solana, each vying for the attention of Wall Street and Big Tech. The race is far from over, and Ethereum's Layer 2 gamble could ultimately determine its fate.

A Call for Layer 1 Revival

The recent focus on optimizing Layer 1 is a welcome sign. Ethereum needs to revitalize its core network, not just rely on L2s to pick up the slack. It needs to become faster, more efficient, and more secure. Only then can it truly fulfill its promise as a world computer.

Ultimately, Ethereum's success hinges on its ability to adapt and evolve. But adaptation shouldn't come at the expense of its core values. The Layer 2 gamble might pay off, but it's a high-stakes bet with potentially fatal consequences. We must proceed with caution, learn from the past, and build a future where innovation and responsibility go hand in hand.

The future is not written, but the decisions we make today will determine whether Ethereum becomes a lasting legacy or a cautionary tale.