Layer-1 vs. Layer-2: The Battle for dApp Economic Dominance

This article analyzes the advantages and disadvantages of Layer-2 (L2) compared to Layer-1 (L1) in terms of operational costs, speed, and Maximal Extractable Value (MEV), ultimately exploring the decision matrix for deploying dApps on either L1 or L2 in the current environment. By comparing the strengths and weaknesses of different blockchain ecosystems, we highlight L2's unique advantages in maximizing dApp profitability, facilitating a shift in the crypto industry towards profit-driven business models.

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The Decision Matrix: L1 or L2 for dApp Deployment?

The following decision matrix considers dApp deployment from the perspective of developers, analyzing whether to choose L1 or L2 under the current circumstances, assuming both support similar application types (i.e., neither L1 nor L2 is customized for specific application types).

Beyond the relatively low MEV resulting from the centralization of block producers, L2 hasn't fully realized its other advantages. For example, while L2 has the potential for lower transaction costs and faster throughput, Solana currently outperforms EVM-based L2s in terms of performance and transaction costs.

As Solana continues to improve throughput and implement MEV tax mechanisms (like ASS and MCP), L2s need to explore new ways to help dApps maximize revenue and reduce costs. My current view is that L2s are structurally better positioned than L1s for rapid implementation of dApp profit maximization strategies.

The Crucial Role of Execution Layers in Maximizing App Revenue

One key aspect of maximizing application revenue is the allocation of transaction fees/MEV. Currently, MEV tax or fee-sharing requires "honest block proposers"—those willing to follow prioritized ordering rules or share revenue with applications according to predefined rules. Another approach involves allocating a portion of the base fee (similar to EIP-1559) to the dApp involved in the user interaction; Canto CSR and EVMOS seem to employ this mechanism. This at least improves a dApp's ability to bid for MEV, making it more competitive in the transaction inclusion market.

In L2 ecosystems, if the block proposer is operated by a team (i.e., a single block proposer), it's inherently "honest," and transparency in the block building algorithm can be ensured through reputation mechanisms or Trusted Execution Environments (TEEs). Two L2s have already adopted fee-sharing and prioritized block building, while Flashbots Builder, with minor modifications, could offer similar functionality to the OP-Stack ecosystem.

In the Solana Virtual Machine (SVM) ecosystem, infrastructure like Jito can proportionally redistribute MEV revenue to dApps (e.g., calculated based on CUs; Blast uses a similar mechanism). This means that while L1s are still researching MCP and built-in ASS solutions (Solana might push this, but the EVM ecosystem lacks a similar CSR revival plan), L2s can enable these features faster. Because L2s can rely on trusted block producers or TEE technology, they don't need to enforce OCAproof mechanisms, allowing for quicker adjustments to the dApp's MRMC (Revenue, Margin, MEV Competition) model.

Structural Advantages of L2

The advantages of L2 extend beyond development speed or fee redistribution; they face fewer structural limitations. The survival conditions of L1 ecosystems (i.e., maintaining the validator network) can be described by the following equation:

(Number of Validators) × (Validator Operational Cost) + (Staked Capital Requirement) × (Capital Cost) < TEV (Inflation + Total Network Fees + MEV Tips)

From a single validator's perspective:

(Validator Operational Cost) + (Staked Capital Requirement) × (Capital Cost) > Inflation Rewards + Transaction Fees + MEV Rewards

In other words, L1s face a hard constraint when aiming to reduce inflation or reduce fees (through sharing with dApps): validators must remain profitable! This limitation is more pronounced if validator operational costs are high. For example, Helius's SIMD228 article points out that reducing inflation according to the proposed emission curve, with a 70% staking rate, could cause 3.4% of current validators to exit due to decreased profitability (assuming REV maintains 2024 volatility levels).

This means that in L1 ecosystems, the pressure on validator profitability creates a ceiling for reducing inflation or adjusting fee allocation. L2s, however, are not subject to this constraint and can more freely explore strategies to optimize dApp revenue.

Solana validators currently face high operational costs, directly limiting the "shareable profit margin," especially as inflation decreases. If Solana validators must rely on REV (MEV share of staking rewards) to remain profitable, the total percentage allocatable to dApps will be severely restricted. This leads to an interesting trade-off: higher validator operational costs necessitate a higher overall network take-rate.

From a network perspective, the following equation must hold:

Total Network Operational Cost (including capital cost) < Total Network REV + Emission

Ethereum's situation is similar but less severely impacted. Currently, ETH staking APR (Annual Percentage Rate) is between 2.9% and 3.6%, with about 20% coming from REV. This also means Ethereum's ability to optimize dApp revenue is constrained by validator profitability requirements.

This is where L2s have a natural advantage. On L2, the total network operational cost is simply the operational cost of a single sequencer; there's no capital cost because there's no staking requirement. Compared to L1s with numerous validators, the profit margin required for L2 to break even is minimal. This means that, maintaining the same profit margin, L2 can allocate more value to the dApp ecosystem, significantly increasing the revenue potential for dApps.

L2 network costs will always be lower than those of an equivalent L1 because L2 only periodically "borrows" L1 security (occupying a portion of L1's block space), while L1 must bear the security costs of its entire block space.

L1 vs. L2: The Next Battleground

By definition, L2 cannot compete with L1 in terms of liquidity, and because the user base is still primarily concentrated on L1, L2 has struggled to directly compete with L1 at the user level (although Base is changing this trend). However, few L2s have truly leveraged their unique advantage as L2s—the characteristics stemming from the centralization of block production.

While the most discussed advantages of L2 are mitigating malicious MEV and improving transaction throughput (some L2s are exploring this), the next major battleground in the L1 vs. L2 war will be dApp economic models. L2's advantage lies in its non-OCAproof TFM (non-strongly composable TFM), while L1's strength is in CSR (Contract Self-Revenue) or MCP (Minimal Consensus Protocol) + MEV tax.

A Positive Development for the Crypto Industry

This competition is highly beneficial for the crypto industry because it directly leads to:

• dApp revenue maximization and cost minimization, incentivizing developers to build better dApps.
• A shift in the crypto industry's incentive mechanisms, moving from infrastructure token premiums (L(x) premiums) to profit-driven long-term crypto businesses.
• Combined with clearer DeFi regulations, protocol-level token value capture, and the entry of institutional capital, this fosters a shift towards an era focused on "real business models."

Just as we saw capital flow into infrastructure development in recent years, driving innovation in applied cryptography, performance engineering, and consensus mechanisms, competition between chains will now bring about a massive transformation in the industry's incentive structure, attracting the brightest minds to the Crypto application layer. This is the true starting point for the mass adoption of crypto!