Ethereum's $1B Bet Defies Layer 2 Dominance Narrative

A deep dive into how Ethereum’s evolving role as foundational infrastructure, sustained investor confidence, and a $1 billion treasury bet challenge the simplistic story of its decline amid Layer 2 supremacy.

Introduction: The Great Migration and the Unshaken Foundation

The landscape of the Ethereum ecosystem in late 2025 presents a fascinating paradox. On-chain data reveals an undeniable trend: the vast majority of user activity and transactions have migrated to faster, cheaper Layer 2 (L2) scaling solutions. Networks like Polygon, Arbitrum, and Optimism now dominate daily transaction volumes, processing millions of operations while Ethereum’s mainnet handles a fraction of that load. Concurrently, metrics such as Total Value Locked (TVL) on the base layer have eased, and the ETH supply has returned to a mildly inflationary state.

Yet, beneath this surface narrative of a "hollowed-out" Layer 1 (L1), a more complex and resilient story is unfolding. Despite the cooling of its own on-chain metrics, Ethereum continues to command immense market confidence. Derivatives markets show sustained bullish positioning, and prominent analysts point to valuation models suggesting ETH remains significantly undervalued. This dichotomy forces a critical reassessment: Is Ethereum being diminished by the success of its own scaling vision, or is it successfully transitioning into a new, more powerful role as the indispensable settlement and security layer for a sprawling L2 universe? The evidence points decisively toward the latter.

The Data Doesn't Lie: Layer 2 Networks Command Transaction Flow

The shift in transactional activity from Ethereum mainnet to its Layer 2 offspring is no longer a prediction—it is a settled fact. Analytics from platforms like Dune Analytics provide a clear visual of this new reality.

A Pie Chart of Dominance Data illustrates that a handful of major L2 networks now control the overwhelming share of Ethereum ecosystem transactions. Polygon, Arbitrum, and Optimism collectively dominate the landscape, leaving only a small residual slice for emerging rollups like Linea, Scroll, and zkSync. This distribution is not an anomaly but reflects consistent daily performance.

Consistent High-Volume Throughput Daily transaction data solidifies this hierarchy. Networks like Polygon and Arbitrum consistently process between 2 to 4 million transactions per day, with Optimism contributing significant additional volume. In aggregate, these L2s handle an order of magnitude more traffic than Ethereum’s mainnet. This migration is driven by pure utility: users and developers naturally gravitate toward environments that offer drastically reduced gas fees and faster confirmation times for everyday interactions, from token swaps to NFT minting. The scaling roadmap, often summarized as "the rollup-centric roadmap," is functioning precisely as intended from a user experience perspective.

Re-examining the "Digital Oil" Metaphor in an L2 World

The longstanding narrative of ETH as "digital oil"—the essential fuel consumed to power the network—faces its most direct challenge in this new environment. The mechanism of EIP-1559, which burns a portion of base layer transaction fees, was designed to create deflationary pressure tied directly to network usage. However, with activity moving off-chain, base layer fee revenue has decreased, contributing to ETH’s supply turning inflationary again in late 2025.

The Critic's Perspective: Revenue Migration Critics posit a straightforward argument: value is being extracted from the Ethereum ecosystem without flowing back to its core asset. They point out that sequencer fees—the charges for ordering transactions on L2s—and potential Maximal Extractable Value (MEV) on these chains are captured by the L2 operators or their validators. This represents economic activity that once would have occurred on and benefited Ethereum mainnet directly through fee burns and validator rewards.

The Supporter's Counter: Evolution into Digital Land Proponents of Ethereum’s evolving value proposition offer a different framework. They argue that the "digital oil" metaphor is becoming reductive. Instead, Ethereum is maturing into digital land or foundational infrastructure. Its primary value derives not from being constantly burned in high-volume transactions but from providing unparalleled security, decentralization, and final settlement. In this view, every L2 transaction implicitly rents Ethereum’s security; the value accrues to ETH through the staking required to secure the chain (staking yield) and through the necessity of posting data or proofs back to the mainnet (data availability costs), even if those costs are currently low. The bet is that as the L2 economy grows exponentially, the demand for this scarce settlement space and security guarantee will drive ETH’s value.

Derivatives and Valuation Models Signal Unwavering Belief

While on-chain activity metrics may show a migration, capital markets tell a markedly different story regarding sentiment toward ETH itself. The asset is not being priced as if it is obsolete.

Sustained Bullish Derivatives Positioning Data from Coinalyze reveals that aggregated Open Interest for Ethereum derivatives remains elevated above $15 billion. Perhaps more tellingly, Funding Rates across perpetual swap markets have stayed consistently positive. This indicates that traders holding long positions are continuously paying a premium to those holding short positions—a classic sign of sustained bullish sentiment in futures markets. Traders are not treating ETH as a fading asset but continue to price it as core infrastructure worth holding.

Analyst Perspectives on Undervaluation This market confidence finds support in fundamental analysis. As previously reported by AMBCrypto, CryptoQuant CEO Ki Young Ju highlighted that Ethereum appears significantly undervalued based on multiple models. The analysis noted that 10 out of 12 valuation models surveyed showed ETH trading far below its estimated fair value. Specifically, the Composite Fair Value model estimated ETH’s price near $4,800, implying the asset was approximately 59% undervalued at the time of analysis despite broader macroeconomic weakness. These models often incorporate factors like network security expenditure (staking yield), adoption velocity, and relative value—metrics that may capture Ethereum’s role as a foundational layer beyond simple transaction count.

The Strategic Conclusion: Infrastructure Ascendancy Over Throughput

The narrative that Ethereum is being weakened by Layer 2 dominance is a superficial reading of a profound architectural transition. The current data paints a picture of successful scaling and strategic evolution.

The Broader Market Insight Ethereum’s value proposition is undergoing a fundamental shift from being the primary execution environment to becoming the bedrock security and settlement layer for a multi-chain ecosystem it spawned. The cooling of its own L1 metrics is not a sign of failure but an indicator of specialization. High-throughput, low-cost activity belongs on L2s; ultra-secure, trust-minimized finality belongs on Ethereum mainnet. The sustained positive funding rates and high open interest demonstrate that sophisticated market participants understand and are betting on this transition.

What to Watch Next For observers and investors, several key developments will be critical to monitor:

1. The Implementation of EIP-4844 (Proto-Danksharding) and Full Danksharding: These upgrades are designed specifically to drastically reduce the cost for L2s to post data to Ethereum mainnet, strengthening the economic bond and making Ethereum an even more attractive settlement layer.
2. L2 Revenue Models and Tokenomics: How will leading L2s structure their economic relationship with Ethereum? Will fee structures evolve to share revenue or otherwise directly value-accrue back to ETH stakers or holders?
3. The Growth of Restaking: Protocols like EigenLayer allow staked ETH to provide security for other applications (actively validated services). This creates new utility and yield opportunities for ETH, further embedding it as the foundational security asset for all Web3.
4. Valuation Gap: Will the significant undervaluation suggested by models like CryptoQuant’s Composite Fair Value begin to close as the market more fully prices in Ethereum’s evolved role as foundational infrastructure?

The $1 billion bet referenced metaphorically in analyses is not a single treasury move but the aggregate bet being placed by developers building L2s, institutions holding ETH, and traders maintaining long positions: the bet that Ethereum’s ultimate value will be determined not by its own transaction volume but by the total value secured across its entire flourishing ecosystem. The dominance of Polygon, Arbitrum, and Optimism doesn't defy this bet; it validates its premise and sets the stage for Ethereum's next chapter as the sovereign foundation of decentralized computation