Ethereum is a legacy chain that has expanded over time to meet the needs of an ever-demanding global user base. More layer 2 platforms have sprung up to free the mainnet from transaction flooding.
Because transactions are cheap and scalable, users can deploy centralized distributed applications that are not possible with the base layer.
Ethereum Layer 2 is a success, but it also has its problems
According to L2Beat, the current Layer 2 platform on Ethereum is management The total value locked (TVL) is over $39 billion. Still, Blockchair lead developer Nikita Zaboronkov is concerned, believing Layer 2 is a “huge legal liability that's going to come.”
Challenge X, Zavoronkov claim That means Ethereum and Bitcoin's Layer 2 protocols are vulnerable to regulatory crackdowns. In the opinion of developers, these platforms are similar to money services businesses (MSBs), given the way they operate. They are unregulated and the developer said they may be operating illegally.
Topping the list, Zaboronkov argues that most existing Layer 2 solutions are not truly decentralized. They point to the use of multi-signature contracts and “emergency councils” administered by a limited group as evidence of centralized control.
Additionally, developers emphasized the administrative nature of many Layer 2s. Users have no direct control over their funds based on how these scalable platforms operate. Analysts say this trend toward centralization creates vulnerabilities if regulators target these organizations.
Zavoronkov added that while Layer 2 platforms are enablers that operate on an untrusted basis, they operate as commercial enterprises that generate revenue from transaction fees. Some platforms, such as Optimism and Arbitrum, issue tokens, so the revenue generated can affect the price of the token.
This is why Layer 2 platforms are no different from traditional enterprises, and developers claim they are truly decentralized platforms.
Further headwind for ETH, US SEC reports investigation
Given their mode and model of operation, Zhavoronkov's assertion that Layer 2 solutions could be classified as MSBs under U.S. law is concerning. Due to such classification, these protocols may be subject to strict regulations, compliance requirements, and potential sanctions.
this Not only does it threaten to stifle innovation, but it could also significantly hinder Ethereum’s scalability..
While some have dismissed Zaboronkov's views as “distorted,” the fact that Ethereum is reportedly under investigation by the U.S. Securities and Exchange Commission (SEC) further complicates the situation. .
Analysts say the SEC's classification of ETH as a security rather than a commodity like BTC could further delay approval of the Spot Ethereum Exchange Traded Fund (ETF).
Featured image from Canva, chart from TradingView
