Do You Really Need a Custom Layer 2 Solution for Your Business?

The idea of launching a custom Ethereum layer 2 network has gained significant traction among companies. However, most of them may not need to invest in this endeavor. With over 150 existing layer 2 networks, the market is already saturated. Several companies, including Robinhood, have recently announced plans to launch their own layer 2 networks, despite the potential drawbacks. The primary advantage of a layer 2 network is its ability to leverage the strength of the Ethereum ecosystem while maintaining control over a custom ecosystem. Nevertheless, this comes with costs, including the purchase of transaction processing space on the Ethereum mainnet. The economics of layer 2 networks can be attractive, but they may not be suitable for every company. In fact, the costs associated with developing a layer 2 network can be relatively low, as demonstrated by Token Terminal's data on Base, a layer 2 network run by Coinbase. The recent announcement by Robinhood to build its own layer 2 network on Ethereum validates the layer 2 thesis, enabling various business models and attracting a wide range of companies to join the network. The key question remains: does your company need a custom layer 2 network? The answer is likely no. The true value proposition of a blockchain ecosystem lies in its ability to facilitate cooperation among participants without a single controlling entity. For most companies, working together on a level playing field is more cost-effective and preferable to integrating into different systems controlled by each key customer or supplier. While some layer 2 networks appear profitable, this is only true if they can generate significant transaction volume. Many layer 2 networks struggle to differentiate themselves in a crowded market, with most having less than $1 million in TVL bridged in from Ethereum and averaging less than one user operation per second. A company may need its own layer 2 network if it can aggregate substantial transaction volume and its customers lack the means or volume to establish a direct connection to Ethereum. This typically applies to financial services firms with thousands or millions of retail customers. To determine if a company should launch its own Ethereum layer 2 network, it should consider three questions: can the company aggregate significant transaction volume, is transacting on-chain central to its core business model, and does its layer 2 approach offer a differentiated value proposition? If the answer is yes to all three, then launching a custom layer 2 network might be a viable path forward. For most other companies, connecting directly to Ethereum or one of the other open layer 2 networks may be the optimal solution, as it will be less costly and more private than going through an aggregator or running their own network.