Reflections on Celo's "active downgrade": Why will L1 eventually shift to L2?

Author: Kydo

Compiled by: Luffy, Foresight News

Last week, a significant event occurred in the cryptocurrency space, but only a few people fully understand its importance.

Celo announced its transition from an independent L1 blockchain to an Ethereum L2 blockchain.

People can easily interpret this as yet another technological shift. But in reality, it signifies a broader transformation that Ethereum has been quietly driving, reshaping our understanding of how projects are built in the crypto space.

Let's take a deep dive.

1. The industry begins to take the issues of costs and revenue seriously.

We are in a late adjustment. The crypto market is starting to reassess the fundamentals, the narrative is still important, but now, people will ask:

1. What is the actual revenue of this chain?
2. What are its operating costs?
3. Where is value accumulated?

A series of new metrics such as market cap to revenue ratio (REV) are becoming increasingly important, as they reveal significant differences between blockchain projects that may appear similar on the surface.

This may be the reason why Celo decided to transition to Ethereum L2.

2. L1 unable to obtain revenue, L2 can

People often overlook this point: L1 chains are actually unable to generate revenue in a sustainable way.

Why is that? Because all the value flows directly to the stakers or miners. L1 charges fees, and these fees are immediately distributed as block rewards or staking profits. There is no retained profit margin, no surplus, and therefore no excess funds to support innovation or protocol development.

This has resulted in a strange phenomenon: L1 can be a highly valuable platform, yet it operates like public infrastructure, lacking a built-in funding mechanism for developmental evolution.

In contrast, L2 is able to retain and reallocate revenue. Fees for sorters, maximum extractable value (MEV), and even customized charges for block space can be retained and then reinvested into research and development, developer funding, growth promotion activities, or public goods. Over time, this is a model that can achieve true sustainability and keep incentives aligned.

This is why so many new ecosystems choose to prioritize building L2. It's not just about the technical architecture, but also about the economic design.

3. L1 is a large host in the Web3 era.

Here is a simple thinking model: L1 blockchain is like a large mainframe in the field of cryptocurrency.

In the early days of the internet, if you wanted to run an important application, you had to buy a large mainframe. You had to maintain the hardware, write your own network stack, and be responsible for the system's uptime, security, performance, and various other aspects. This was powerful, but expensive.

Running an L1 blockchain today faces similar situations. You need to have your own consensus mechanism, your own set of validators, and your own token incentives to ensure network security. To keep the system running and secure, you need to spend millions of dollars each year.

Taking Celo as an example, they spend about 4% to 6% of the total token issuance each year, approximately 15 million to 25 million dollars annually, just to maintain basic security and the normal operation of the system.

This is not uncommon. Ethereum is like this, and Solana is too. Every independent L1 has to bear such costs. But the key is: this cost does not decrease as the scale shrinks. If you are a smaller L1 chain, the costs you bear may be overwhelming.

4. L2 is like a hosted server: equally powerful, but at a lower cost.

Now imagine that you are no longer running a large mainframe, but have switched to a managed server.

You can still control your environment, customize how your blockchain operates, and maintain autonomy in execution. However, you do not need to ensure the security of the physical devices yourself; that's what L2 on Ethereum is like.

As an L2, Celo will still provide the same user experience. However, now the heavy lifting in terms of security, such as fraud proofs, consensus mechanisms, and the finality of the base layer, is handled by Ethereum. The cost of maintaining this chain has significantly decreased.

No longer is it a security cost of 20 million dollars a year; the current cost is merely that of state storage fees and data availability, which can be further reduced through data compression and the use of alternative data availability layers (Celo has chosen EigenDA).

5. Why this is a strategic move for Ethereum

This is not just about Celo, but also means that Ethereum's long-term strategy is finally beginning to be implemented step by step.

Ethereum no longer tries to be "the one server that rules them all." That vision of a single dominant chain has proven to be incorrect in every era of computing, whether it was Web1, Web2, or now Web3.

On the contrary, Ethereum is becoming a foundational layer on which other chains can build, providing security, decentralization, and interoperability as a service.

That's right, at first glance this seems like self-cannibalization. Ethereum is decreasing the "premium" of its L1 chain. But in reality, by becoming the foundation that other chains rely on, it is capturing a much broader market.

You can insist that there will only be one server, or you can choose to help build the next billions of servers.

Just as no one runs their own large mainframes today, in the future, very few projects will run their own L1 chains. They will operate on hosted servers, they will become L2, and they will achieve all of this based on Ethereum.

It is an inevitable trend to move towards efficiency

As various projects face market pressures to reduce costs and increase revenue, they will come to the same conclusion as Celo:

When Ethereum can provide stronger security at a lower cost, why spend tens of millions of dollars to build a new L1?

This may not happen overnight, but it will eventually come, as economic laws do not err.