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Coinbase Warns Polygon (MATIC) and Other Scaling Solutions Threaten Ethereum (ETH) Price – Here’s Why

Crypto exchange Coinbase is analyzing the impact scaling solutions could have on the Ethereum (ETH) blockchain.

In a research report, Coinbase says that Layer-2 scaling solutions (L2s) could cannibalize Ethereum’s revenue.

“The future of L2s may be a zero-sum game, as L2s are the majority of decentralized applications that will one day power the entire Ethereum ecosystem. That suggests that L2s may eventually divert revenue away from Ethereum.

Coinbase says that over the past 12 months, scaling solutions like Polygon ( MATIC ), Optimism ( OP ) and Arbitrum have generated less than one percent of the revenue Ethereum pulled.

“Over the past 12 months, Ethereum has generated $9.971 billion in total revenue, compared to just around $78 million for Arbitrum, Polygon, and Optimism,” Token Terminal reported.

Source: Coinbase

The crypto exchange says that once Ethereum transitions to a Proof-of-Stake (PoS) consensus mechanism, scaling solutions could potentially cause a drop in staking yields, which could negatively impact the price of ETH.

“If more user activity migrates to L2s and those L2s require their own tokens to facilitate transactions, that could reduce staking yields for validators who earn less in those net transaction fees. If that discourages staking on the platform, it could increase the size of the ETH liquid circulating supply, possibly hurting ETH prices.”

Coinbase, however, says scaling solutions could benefit Ethereum in the long run because they increase network activity.

“The effect of L2s eating into Ethereum’s revenue is a short-term phenomenon. In the long run, revenue will depend on more activity in the overall crypto ecosystem and Ethereum becoming a strong universal (or general-use) blockchain.”

If L2s facilitate more transactions by making them cheaper, faster and easier, the initial revenue impact can be mitigated by the increased activity that eventually takes place on the network.

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