Standard Chartered Calls for Taxation on Layer-2 Blockchains: A Critical Examination
On Monday, Standard Chartered issued a bold recommendation that has captured the attention of the cryptocurrency and financial worlds alike. The bank’s research team is advocating for the taxation of excess profits generated by Layer-2 blockchains, specifically those operating on Ethereum. This perspective has significant implications for the future of Ethereum, especially in its ongoing rivalry with Bitcoin.
The Context: Layer-2 Blockchain Dynamics
Layer-2 networks, which operate atop the primary Ethereum blockchain, have been gaining traction for their ability to enhance scalability and reduce transaction costs. Among these, Base, a Layer-2 solution developed by Coinbase, has emerged as a standout. However, Standard Chartered’s research argues that these secondary blockchains are extracting substantial economic value from Ethereum without adequately contributing back to its ecosystem.
Geoffrey Kendrick, the bank’s Global Head of Digital Assets Research, draws a parallel between these Layer-2 networks and foreign mining companies that often face windfall taxes due to their significant profitability. Kendrick suggests that similar measures could help address the value levied from Ethereum, stating, “The solution would be to tax Layer 2 super-profits in the same way governments sometimes charge super taxes for foreign-owned mining companies that extract excess profits.”
The Financial Impact on Ethereum
The consequences of this emerging trend are striking. Standard Chartered reports that Base alone has contributed to a staggering $50 billion depletion of Ethereum’s market capitalization. The primary reason for this significant loss? Base reportedly retains a vast majority of its fee revenue—around 80%—which is predominantly directed to Coinbase. As a result, a mere fraction is funneled back into the Ethereum network for Layer-1 settlements, exacerbating the financial strain on Ethereum’s ecosystem.
Ethereum’s Evolution and Its Implications
Ethereum has undergone considerable transformations in recent years, including the pivotal 2022 merge to a proof-of-stake model and the anticipated Dencun update in 2024. While these upgrades have aimed to improve scalability and efficiency, they appear to have unintentionally commoditized Ethereum within its own ecosystem.
Kendrick notes that these changes have allowed Layer-2 solutions to commandeer revenue generation, leaving Ethereum at a disadvantage. “Changes made to Ethereum over the past few years, while perhaps necessary, have been value destructive. The merge removed ETH’s unique proof-of-work status among smart contract peers, and the Layer 2 concept gave away value for free,” he points out.
The Ethereum Valuation Forecast
In light of these revelations, Standard Chartered has adjusted its forecast for Ethereum’s price. The new target places ETH at $4,000 by the end of 2025, a considerable reduction from the previous estimate of $10,000. Furthermore, projections indicate that the ETH-BTC price ratio may fall to 0.015 by 2027, marking a low not observed since early 2017.
This downward trajectory underscores increasing concerns for Ethereum as it struggles to maintain relevance amid rising Layer-2 platforms.
Blockchain GDP: A New Metric?
The research introduces an intriguing new metric termed "blockchain GDP," which aims to measure the value generated within Ethereum’s ecosystem. This concept likens blockchain activity and profit generation to national economic output. With a growing proportion of transaction activity shifting away from the Ethereum mainnet and towards platforms like Base, there is a pressing need for Ethereum’s ecosystem to reassess its financial health.
Layer-2s Under the Microscope
While Layer-2 solutions like Arbitrum and Optimism are mentioned, they do not extract profits in the same manner as Base. Standard Chartered’s analysis isolates Base as the primary contributor to market capitalization erosion. This growing influence is highlighted by Base accounting for a significant share of new addresses within major Layer-2 solutions, signaling potential acceleration in value extraction from Ethereum unless corrective measures are implemented.
Call to Action for Ethereum
The essence of Standard Chartered’s argument is a call to action for the Ethereum Foundation. The bank strongly posits that implementing a taxation framework on Layer-2 networks could represent a necessary step toward regaining balance in the ecosystem. Without proactive measures, Kendrick warns that Ethereum may continue to lag behind Bitcoin in the coming years.
As the landscape of digital assets evolves, the tension between Layer-2 blockchains and their underlying platforms like Ethereum is sure to remain a pivotal issue. How stakeholders respond to this call for taxation could shape the future dynamics of the crypto economy in ways yet to be fully understood.
