Why Layer 2s Are Creating Public Goods Silos

Layer 2s are sovereign silos. Each rollup (Arbitrum, Optimism, zkSync) operates a separate execution environment with its own state, sequencer, and fee market. This design achieves scalability but sacrifices the native composability of Ethereum's single state.

Public goods become chain-specific. A protocol like Uniswap V3 must deploy and bootstrap liquidity separately on each L2. This fragments network effects and forces users into a multi-chain wallet management puzzle, undermining the unified economic security of Ethereum L1.

The bridge is the new bottleneck. Moving assets between these silos relies on external bridging protocols like Across or Hop, which introduce trust assumptions, latency, and cost that did not exist in the monolithic L1 model. The user experience regresses.

Fragmented liquidity is toxic. Each new L2, from Arbitrum to Base, fragments capital into separate state silos. This forces protocols to deploy redundant instances, splitting TVL and increasing slippage, which directly contradicts Ethereum's foundational network effect.

Composability breaks at the bridge. The seamless, atomic composability of DeFi protocols like Uniswap and Aave on Ethereum L1 shatters across L2s. A cross-chain swap via Across or Stargate is a multi-step, non-atomic transaction, creating execution risk and killing complex financial logic.

Developer overhead explodes. Building a multi-chain dApp requires maintaining separate deployments, managing bridge security assumptions, and integrating with chain-specific oracles like Chainlink CCIP. This complexity is a tax on innovation and a barrier to new entrants.

Evidence: The total value locked (TVL) in Ethereum L2s exceeds $40B, yet the largest cross-L2 bridge, Arbitrum Bridge, processes only a fraction of that volume daily, proving capital is largely trapped and inactive across the ecosystem.

Chain-locked liquidity and users become the primary outcome of most L2 grants. Protocols like Arbitrum's STIP and Optimism's RetroPGF explicitly fund projects that deploy exclusively on their chain, creating captive ecosystems.

This creates protocol-level vendor lock-in, a direct contradiction to crypto's composability promise. A grant-funded DEX on Arbitrum cannot natively integrate with Solana or Base without sacrificing its funding, fracturing liquidity.

The result is redundant development. Ten L2s fund ten separate versions of a lending protocol, each with its own oracle feeds and risk parameters, instead of one robust, chain-agnostic standard like AAVE or Compound.

Evidence: Over 80% of projects funded in Arbitrum's STIP Round 1 pledged multi-year exclusivity, according to on-chain proposal data. This siloing is the cost of growth.

Silos optimize for local performance. A dedicated rollup sequencer with a custom data availability layer like Celestia or EigenDA creates a deterministic, high-throughput environment. This eliminates the consensus overhead of a shared base layer, allowing protocols like GMX or Uniswap V3 to offer sub-second finality and lower fees for their specific user base.

Fragmentation is a feature, not a bug. Competing rollup stacks—OP Stack, Arbitrum Orbit, zkSync Hyperchains—create a market for execution. This competition drives down sequencer costs and spurs innovation in VM design (EVM vs. SVM vs. MoveVM), letting applications choose the optimal technical and economic substrate.

Capital follows utility, not dogma. TVL migrates to where it earns the highest risk-adjusted yield. The liquidity silo on a chain like Blast, which natively integrates yield-bearing assets, is a rational response to user demand for capital efficiency, not a failure of interoperability.

Evidence: The dominant DeFi protocols are chain-specific deployments. Uniswap V3 on Arbitrum processes more volume than its Ethereum mainnet deployment. Aave V3 uses a cross-chain governance bridge but maintains isolated risk pools per network. This proves markets value tailored performance over unified liquidity.