# L2 Issuance Was Fun While It Lasted

Source: https://research.auditless.com/p/l2-issuance-was-fun-while-it-lasted
Kiwi News: https://news.kiwistand.com/stories/L2-Issuance-Was-Fun-While-It-Lasted?index=0x67b4a43858a58c08a669e0ecd41fb4b213acec86097a10530708deba8190aad8d07b6b47
Submitted by auditless.eth on 2025-02-18 UTC, 6 upvotes, 6 comments

## Summary

Issuing tokens on L2 rollups carries weaker security guarantees than L1-issued assets, and the piece asks how much issuance really matters for rollups given Solana's dominance. It says deposited L1 tokens are the funds that matter, since rollups support forced withdrawals of directly bridged L1-to-L2 tokens. As Vitalik points out, holders of a rollup's upgrade keys could change its proof system and mint unlimited L2 tokens. The piece responds to Vitalik's proposal for higher L1 gas limits, noting that putting all tokens on L1 is not currently viable, and raises concern that rollup-issued tokens could fragment liquidity.

## Article

Thanks to Tarun Chitra for sparking the idea for this essay.

Vitalik's Valentine’s Day gift to the Ethereum community – Reasons to have higher L1 gas limits even in an L2-heavy Ethereum – was an almost offensively rational take on the emerging debate of whether to scale L1.

If you’re not caught up, this is the crux of the debate spurred by various factors:

The search for Ethereum’s “North Star”,

Addressing Solana’s dominant growth,

The unwillingness to commit to a rollup-centric future.

We covered it in December:

What caught most people’s attention was the critique on issuing tokens on L2s:

We've talked previously about this idea. The money that really matters is the cash you deposit (i.e., L1-issued tokens). FDIC insurance applies to funds in your current account and in the same way rollups support forced withdrawals of directly L1→L2 bridged tokens. Everything else you do in the rollup has weaker security guarantees.

Each rollup has a smart contract on L1 that keeps track of state and releases bridged capital. If you have the upgrade keys you can effectively change the proof system and how state works on the rollup which includes as Vitalik points out, minting unlimited amounts of L2 tokens.

This applies not just to L2 memecoins but also Cross-chain bridged assets like Layer0 OFTs and Native Real World Assets (e.g., L2-native versions of fiat-backed stablecoins).

The other axis risk of L2 issuance risk is the ability for the L2 to “exit” Ethereum.

To challenge the validity of L2 issuance isn't a trivial concern.

The emerging consensus is that despite Ethereum having excellent points programs, lending markets and incentives, it can't compete with Solana’s pure organic issuance flywheel.

Issuance attracts traders, which make LPing profitable and attract liquidity. Then people issue where the liquidity is. And so on.

Even Base which had a good issuance run in 2024 and at the start of the AI agents meta has not been able to keep up.

Unfortunately, as Vitalik points out, having all tokens on L1 is not currently viable for various reasons.

L2-to-L2 interop

Direct issuance cost

L2 issuance precompile

Dedicated precompiles is an interesting idea, modifying the L1 to support L2 issuance.

Cluster tokens

Rollup clusters (Superchain) or shared liquidity bridges (AggLayer) could assign promotion rules to cluster-native tokens.

Using these, an L1 ERC20 contract could be created for them as another form of exit mechanism with some carefully calculated bounds on supply (e.g., multiple chains have to agree).

ZK

Since ZK solves everything, it’s possible that validity rollups have better gadgets to address these problems in the future. Perhaps through some form of supply invariants or enshrined proof verification.

Time to reassess: how important is issuance for rollups?

For example, if rollups don't control the asset directly but are the liquidity hub for it (most liquid trading venue), is that a similar level of market power as having direct asset issuance on Solana?

This question is not just philosophical, another way of looking at Vitalik’s proposal is whether it would contribute to a liquidity fragmentation issue?

Which token are you supposed to use on a rollup?

The L1→L2 bridged version?

The cross-chain bridged version (e.g., OFT)?

The protocol’s natively issued L2 version?

OR the most liquid of them all at a given point in time?

These choices doesn't even include the choice of the rollup itself.

Solana not having this issue has got to be nice.

## Comments

**tim**: I gotta say that I find it crazy that the Ethereum community is discussing this now. Martin Köppelmann was already talking about this in November at Devcon in Bangkok and made it very clear that there's a huge question mark around L2 issuance of tokens and by reading all the replies of the main influencers like Hayden from Uniswap and other people working on OP, I'm surprised that there is no definitive answer to this issue that must have been known since for much longer than just November 2024 and even when L2s really started to advertise L2 token issuance. So to me this is crazy that the problem is publicly discussed now. It almost seems like it needed to become common knowledge for people to admit this as a core problem.

**tim**: Martin‘s talk: https://news.kiwistand.com/stories/Koppelmann:-Ethereum-needs-native-L2s?index=0x674609ce714b6b83a18e0bd9900e49af9430fba8814031c825f934053a7868eb40bb49c0

**naomiii.eth**: That was such a good talk - yet a shame it seemingly didn't go very far in terms of translating into some sort of action. Even though he did probably very consciously focus on using tech we already have for the proposed solution. 


As a funny side anecdote, I am atm in a 6-day waiting period to get a token from Arbitrum to Ethereum with their native bridge. That liquidity isn't even fragmented it's just "stuck" ha 

**tim**: I think it was Galen who proposed to me the idea that maybe this time, it’s just the crime cycle. Even though I pledged allegiance to only telling the positive visions of Ethereum just a week ago, I can’t help but feel disappointed—and also prompted to say a few things about the admission of the pretty much apparent issues with the Layer 2 roadmap.

As early as November, and even before that, we were discussing in the Kiwi News Telegram channel that native L2 issuance wouldn’t allow you to reliably withdraw tokens from L2 to mainnet. Additionally, many builders have unknowingly built on an L2, not realizing that their data will soon be stored on EIP-4844 blob data—whereas before, it was retrievable in perpetuity by being stored in call data. In this regard, L2 developers have knowingly allowed people to ship applications on L2 for use cases it was explicitly not designed for, even when updates were shipped that violated prior invariants.

If I were to summarize the entire situation, it almost feels as if the Ethereum community was truly caught off guard by Solana’s rise. They panicked and simply went with the flow, despite not being technically ready. I call this the crime cycle because, only after many admissions from those in the outer circles of the Ethereum community, did we finally get Vitalik, on Valentine’s Day, to acknowledge the issue. That, in turn, sparked discussions among Crypto Twitter and renowned L2 researchers.

This surprises me because the issue is so fundamental to using L2s that, at least in my mind, it should have been widely discussed the moment a community member first raised it publicly. Instead—while I don’t want to accuse anyone of malice—it seems strange that this wasn’t widely picked up during, for example, Martin’s talk. That said, the talk was somewhat convoluted, Martin is admittedly not the best speaker, and the rooms at Devcon weren’t always full. Still, in the Kiwi community, we discussed this extensively, including the fact that all non-settled data stored on L2s will no longer be retrievable in perpetuity after the blobs launch. Yet, I have yet to see anyone propose a solution to that problem—whereas on Solana’s L1, it has already been addressed.

I hope this cycle won’t go down in history as a historic underperformance of ETH, with Ethereum researchers caught off guard, unprepared, and panicking in the face of Solana’s rise—only to find themselves exposed once the cycle is over. Today, it certainly looks like ETH’s underperformance is technically justified, given how many issues L2s still have. The current Ethereum roadmap—proposals like Beamchain, snarkification—feels like a slap in the face to app developers. They just want to use this technology now; they don’t want to wait a few more years for it to be ready. In fact, I’m sure that if ETH researchers drastically reduced the scope, focused on making things work quickly, and provided users and developers with the necessary security guarantees, these issues could be solved fairly soon. However, I don’t think it’s in the nature of the Ethereum research community to hotfix issues like this. Instead, they tend to take a long time and then ship one major update, as they did with proof-of-stake and the Merge.

All of this said, this entire cycle so far has been about how the underlying technology does not matter for the price to rise.

**auditless.eth**: This is such a good take that it should be a blog post of its own!

I think things need to get a little worse before they get better.

**tim**: > I think things need to get a little worse before they get better.

Sadly this seems to be the direction that the wind is blowing