Celo's "active downgrade" triggered by thinking: Why will L1 eventually turn to L2?

Author: Kydo

Compiled by: Luffy, Foresight News

Last week, a big thing happened in the crypto space, but only a few people fully understand the importance of it.

Celo announced the transformation from a standalone L1 blockchain to an Ethereum L2 blockchain.

It is easy for one to interpret this as another technology migration. But in reality, this marks a broader shift that Ethereum has been quietly pushing, which is reshaping our perception of project construction in the crypto space.

Let's take a deeper analysis.

1. The industry has begun to take cost and revenue issues seriously

We are in a belated adjustment. The crypto market is beginning to refocus on fundamentals, and narratives are still important, but now people ask:

1. What is the actual revenue of this chain?

2. What is its operating cost?

3. Where does value accumulate?

A series of new metrics like market capitalization to income ratio (REV) are beginning to become increasingly important, revealing significant differences between seemingly similar blockchains.

This may be why Celo decided to turn to Ethereum L2.

2. L1 cannot obtain revenue, L2 can

This is often overlooked: L1 chains cannot actually generate revenue in a sustainable way.

Why? Because all the value goes directly to the staker or miner. L1 charges fees, which are immediately distributed as block rewards or staking proceeds. There is no retained profit margin, no surplus, and there is no remaining funds to support innovation or agreement development.

This creates a strange phenomenon: L1 can be a valuable platform, but it still operates like a public infrastructure, without built-in funding mechanisms to achieve development and evolution.

In contrast, L2, which can retain and redistribute revenue. Sorter fees, maximum extractable value (MEV), and even custom charges for block space can be retained and then invested in R&D, developer funding, growth promotion activities or public products. Over time, this is a model that enables true sustainability and keeps incentives consistent.

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

3. L1 is the main host in the Web3 era

Here is a simple mindset: L1 blockchain is like a large host in the field of encryption.

In the early days of the Internet, if you want to run an important application, you have to buy a large host. You need to maintain the hardware, write your own network stack, and be responsible for all aspects of the system's uptime, security, performance, etc. This is powerful, but expensive.

Running an L1 blockchain today is also facing a similar situation. You need to have your own consensus mechanism, your own collection of validators, and your own token incentives to ensure network security. To keep your system running and secure, you will need to spend millions of dollars a year.

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

This is not uncommon. This is true for Ethereum and so is Solana. Each independent L1 has to bear such a cost. But the key is: this cost will not decrease as the scale decreases. If you are a smaller L1 chain, the costs you will be overwhelmed.

4. L2 is like a hosting server: equally powerful and cheaper

Now imagine you no longer run the mainframe, but instead switch to the hosted server.

You can still control your environment, customize your own blockchain operation, and still have autonomy in execution. But you don’t need to ensure the security of physical devices yourself, this is the L2 on Ethereum.

As the L2 Celo, it will still provide the same user experience. But now, the heavy work in security, such as fraud proof, consensus mechanism and the final certainty of the basic layer, is handled by Ethereum. The cost of maintaining this chain has dropped significantly.

No longer the security costs of $20 million per year, the cost now is just the cost of state storage costs and data availability, and it can be further reduced through data compression and the use of an alternative data availability layer (Celo chose EigenDA).

5. Why is this a strategic move by Ethereum

This is not only about Celo, but also means that Ethereum's long-term strategy has finally begun to be gradually implemented.

Ethereum no longer tries to be the "only server that rules everything". That vision of a single dominant chain has been proven to be wrong in every era in the field of computing, whether it is Web1, Web2, or now Web3.

Instead, Ethereum is becoming the underlying layer on which other chains can be built, providing security, decentralization, and interoperability as a service.

That's right, at first glance, it looks like self-eating. Ethereum is reducing the "premium" of its L1 chain. But in reality, by becoming the basis for other chains to rely on, it is occupying a wider market.

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

Just like no one is running their own mainframes nowadays, few projects will run their own L1 chains in the future. They will run managed servers, they will become L2, and they will do it all based on Ethereum.

Going closer to efficiency is an inevitable trend

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

Why spend tens of millions of dollars to build a new L1 when Ethereum can provide greater security at a lower cost?

This may not happen overnight, but it will eventually come because economic laws can't go wrong.