As Ethereum finds itself at the center of a rapidly evolving financial landscape, the spotlight is now on whether its future in decentralized finance (DeFi) is shifting towards layer-2 (L2) networks. This is a period of intriguing dynamics for Ethereum. Despite Ether reaching record highs in late August 2025, DeFi activity on Ethereum’s primary layer-1 (L1) appears subdued compared to its peak in late 2021. Fees collected on Ethereum’s mainnet in August were just $44 million, representing a significant 44% drop from the previous month. Meanwhile, L2 networks like Arbitrum and Base are thriving, boasting total value locked (TVL) figures of $20 billion and $15 billion, respectively. This contrast raises an essential question: are L2s cannibalizing Ethereum’s DeFi activity, or is the ecosystem merely transitioning into a more complex, multi-layered financial architecture?
Ethereum as the Global Settlement Layer
According to AJ Warner, Chief Strategy Officer at Offchain Labs, which developed the popular L2 network Arbitrum, the metrics are more nuanced than a simple competition between layers. Warner argues that focusing solely on TVL overlooks Ethereum’s evolving role as the “global settlement layer” of the crypto world. While L2s handle everyday transactions with speed and low costs, Ethereum serves as the secure and trusted foundation for high-value issuance and institutional activities. For instance, products like Franklin Templeton’s tokenized funds and BlackRock’s BUIDL project launch directly on Ethereum L1. These activities underscore Ethereum’s crucial role as a financial bedrock, even if they’re not fully captured in traditional DeFi metrics.
Warner likens Ethereum’s function to that of a wire transfer in traditional finance: trusted and secure, used for large-scale settlements. Everyday transactions, however, are increasingly moving to L2s, the “Venmos and PayPals” of the crypto space.
The Rise of Layer-2 Networks
Layer-2 networks have surged in popularity over recent years, offering faster and cheaper alternatives to Ethereum. They enable whole categories of DeFi that don’t function as well on the Ethereum mainnet. Fast-paced trading strategies, like arbitraging price differences between exchanges or executing perpetual futures contracts, struggle with Ethereum’s slower 12-second block times. Conversely, on Arbitrum, where transactions finalize in under a second, these strategies flourish. This shift is evident in transaction volumes: Ethereum has processed fewer than 50 million transactions over the last month, while Base has handled 328 million, and Arbitrum, 77 million, according to L2Beat.
Beyond transaction speed, L2s are becoming fertile testing grounds for innovation. Alice Hou, a research analyst at Messari, pointed to Uniswap V4’s hooks as an example. These customizable features can be iterated far more cheaply on L2s before being rolled out widely. For developers, quicker confirmations and lower costs aren’t just a convenience—they expand the realm of what’s possible. “L2s provide a natural playground to test these kinds of innovations, and once a hook achieves breakout popularity, it could attract new types of users who engage with DeFi in ways that weren’t feasible on L1,” Hou explained.
Shifts in Liquidity and User Experience
The shift towards L2s isn’t just technological; liquidity providers are responding to economic incentives. Data indicates that smaller liquidity providers increasingly favor L2s, where yield incentives and lower slippage amplify returns. Yet, larger liquidity providers tend to remain on Ethereum, valuing security and liquidity depth over higher yields. Interestingly, while L2s capture more activity, flagship DeFi protocols like Aave and Uniswap still rely heavily on the mainnet. Aave, for instance, has consistently maintained about 90% of its TVL on Ethereum, though Uniswap is showing a gradual shift towards L2 activity.
An enhanced user experience is further accelerating L2 adoption. Wallets, bridges, and fiat on-ramps increasingly direct new users directly to L2s, making these networks more accessible. As of September 2025, approximately one-third of L2 TVL originates from Ethereum bridges, another third is natively minted, and the remainder comes via external bridges. “This mix shows that while Ethereum remains a key source of liquidity, L2s are also developing their own native ecosystems and attracting cross-chain assets,” Hou noted.
A New Era for Ethereum and DeFi
Ethereum appears to be cementing its role as the secure settlement engine for global finance, with rollups like Arbitrum and Base emerging as execution layers for fast, cheap, and creative DeFi applications. Warner encapsulated the relationship between Ethereum L1 and L2s with an analogy: “Most payments I make use something like Zelle or PayPal… but when I bought my home, I used a wire. That’s somewhat parallel to what’s happening between Ethereum layer one and layer twos.”
As Ethereum continues to serve as the bedrock of crypto finance, L2 networks are proving indispensable in scaling and diversifying DeFi applications. The data suggests that the L1 vs. L2 debate isn’t zero-sum; rather, it’s a complementary evolution of the blockchain ecosystem. Ethereum’s DeFi future may indeed lie in the synergy between its secure foundation and the innovative potential unlocked by layer-2 networks.
Steve Gregory is a lawyer in the United States who specializes in licensing for cryptocurrency companies and products. Steve began his career as an attorney in 2015 but made the switch to working in cryptocurrency full time shortly after joining the original team at Gemini Trust Company, an early cryptocurrency exchange based in New York City. Steve then joined CEX.io and was able to launch their regulated US-based cryptocurrency. Steve then went on to become the CEO at currency.com when he ran for four years and was able to lead currency.com to being fully acquired in 2025.
