Is Ethereum’s DeFi Future on L2s? Liquidity, Innovation Say Perhaps Yes

Ethereum is in the midst of a paradox. Even as ether hit record highs in late August, decentralized finance (DeFi) activity on Ethereum’s layer-1 (L1) looks muted compared to its peak in late 2021. Fees collected on mainnet in August were just $44 million, a 44% drop from the prior month.

Meanwhile, layer-2 (L2) networks like Arbitrum and Base are booming, with $20 billion and $15 billion in total value locked (TVL) respectively.

This divergence raises a crucial question: are L2s cannibalizing Ethereum’s DeFi activity, or is the ecosystem evolving into a multi-layered financial architecture?

AJ Warner, the chief strategy officer of Offchain Labs, the developer firm behind layer-2 Arbitrum, argues that the metrics are more nuanced than just layer-2 DeFi chipping at the layer 1.

In an interview with CoinDesk, Warner said that focusing solely on TVL misses the point, and that Ethereum is increasingly functioning as crypto’s “global settlement layer,” a foundation for high-value issuance and institutional activity. Products like Franklin Templeton’s tokenized funds or BlackRock’s BUIDL product launch directly on Ethereum L1 — activity that isn’t fully captured in DeFi metrics but underscores Ethereum’s role as the bedrock of crypto finance.

Ethereum as a layer-1 blockchain is the secure but relatively slow and expensive base network. Layer-2s are scaling networks built on top of it, designed to handle transactions faster and at a fraction of the cost before ultimately settling back to Ethereum for security. That’s why they’ve become so appealing to traders and builders alike. Metrics like TVL, the amount of crypto deposited in DeFi protocols, highlight this shift, as activity is moved to L2s where lower fees and quicker confirmations make everyday DeFi far more practical.

Warner likens Ethereum’s place in the ecosystem to a wire transfer in traditional finance: trusted, secure and used for large-scale settlement. Everyday transactions, however, are migrating to L2s — the Venmos and PayPals of crypto.

“Ethereum was never going to be a monolithic blockchain with all the activity happening on it,” Warner told CoinDesk. Instead, it’s meant to anchor security while enabling rollups to execute faster, cheaper and more diverse applications.

Layer 2s, which have exploded over the last few years because they are seen as the faster and cheaper alternative to Ethereum, enable whole categories of DeFi that don’t function as well on mainnet. Fast-paced trading strategies, like arbitraging price differences between exchanges or running perpetual futures, don’t work well on Ethereum’s slower 12-second blocks. But on Arbitrum, where transactions finalize in under a second, those same strategies become possible, Warner explained. This is apparent, as Ethereum has had fewer than 50 million transactions over the last month, compared to Base’s 328 million transactions and Arbitrum’s 77 million transactions, according to L2Beat.

Builders also see L2s as an ideal testing ground. Alice Hou, a research analyst at Messari, pointed to innovations like Uniswap V4’s hooks, customizable features that can be iterated far more cheaply on L2s before going mainstream. For developers, quicker confirmations and lower costs are more than a convenience: they expand 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 said.

But the shift isn’t just about technology. Liquidity providers are responding to incentives. Hou said that data shows smaller liquidity providers increasingly prefer L2s where yield incentives and lower slippage amplify returns. Larger liquidity providers, however, still cluster on Ethereum, prioritizing security and depth of liquidity over bigger yields.

Aave TVL (Messari Dashboard/ Alice Hou)

Interestingly, while L2s are capturing more activity, flagship DeFi protocols like Aave and Uniswap still lean heavily on mainnet. Aave has consistently kept about 90% of its TVL on Ethereum. With Uniswap however, there’s been an incremental shift towards L2 activity.

Uniswap L2 activity (Dune dashboard/ Alice Hou)

Another factor accelerating L2 adoption is user experience. Wallets, bridges and fiat on-ramps increasingly steer newcomers directly to L2s, Hou said. Ultimately, the data suggests the L1 vs. L2 debate isn’t zero-sum.

As of September 2025, about a third of L2 TVL still comes bridged from Ethereum, another third is natively minted, and the rest 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 said.

Ethereum thus as a base layer appears to be cementing itself as the secure settlement engine for global finance, while rollups like Arbitrum and Base are emerging as execution layers for fast, cheap and creative DeFi applications.

“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,” Warner of Offchain Labs said.

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