If Vitalik's Right That L2s Need 'Distinct Value Props,' What Should L2s Focus On Besides Scaling?

General
1

Following Vitalik’s statement that L2s need “distinct value propositions” beyond simple scaling, I’ve been thinking about what that actually means for developers and protocols.

If L2s can’t compete on “cheaper and faster” alone (since L1 is getting both), what SHOULD they focus on?

The New L2 Value Proposition Framework

Based on Vitalik’s comments and recent ecosystem discussions, here are the differentiation strategies that actually make sense:

1. Privacy & Confidentiality

Example: Aztec Network, Manta Network

  • Private transactions with zero-knowledge proofs
  • Confidential DeFi (private trading, hidden positions)
  • Compliance-friendly privacy (proving compliance without revealing data)

Developer Perspective: This is genuinely impossible to do on transparent L1. If your app needs privacy, specialized L2 is the ONLY option.

2. Application-Specific Optimization

Example: ImmutableX (gaming), dYdX (perpetuals)

  • Custom precompiles for specific use cases
  • Gaming chains with 100ms block times
  • Orderbook DEXs with specialized MEV protection
  • On-chain game state management with gaming-optimized VMs

Developer Perspective: Trying to optimize L1 for gaming would hurt DeFi performance. App-specific L2s make sense.

3. Regulatory Compliance

Example: Permissioned L2s for institutions

  • Built-in KYC/AML at protocol level
  • Regulatory reporting built into the chain
  • Jurisdiction-specific compliance rules
  • Still benefit from L1 settlement guarantees

Developer Perspective: TradFi institutions won’t use fully permissionless chains. Compliance-focused L2s could unlock trillions in institutional capital.

4. Novel Virtual Machine Designs

Example: Fuel (parallel execution), Cairo/StarkNet (non-EVM)

  • Different programming models (Move, Cairo, Sway)
  • Better suited for certain applications
  • Account abstraction native
  • Experimental features too risky for L1

Developer Perspective: Alternative VMs enable new types of applications. But EVM compatibility is still massive benefit for most projects.

What L2s Should STOP Doing

Stop competing on price alone: If your only value prop is “10x cheaper than L1,” you’ll lose when L1 gets 10x cheaper.

Stop trying to be general-purpose Ethereum clones: We don’t need 50 “slightly faster Ethereum” chains. We need specialized execution environments for specific use cases.

Stop promising decentralization “soon”: Either launch decentralized from day one (Based Rollups) or be honest about the centralization tradeoffs.

My Developer Decision Framework

When should I deploy on L2 vs L1?

Deploy on L1 if:

  • You need maximum security
  • You need to compose with other L1 protocols
  • Your app doesn’t need special features
  • You value simplicity over optimization

Deploy on specialized L2 if:

  • You need privacy
  • You need sub-second confirmation times
  • You need regulatory compliance features
  • You need a non-EVM virtual machine

Don’t deploy on generic L2s that are just “cheaper Ethereum” — those don’t have a sustainable competitive advantage.

Looking Forward

I think the endgame is:

  1. Scaled Ethereum L1 (200M gas limit, parallel execution) for core DeFi and general-purpose apps
  2. Privacy L2s for confidential transactions
  3. Gaming/High-frequency L2s for latency-sensitive apps
  4. Compliance L2s for institutional finance
  5. Experimental L2s for testing new VM designs before potentially moving to L1

This is very different from the “everything moves to L2s” narrative we had in 2021-2023.

Question for protocol builders: What unique value proposition would convince you to deploy on an L2 instead of scaled mainnet? Just cost savings, or do you need genuinely differentiated features?

Just my perspective as someone who deploys smart contracts daily — curious what others think!

2

Sarah, this is exactly the conversation the L2 ecosystem needs to have. From an infrastructure perspective, here’s what I think genuinely differentiates L2s:

Technical Differentiation That Matters

Custom Execution Environments: This is huge. Fuel’s parallel execution VM, StarkNet’s Cairo, Sei’s orderbook-optimized chain — these enable applications that literally can’t run efficiently on standard EVM.

Novel Consensus Mechanisms: L2s can experiment with consensus approaches that are too risky for L1. If it works, great. If it breaks, L1 security guarantees prevent total loss.

Specialized Precompiles: Gaming chains can have native collision detection, physics calculations, or random number generation as cheap precompiles instead of expensive Solidity.

MEV Protection Strategies: Different L2s can try different approaches (encrypted mempools, fair ordering, MEV redistribution) without coordinating L1 changes.

What I’m Personally Building

I’m working on L2 infrastructure that focuses on extreme low latency (sub-100ms confirmation) for gaming and high-frequency DeFi. This genuinely can’t be done on 12-second L1 block times.

But I’m not pitching it as “Ethereum but cheaper” — I’m pitching it as “real-time execution environment for latency-sensitive apps with Ethereum settlement guarantees.”

The Honest Truth

Most L2s today are just EVM clones with centralized sequencers. They don’t have meaningful differentiation beyond cost. Sarah’s right that this strategy is doomed once L1 scales.

Future belongs to L2s that enable things L1 cannot, not L2s that do the same thing as L1 but slightly cheaper.

3

From a DeFi protocol perspective, here’s what would actually make me choose an L2 over mainnet:

Differentiation That Matters For DeFi

1. Native MEV Protection
If an L2 had built-in fair ordering or encrypted mempool that genuinely prevented frontrunning, that’s massive value for DeFi users. This is hard to add to L1 but L2s can experiment.

2. Specialized DeFi Primitives
Orderbook DEXs need different optimization than AMMs. Perpetuals need different features than spot markets. An L2 optimized for specific DeFi use cases (with native orderbook support, better liquidation mechanisms, etc.) could be compelling.

3. Privacy For Competitive Trading
Being able to place large orders without revealing them publicly would be game-changing for institutional DeFi. Privacy L2s like Aztec could unlock this.

4. Better Composability Guarantees
Ironically, a single “DeFi L2” where all major protocols deployed would have BETTER composability than fragmented L2s, while still being faster/cheaper than L1.

What Doesn’t Matter

  • Being 50x cheaper if L1 is already /bin/zsh.20
  • Having slightly faster blocks (12s vs 2s doesn’t matter for most DeFi)
  • EVM compatibility (everyone has this)

My Wish

Honestly, I wish we’d get one canonical DeFi L2 where Aave, Uniswap, Curve, etc. all deploy, giving us the unified liquidity benefits while experimenting with DeFi-specific optimizations.

But instead we have 50 competing L2s each trying to be general-purpose, fragmenting everything.

4

Sarah’s framework is spot-on. Let me add some technical depth on what genuinely differentiates L2s architecturally.

Technical Differentiation Vectors

1. Privacy & Confidentiality
zkRollups can provide privacy that is cryptographically impossible on transparent L1. This isn’t just “nice to have” — it’s a fundamental capability difference.

2. State Model Innovations
UTXO-based L2s (like Fuel) enable parallel transaction execution that account-based EVM can’t do efficiently. This is a genuine architectural advantage for high-throughput apps.

3. Custom Cryptographic Primitives
StarkNet’s Cairo makes certain crypto operations (STARK proofs, recursive proofs) vastly cheaper than on EVM. For apps built around these primitives, it’s transformative.

4. Execution Guarantees
Some L2s can offer fairness guarantees (no MEV extraction) or censorship resistance guarantees (Based Rollups using L1 validators) that are hard to achieve on L1 without breaking other properties.

The Settlement Layer Model

I increasingly think Ethereum’s role is evolving to be a settlement and data availability layer for specialized execution environments (L2s) rather than the primary execution layer itself.

This is similar to how TCP/IP is the settlement layer for the internet, but HTTP, SMTP, FTP, etc. are specialized protocols for different use cases.

What This Means For Builders

  • Don’t build “Ethereum but slightly different” — it will lose to actual Ethereum
  • Do build specialized execution for use cases where L1 trade-offs don’t make sense
  • Focus on defensible technical differentiation, not just “we’re faster/cheaper”

Sarah’s categorization (privacy, app-specific, compliance, novel VMs) is the right framework for evaluating L2 value props going forward.

5

As a developer who’s still relatively new to all this, let me give the practical perspective:

What Would Make Me Choose An L2

Honestly? Developer experience improvements that mainnet doesn’t have.

Native Account Abstraction: If an L2 has account abstraction built-in (like zkSync) so my users don’t need to understand gas, seed phrases, etc. — that’s HUGE for consumer apps.

Better Tooling: If an L2 has significantly better debugging tools, testing frameworks, or deployment pipelines than mainnet, I’d consider it.

Community & Support: If an L2 has really responsive developer relations, good docs, active community helping each other — that matters more than 10x cheaper gas.

Ecosystem Grants: Real talk — many developers choose L2s because of ecosystem grants and incentives, not purely technical reasons.

What Wouldn’t Make Me Choose An L2

  • Slightly cheaper gas (not worth the complexity)
  • Slightly faster blocks (12s is fine for most apps)
  • Claims of “decentralization coming soon” (don’t care until it’s live)

My Ideal World

I want one or two dominant L2s for specific use cases (gaming, privacy) rather than 50 generic L2s fragmenting everything.

Like Sarah said: specialized L2s for specialized use cases. Not 50 “general purpose Ethereum alternatives” that all do the same thing with minor differences.

The fragmentation and decision paralysis (“which L2 should I deploy on?”) is honestly one of the biggest barriers to entry for new developers in the ecosystem.