Concerns are emerging regarding the security of Ethereum Layer-2 networks as a significant portion of assets depend on external bridges and natively issued tokens, moving away from Ethereum's core security guarantees.

Layer-2 Asset Security Questioned Due to Bridge Reliance

Two-thirds of assets on Layer-2 (L2) networks have migrated away from Ethereum's inherent security due to the reliance on external bridges and natively issued tokens. This raises critical questions about the decentralization and security of these scaling solutions.

Decentralization Risks in Layer-2 Networks

A significant portion of L2 assets are secured by external bridges, which depend on their validators and multi-sig mechanisms, rather than Ethereum's consensus. Native token issuance on L2s bypasses the Ethereum bridge, making their security dependent on the L2's governance and infrastructure.

As of May 2024, most cross-chain bridges still validate cross-chain transactions through external validators and federations. In this case, the attacker can compromise the majority of the small-size validator committee by stealing their private keys.

Centralized sequencers in most L2s introduce risks like transaction censorship and the ability to block withdrawals. Corporate-backed L2s may prioritize shareholder interests over Ethereum's social contract, potentially leading to increased fees and rule changes. Base, Coinbase's L2, has faced criticism for allocating more daily fees to the Optimism Collective than to Ethereum's mainnet, raising concerns about value extraction.

Impact of Centralization and Fragmentation

The lack of atomic composability across L2s fragments liquidity and weakens the seamless DeFi user experience of Ethereum. This fragmentation creates inefficiencies, leading to thinner markets, higher slippage, and weaker user and protocol incentives.

Fractured liquidity is becoming DeFi's central scalability risk. While expanding to multiple chains was a natural response to Ethereum's scalability limits, it has created a new class of problems.

Centralized sequencers in Ethereum's L2s pose systemic risks, including censorship and security breaches, undermining decentralization and investor trust. Incidents like Linea's $2.6 million user loss in June 2024 highlight the vulnerabilities of centralized sequencer models. By December 2024, the total value locked (TVL) in Ethereum's L2 ecosystem had surpassed $51.5 billion, with L2s processing over 50% of Ethereum-based transactions.

Market Implications and Investor Sentiment

Investor confidence is being affected by centralization risks. A 2025 survey revealed that 78% of global institutional investors had formal crypto risk management frameworks, emphasizing decentralization and regulatory compliance. Centralized sequencers contradict the trustless principles of blockchain technology, potentially deterring capital inflows. Regulatory scrutiny is also intensifying as centralization risks become more apparent, with the EU's Markets in Crypto-Assets (MiCA) regulation emphasizing decentralization and transparency.

The Dencun hardfork in 2024 reduced L2 transaction costs by up to 98%, shifting transaction demand from Ethereum's Layer 1 (L1) to L2s. This shift has reduced L1 fee burn, contributing to a rise in ETH inflation and overvaluation based on traditional economic models. Analysts warn that this divergence between technical progress and token economics could create financial risks for investors.

Addressing Centralization: Future Solutions

To address these centralization issues, several alternative architectures are emerging to decentralize sequencers and improve L2 network security. These include Geographic Decentralization, Sequencer Auctions & Leader Election, Shared Sequencer Networks (like those proposed by Astria and Espresso), and Proposer–Builder Separation (PBS). Projects like zkSync aim to achieve “Fair Sequencing” by transitioning to a decentralized sequencer network.

The path forward for L2 sequencers lies in decentralization, shared networks, and potentially AI-powered systems. This evolution is crucial for maintaining the integrity and security of the Ethereum ecosystem as L2 adoption continues to grow.