Blockchains are more of sequenced layers of solutions to existing problems building up more questions/problems to each layer of cemented solutions and it goes unendingly…. And yes, layer 2 (L2) blockchains have revolutionized the blockchain ecosystem by scaling transaction throughput and reducing costs, yet they face the challenge of significant centralization risks — one that pose a looming challenge to the core principles of decentralization, trustlessness, and censorship resistance of blockchains. Here, I analyse in-depth what I understand are the underpinned risks, supported by real-world examples.
- Reliance on Centralized Sequencers.
We all know many L2 blockchains depend on a centralized sequencer to order transactions and submit batch proofs to the Layer 1 (L1) blockchain. While this setup ensures smooth operation and high throughput, it also introduces vulnerabilities. A centralized sequencer can censor transactions, prioritize certain users, or become a single point of failure. If compromised or behaving maliciously, the sequencer could halt the network or undermine trust in the system.
For example, in Arbitrum, the sequencer is controlled by Offchain Labs, the core development team. While Arbitrum plans to decentralize its sequencer in the future, its current model means that users must trust a single entity to order and batch transactions fairly. In a worst-case scenario, the sequencer could censor certain transactions or prioritize high-fee transactions, compromising the network’s fairness and neutrality.
- Centralized Governance.
The governance of many L2 networks remains centralized, with small teams or entities making critical decisions about protocol upgrades and operational changes. While this centralized control enables faster decision-making during the early phases of development, it also creates risks. Decisions might prioritize the interests of a few stakeholders, leading to conflicts of interest and undermining community trust.
Optimism, for example, initially relied on a multi-sig wallet controlled by the core team for governance. Although the Optimism Collective has introduced steps toward decentralization through a bicameral governance system, the early reliance on a multi-sig meant that protocol changes could be executed by just a few individuals. This setup leaves the network vulnerable to insider manipulation or external coercion.
- Dependency on Layer 1.
Layer 2 networks inherit security from their parent Layer 1 blockchain, such as Ethereum. However, this dependency introduces indirect centralization risks. Congestion or censorship on Layer 1 can trickle down to Layer 2, impacting performance and reliability. Again, many L2 solutions rely on centralized bridges to move assets between Layer 1 and Layer 2, creating additional points of vulnerability.
A well-documented example occurred during the May 2021 Ethereum congestion crisis, when gas fees spiked to record levels. This congestion significantly increased the cost of submitting transaction batches from L2 solutions to Ethereum, highlighting the reliance of L2s on a single underlying chain. Users of platforms like zkSync and Loopring experienced delays and higher transaction costs, despite using L2s to avoid such issues.
- Validator or Operator Centralization
Many L2 solutions rely on validators or operators to process transactions and ensure network integrity. In early implementations, these roles are often centralized, limiting the resilience and trustlessness of the system. A centralized validator could collude with others to manipulate transactions, delay confirmations, or exploit the system for personal gain.
For instance, StarkNet, a zk-Rollup, initially used a single centralized operator to process transactions and generate zk-proofs. While this approach was necessary to ensure early functionality, it concentrated power in one entity, leaving the network vulnerable to downtime or abuse. Plans to decentralize StarkNet’s operation are in progress, but the centralized model remains a temporary risk.
Now what?
While Layer 2 solutions have successfully addressed some of the scalability challenges facing blockchain networks, their reliance on centralized components introduces risks that cannot be ignored. To fully align with the ethos of blockchain technology, L2 systems must prioritize decentralization in their sequencers, governance, and infrastructure.
Decentralizing these components will improve censorship resistance, enhance security, and foster greater trust in the ecosystem. Future developments may include (but should not be limited to) decentralized sequencer networks, open governance frameworks, and interoperability protocols that reduce reliance on centralized bridges.
As the blockchain space evolves, addressing the centralization risks of L2 blockchains will be critical to achieving a truly decentralized and trustless future.
