Standard Chartered on Monday called for the taxation of excess profits earned by Layer-2 blockchains operating on Ethereum ETH/USD, warning that without such measures, Ethereum’s decline relative to Bitcoin will likely continue.

The recommendation, part of a detailed research note released on Monday, argues that Layer-2 networks—particularly Base—are extracting substantial value from Ethereum without contributing proportionally to its ecosystem.

What Happened: Geoffrey Kendrick, the bank’s Global Head of Digital Assets Research, compared the unchecked profitability of these secondary blockchains to foreign mining companies that face windfall taxes.

“The solution would be to tax Layer 2 super-profits in the same way governments sometimes charge super taxes for foreign-owned mining companies that extract excess profits,” Kendrick stated.

According to the report, Ethereum’s market cap has suffered significantly from the rise of Base, a Layer-2 blockchain developed by Coinbase COIN.

The research estimates that Base alone has drained approximately $50 billion in value from Ethereum’s market capitalization.

The loss is attributed to Base retaining the majority of its fee revenue—estimated at 80%—and redirecting it to Coinbase, while only a fraction goes back to the Ethereum network for Layer-1 settlements.

The report emphasizes that Ethereum’s own upgrades, including the 2022 merge to proof-of-stake and the 2024 Dencun update, have contributed to this trend.

These changes, while improving scalability and reducing fees, have also commoditized Ethereum within its own ecosystem, enabling Layer-2s to dominate revenue generation.

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Why It Matters: As a result, Standard Chartered has revised its Ethereum price target downwards, forecasting ETH to reach $4,000 by the end of 2025, a sharp cut from the previous $10,000 estimate.

The ETH-BTC price ratio is also expected to fall, hitting 0.015 by 2027—its lowest since early 2017.

Kendrick elaborated on the broader implications, stating, “Changes made to Ethereum over the past few years, while perhaps necessary, have been value destructive. The merge removed ETH’s unique proof-of-work status among smart contract peers, and the Layer 2 concept gave away value for free. Dencun then gave Layer 2s even more power and created super-profits for them.”

The analysis introduces the concept of blockchain “GDP” to measure value generated within Ethereum’s ecosystem, likening it to national economic output.

This metric reveals that a growing share of transaction activity—and profits—are occurring off the Ethereum mainnet, especially on Base, further supporting the case for intervention.

While other Layer-2s like Arbitrum ARB/USD and Optimism OP/USD do not extract profits externally in the same way, the report singles out Base as a source of market cap erosion.

The continued growth of Base, which accounts for the majority of new addresses among major Layer 2s, suggests that this trend could accelerate unless corrective action is taken.

Standard Chartered argues that only a proactive shift from the Ethereum Foundation—such as implementing a tax on Layer 2s—can reverse the current trajectory.

Without it, the bank sees Ethereum’s underperformance relative to Bitcoin persisting in the coming years.

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