Ethereum (ETH): why some funds rotate from L2 tokens back to ETH

Explore why institutional funds are shifting from Layer‑2 tokens back to Ethereum, the drivers behind this trend and what it means for investors in 2025.

Institutional fund flows have moved from Layer‑2 tokens to native ETH.
The shift is driven by fee dynamics, liquidity, and regulatory clarity.
Investors should consider gas costs, on‑chain exposure, and emerging RWA opportunities.

Ethereum (ETH): why some funds rotate from L2 tokens back to ETH is a question that has surfaced across fund desks in 2025. Layer‑2 rollups such as Optimism and Arbitrum have offered lower gas fees and higher throughput, attracting millions of dollars in capital. Yet, recent market data shows a noticeable pullback toward the base layer, with several large crypto funds re‑allocating assets from L2 tokens to ETH itself.

For retail investors navigating the post‑cryptocurrency boom landscape, understanding this rotation is essential. It signals changing expectations about cost efficiency, risk exposure, and the broader integration of real‑world assets (RWA) into DeFi ecosystems. This article examines the mechanics behind the trend, its market implications, and how tokenized property platforms like Eden RWA fit into the evolving picture.

In what follows, you will learn: the core drivers that push funds toward ETH; how Layer‑2 tokens function and why their appeal may be waning; the regulatory backdrop shaping these movements; and concrete examples of real‑world asset tokenization that could influence future allocation decisions. By the end, you should have a clear view of whether this rotation is temporary or signals a deeper shift in institutional strategy.

Background and Context

The Ethereum network has long been the backbone for decentralized finance (DeFi) and non‑fungible tokens (NFTs). Layer‑2 (L2) solutions, such as Optimistic Rollups and zk‑Rollups, were introduced to alleviate congestion on the mainnet by batching transactions off‑chain before committing final state updates. Their promise—lower fees, faster confirmation times—has attracted both retail users and institutional capital.

However, 2025 has seen a combination of factors eroding that advantage. The rise in gas prices during network congestion spikes, coupled with the introduction of new L2 rollups offering similar throughput but at higher fee tiers, has narrowed the cost differential. Moreover, regulators are increasingly scrutinising L2 token issuances for compliance with securities laws, adding legal risk to on‑chain exposure.

Key players in this space include Ethereum Foundation (maintaining the base protocol), Optimism Technologies, Arbitrum One, and LayerZero Labs, which provide interoperability bridges. Institutional investors such as Grayscale, Pantera, and Fidelity’s Digital Assets arm have all disclosed significant positions in both ETH and L2 tokens over the past year.

How It Works: From On‑Chain Tokens to Base Layer Exposure

L2 tokens operate by executing transactions on a secondary chain that periodically posts aggregated state changes to Ethereum. This process reduces the number of messages processed directly on the mainnet, thereby lowering fees. For example:

Step 1 – Transaction Execution. A user sends an operation (e.g., swapping USDC for DAI) to the L2 rollup.
Step 2 – State Commitment. The rollup aggregates multiple transactions and posts a succinct proof to Ethereum, updating the mainnet state.
Step 3 – Final Settlement. If disputes arise, users can challenge on‑chain within a defined window; otherwise, the L2 state becomes immutable.

The actors involved are:

Issuers/Developers. Build and maintain rollup contracts.
Custodians & Liquidity Providers. Offer liquidity pools on both L1 and L2 to facilitate swaps.
Investors. Hold tokens that represent a claim on the underlying assets or protocol rewards.

When funds shift from L2 tokens back to ETH, they are effectively opting for direct exposure to the base layer’s security model and liquidity, foregoing the fee benefits of rollups in exchange for lower regulatory friction and higher asset backing.

Market Impact & Use Cases

The rotation has tangible effects on price dynamics. As institutional capital exits L2 tokens, their market caps shrink, often leading to a temporary dip in token prices. Conversely, ETH’s liquidity deepens due to increased trading volume and new depositors seeking base layer exposure.

Use Case	L2 Token Advantages	ETH Advantages
DeFi Yield Farming	Lower gas, higher APY	Higher security, broader market access
RWA Tokenization Platforms	Fast settlement, lower cost	Regulatory clarity, direct asset backing
NFT Trading	Rapid minting, low fees	Wider buyer base, institutional liquidity

Real-world examples include tokenized real estate on platforms like Eden RWA, which leverages Ethereum’s security for fractional property ownership. As funds seek more tangible exposure, the appetite for ETH-backed projects grows.

Risks, Regulation & Challenges

While Layer‑2 solutions reduce transaction costs, they introduce new risk vectors:

Smart Contract Risk. Bugs in rollup contracts can lead to loss of funds; audits are mandatory but not foolproof.
Custody & Liquidity. L2 liquidity pools may dry up if major LPs withdraw, causing slippage for traders.
Regulatory Uncertainty. The SEC has signalled potential enforcement against unregistered token sales on L2 platforms; similar scrutiny may extend to DeFi protocols.

For ETH itself, the primary concerns revolve around network congestion and scalability. Although Ethereum 2.0’s rollup adoption aims to mitigate this, sudden surges in demand can still spike gas fees, undermining the very appeal that keeps funds invested.

Outlook & Scenarios for 2025+

Bullish scenario. If Layer‑2 protocols improve interoperability and reduce fees below Ethereum’s current levels while maintaining regulatory compliance, funds may re‑enter L2 tokens. A robust RWA ecosystem could also attract new institutional capital back to L2 chains that offer higher yield opportunities.

Bearish scenario. Persistent gas price spikes on ETH combined with tightening regulation on tokenized assets could push more capital toward traditional finance or stablecoins, reducing demand for both ETH and L2 tokens.

The most realistic base case sees a gradual equilibrium. Funds will likely maintain diversified portfolios: core exposure to ETH for security and liquidity, supplemented by selective L2 positions that offer clear fee advantages and regulatory certainty. This hybrid approach aligns with risk‑managed investment strategies.

Eden RWA: Tokenizing French Caribbean Luxury Real Estate

Among the many RWA platforms leveraging Ethereum’s infrastructure, Eden RWA stands out for its focus on high‑end property in the French Caribbean. The platform democratizes access by issuing ERC‑20 tokens that represent fractional ownership of a dedicated special purpose vehicle (SPV) holding a luxury villa.

How it works:

Asset Selection. Properties in Saint‑Barthélemy, Saint‑Martin, Guadeloupe, or Martinique are vetted for quality and yield potential.
SPV Creation. An SCI/SAS is formed to hold the property; investors acquire ERC‑20 tokens that represent an indirect share of this entity.
Income Distribution. Rental income is paid out in USDC, a stablecoin pegged to the U.S. dollar, directly into holders’ Ethereum wallets via smart contracts.
Experiential Layer. Quarterly, a bailiff‑certified draw selects a token holder for a free week’s stay; this enhances community engagement and adds tangible value.
Governance. A DAO‑light structure allows token holders to vote on major decisions—renovation plans, sale timing, or property usage—ensuring alignment of interests while maintaining operational efficiency.

Eden RWA’s model is relevant to the current ETH rotation trend because it offers a tangible, income‑generating asset that is fully anchored to Ethereum’s security layer. Investors seeking exposure beyond speculative tokens may find such platforms attractive for diversifying their portfolios within the DeFi ecosystem.

For those interested in exploring this opportunity, you can learn more about Eden RWA’s upcoming presale and how to participate:

These links provide detailed product information and the steps required to join the presale. Participation is not a guarantee of returns; readers should conduct independent due diligence before investing.

Practical Takeaways

Monitor gas fee trends on both L1 and L2 chains—sharp increases often precede capital re‑allocation.
Track liquidity depth in major DeFi protocols; sudden withdrawals can signal a shift in investor sentiment.
Assess regulatory developments, especially SEC guidance on tokenized securities and MiCA updates within the EU.
Evaluate RWA platforms’ asset quality, yield history, and governance structures before committing capital.
Consider hybrid exposure: keep core holdings in ETH for security while allocating a portion to L2 tokens that demonstrate clear fee advantages.
Use on‑chain analytics tools (e.g., Dune Analytics) to stay informed about token flow volumes and holder concentration.

Mini FAQ

Why are funds pulling out of Layer‑2 tokens?

High gas fees during congestion, regulatory uncertainties around L2 token issuances, and a growing preference for the security and liquidity of ETH itself drive this shift.

What is an ERC‑20 property token?

An ERC‑20 token represents fractional ownership in a real estate asset, backed by a legal entity (SPV) that holds the property. Token holders receive proportional income payouts via smart contracts.

How does Eden RWA ensure investor protection?

Eden RWA uses audited smart contracts on Ethereum, a transparent governance model, and stablecoin payouts in USDC to mitigate counterparty risk and maintain liquidity.

Can I trade my property tokens on secondary markets?

Currently, Eden RWA is focused on the primary presale. A compliant secondary market is planned for future phases once regulatory approvals are secured.

Conclusion

The recent rotation from Layer‑2 tokens back to Ethereum reflects a broader reassessment of cost efficiency, regulatory exposure, and asset quality within institutional portfolios. While L2 rollups continue to offer significant throughput advantages, the combination of higher gas spikes, evolving compliance frameworks, and attractive RWA opportunities on ETH is nudging funds toward base layer exposure.

For retail investors, this trend underscores the importance of monitoring fee dynamics, liquidity profiles, and emerging tokenized asset classes. Platforms like Eden RWA illustrate how Ethereum’s infrastructure can be leveraged to create real‑world investment vehicles that combine transparency, yield, and experiential value—factors likely to influence future allocation decisions.

Disclaimer

This article is for informational purposes only and does not constitute investment, legal, or tax advice. Always do your own research before making financial decisions.