Cost of Security of Layer 2 Network : Evidence From Polygon Network

Propelled by the decentralized finance (Defi) hype, the use of decentralized exchange (DEX) platforms has been growing in the last few years. The recent innovation of Layer 2 (L2) blockchain has provided better scalability and lower fees than the Ethereum blockchain (L1). The security of L2 relative to L1 is unclear and is difficult to identify. Using a structural model and a novel and comprehensive data set, we find that traders anticipate a 1.97% chance of losing the transaction value when trading on the L2 compared to L1, a very considerable amount compared to the 0.3% liquidity pool fee charged on each trade