I agree that naive scaling will likely lead to bad outcomes. They might
have the advantage though, as this would mean not changing Bitcoin.

Level2 and Lightning is not well defined. If you move money to a third
party, even if it is within the constrained of a locked contract, then I
don't think that will solve the issues. Blockchain does not know about
offchain and moving between offchain and onchain requires liquidity and a
pricing mechanism. That is exactly the problem with side-chains. If you
have off-chain transactions on an exchange, they are ID'ed in their system,
subject to KYC/AML.