L2s always come with trade-offs like the aforementioned Cashu - loss of custody or centralization tendencies, etc.
I don't think it is diminishing like you say. If there is a use case for private and self-custodial digital cash, Monero is still one of the few to meet that criteria. Non-KYC does diminish the risk, but other parties you transact with still have full view into your stack (if you don't conjoin).
If Bitcoin figures out a way to have on-par or better privacy, without loss of custody, and cheap txs, I will use it.