Yes. The pointers to L2ARC entries must be in RAM. So the larger the L2ARC, the less L1ARC, (aka ARC). It's balancing act. The rule is to max out memory first, before considering L2ARC.
I don't have an idea what the maximum ratio should be. Your original was about 5 to 1, (1.2TB L2ARC to 256GB RAM). The replacement made it 8 to 1.
Of course, your crash might be un-related to size.
Some new OpenZFS features are coming, (or arrived?), that can help;
- Compressed ARC, (I don't remember if that was L1 or L2), uses the same compressed data as the source.
- Allocation classes, allows some interesting SSD options like small files on SSD, meta-data on SSD, etc...