Understanding the Decline in Revenue on the Ethereum Layer-1 Network: What’s Behind It?
The Ethereum layer-1 network has experienced a significant drop of 99% in revenue since March 2024, despite notable growth in layer-2 monthly users and daily transaction costs on the same layer. Data from Token Terminal reveals that network fees reached their peak for the year on March 5, 2024, amounting to $35.5 million. This surge in fees was followed by the implementation of the Dencun upgrade on March 13, 2024, which led to a substantial reduction in fees for Ethereum layer-2 transactions.
Subsequent to the upgrade, network fees exhibited a consistent decline, hitting a low of $566,000 on August 31, and slightly rising to $578,000 by September 2, 2024.
The reduction in Ethereum L2 fees post the Dencun upgrade triggered a proliferation of competing L2 scaling solutions. L2Beat data indicates that there are presently 74 Ethereum L2 scaling projects and 21 layer-3 projects listed. Adrian Brink, CEO of Anoma, points out that the current surplus of L2 solutions built on the Ethereum network surpasses market demands, estimating an excess of about 10 times the required number of layer-2 scaling solutions.
This intense competition has incited a race among rival L2s to offer the lowest transaction fees to attract customers. Consequently, this competition has diverted users away from settling transactions directly on the Ethereum base layer, leading to a self-reinforcing cycle that further reduces network fees.
The decrease in transaction costs facilitated by Dencun counteracted the deflationary impact of EIP-1559, an Ethereum improvement proposal that involved burning a portion of fees on the network.
The substantial decline in fees has resulted in reduced demand for Ether (ETHUSD), the cryptocurrency essential for paying transaction fees on the network. Consequently, the supply of ETH has been steadily increasing post the implementation of the Dencun upgrade.
Historically low transaction fees on Ethereum, coupled with the diminished demand, have been instrumental in driving the price of ETH below the $3,000 mark.
