Ethereum’s Network Revenue Drops 99%, Raising Concerns of ‘Death Spiral’

Ethereum’s layer-1 network has experienced a significant drop in revenue, falling by 99% since March 2024. Data from Token Terminal indicates that network revenue reached over $35 million on March 5 but had dwindled to approximately $200,000 per day by Sept. 2.

Market analysts attribute this decline to the emergence of layer-2 (L2) networks and the impact of the March Dencun upgrade on Ethereum’s fee structure. Token Terminal highlighted that lower transaction fees on L2s have boosted usage but reduced revenue on the L1 network.

Following the upgrade, transaction activity has shifted from Ethereum’s mainnet to L2 networks, resulting in increased daily transactions and active users on these platforms. However, this transition has significantly affected Ethereum’s fee revenue. For example, Coinbase’s L2 network, Base, generated $2.5 million in revenue in August but paid only $11,000 to settle on the mainnet, illustrating the shift in value away from Ethereum’s base layer.

Crypto analyst Kun cautioned that if this trend persists, L2 networks could dominate and potentially abandon Ethereum’s mainnet, particularly for consumer applications. He stressed the importance of Ethereum developing valuable use cases on its mainnet to prevent a severe valuation problem.

Bitcoin investor Fred Krueger echoed these concerns, warning of a potential “death spiral” for Ethereum if its low revenue situation continues. He pointed out that Ethereum’s current fee revenue of $200,000 per day equates to $73 million annually, falling short of sustaining its market cap of $300 billion.

Krueger argued that a more realistic valuation might be around $3 billion, highlighting the disparity between Ethereum’s fee income model and its market valuation. He emphasized that the current revenue is insufficient to cover all the inflation that ETH validators naturally incur.

In conclusion, Ethereum’s revenue decline reflects a shifting landscape in the crypto space, with the rise of L2 networks impacting the traditional revenue structure of layer-1 networks like Ethereum. As the industry evolves, adapting to these changes will be crucial for Ethereum’s sustainability and long-term success.