ethereum’s Layer 1 network has taken a hit, with revenue plummeting by 99% since March 2024. This drastic change comes shortly after the Dencun upgrade, which significantly altered the transaction fee structure.
While Layer 1 revenues have plummeted, Layer 2 solutions are thriving, attracting more users and offering lower rates. Token Terminal data showsThis situation has caused a mix of concerns and optimism within the ethereum community.
Domino effect of Dencun update
The Dencun upgrade went live on March 13, further optimizing the efficiency of layer 2 transactions. Just days before, ethereum’s layer 1 revenue surpassed $35 million. However, once that upgrade was implemented, fees began to decline dramatically, eventually reaching close to $600,000 by the end of August.
Such a shift highlights a visible change in user behavior regarding their interaction with the ethereum ecosystem. Transactions have become much cheaper with the introduction of “blobs” that allow layer 2 solutions to process transactions with much less reliance on the layer 1 network for data availability.
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Ether market cap currently at $285 billion. Chart: TradingView.com
That has caused ethereum's base layer revenue to fall off a cliff. While that sounds scary, it also means that Layer 2 solutions are taking off. The number of active layer 2 projects has also increased: in total, 74 solutions are competing for space. In turn, there is a race to the lowest transaction fee price, and users win because they save money on faster transactions.
Changing perspectives on tariffs
Despite the drop in revenue, some ethereum validators argue that the focus on fees is misguided. According to Ryan Berckmans, a prominent validator, the success of layer-2 solutions has made ethereum’s base layer more accessible to larger entities. He said:
“Fees are a result of ethereum’s utility, not the goal itself.”
However, the community is divided on the issue. Some point to a possible long-term consequence of falling revenue on network health and tokenomics. The lower eth token burn rate has turned the previously deflationary supply into an inflationary supply.
ethereum L2 average network fees dropping. Source: Token Terminal
That said, this development raises some questions about the future value of eth and whether changes to blob fees might be needed to rebalance it.
Institutional adoption and future growth
Amid all these changes, interest in ethereum among institutions is growing. The fact that companies like Coinbase and Circle, and financial players like BlackRock, are supporting the network’s development infrastructure indicates that adoption will become more permanent.
<blockquote class="twitter-tweet”>
I hate to break it to you. twitter.com/hashtag/ethereum?src=hash&ref_src=twsrc%5Etfw” rel=”nofollow noopener” target=”_blank”>#ethereum skeptical, but twitter.com/search?q=%24ETH&src=ctag&ref_src=twsrc%5Etfw” rel=”nofollow noopener” target=”_blank”>$Ether is on track to achieve solid institutional adoption, led by industry giants like Coinbase, Circle, BlackRock, and most recently Sony. And it looks like Toyota and Robinhood could soon join in, too.
Anonymous is… image.twitter.com/2QdaC7sVJx
— AdrianoFeria.eth (@AdrianoFeria) twitter.com/AdrianoFeria/status/1830816943911190726?ref_src=twsrc%5Etfw” rel=”nofollow noopener” target=”_blank”>September 3, 2024
According to Adriano Feria, an ethereum believer, this institutional support is key to ethereum’s future. He has said that while speculation can generate temporary interest in a project, real progress comes from established players entering the space.
Feria also believes that layer 2 scaling solutions are not a passing fad, but rather open up new possibilities and improve the user experience. Giant players, such as Coinbase’s Base, along with Arbitrum, have leveraged ethereum’s leading liquidity to prove that layer 2 scaling solutions can coexist with the base layer and thrive on it.
The increasing use of layer 2 solutions is, to some extent, a huge blow to ethereum’s layer 1 revenues. It’s a whole new chapter for the network, especially with the reshuffle brought about by the recent Dencun upgrade – cheaper and more accessible transactions. The impending institutional interest and influx of users who are already producing high volume on these layer 2 solutions could be the moment when ethereum begins its evolution.
Featured image from PixelPlex, chart from TradingView
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