Ethereum layer-1 network revenue has plummeted by 99% since March 2024, despite a dramatic increase in monthly users and daily transaction costs on layer 2s.
According to data from Token Terminal, network fees hit their highest levels for the year on March 5, 2024, at $35.5 million. The Dencun upgrade — which significantly reduced fees for Ethereum layer-2 transactions — went live on March 13, 2024.
Ethereum network fees in 2024. Source: Token Terminal
Following the upgrade, network fees steadily declined, hitting a low of $566,000 on Aug. 31 —and marginally increasing to $578,000 on Sept. 2, 2024.
Too many L2s?
The sharp reduction in Ethereum L2 fees following the Dencun upgrade sparked an explosion of competing L2 scaling solutions. Layer-2 data resource L2Beat currently lists 74 Ethereum L2 scaling projects and 21 layer-3 projects.
Adrian Brink, CEO of Anoma, argued that the number of L2 solutions currently built on top of the Ethereum network vastly outweighs what the market requires. Brink estimated there are roughly 10 times the number of layer-2 scaling solutions than the industry needs.
Related: ETH Dencun upgrade attracts more L2 bots and failed txs: Galaxy Research
Ethereum layer-2 average network fees by L2 network. Source: Token Terminal
This highly competitive environment has encouraged a race to the bottom, with rival L2s vying to offer the lowest transaction fees to customers. The resulting competition has drawn users away from settling directly on the Ethereum base layer and acts as a self-reinforcing mechanism that further reduces fees on the network.
Low fees create inflationary supply pressure
The lowered transaction costs introduced by Dencun offset the deflationary pressure introduced by EIP-1559 — an Ethereum Improvement Proposal that introduced a mechanism burning a portion of fees on the network.
Ethereum supply. Source: Y Charts
This dramatic reduction in fees translates into lowered demand for Ether (ETH), the currency required to pay transaction fees on the network. As a result, the supply of ETH has been growing steadily since the Dencun upgrade went live.
Historically low transaction costs on Ethereum, and the corresponding lack of demand, acted as drivers that pushed the price of ETH below the $3,000 level.
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