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What caused the sudden drop in Ethereum L1 network revenue?

What caused the sudden drop in Ethereum L1 network revenue?

BlockBeatsBlockBeats2024/09/03 10:56
By:BlockBeats

Ethereum’s Layer 1 network revenue has plummeted 99% since March 2024, but Layer 2 users and transaction costs have increased significantly.

Original title: Ethereum layer-1 network revenue collapses—What's causing it?
Original author: Vince Quill, cointelegraph
Original translation: Eason, MarsBit


Despite a sharp increase in monthly users and daily transaction costs on Layer 2, Ethereum Layer 1 network revenue has plummeted 99% since March 2024.


Network fees reached an annual high of $35.5 million on March 5, 2024, according to Token Terminal. The Dencun upgrade went live on March 13, 2024, which significantly reduced the fees for Ethereum Layer 2 transactions.


What caused the sudden drop in Ethereum L1 network revenue? image 0

Ethereum network fees in 2024. Source: Token Terminal


After the upgrade, network fees steadily declined, hitting a low of $566,000 on August 31, and rose slightly to $578,000 on September 2, 2024.


Too many L2s?


After the Dencun upgrade, Ethereum L2 fees dropped significantly, sparking competition for L2 scaling solutions. Layer 2 data resource L2Beat currently lists 74 Ethereum L2 scaling projects and 21 Layer 3 projects.


Anoma CEO Adrian Brink believes that the number of L2 solutions currently being built on the Ethereum network far exceeds market demand. Brink estimates that the number of Layer 2 scaling solutions is roughly 10 times the industry demand.


What caused the sudden drop in Ethereum L1 network revenue? image 1

Average network fees on Ethereum Layer 2 L2 networks. Source: Token Terminal


This highly competitive environment encourages a race to the bottom, with rival L2s competing to offer the lowest transaction fees to their customers. The resulting competition draws users away from settling directly on the Ethereum base layer and acts as a self-reinforcing mechanism that drives down network fees even further.


Low Fees Create Inflationary Supply Pressure


The reduced transaction costs of Dencun offset the deflationary pressures from EIP-1559, an Ethereum Improvement Proposal that introduced a mechanism to burn some fees on the network.


What caused the sudden drop in Ethereum L1 network revenue? image 2

Ethereum supply. Source: Y Charts


The dramatic reduction in fees means a drop in demand for Ether, the currency needed to pay for network transactions. As a result, the supply of ETH has been steadily increasing since the Dencun upgrade went live. Ethereum’s historically low transaction costs, and the corresponding lack of demand, have caused the price of ETH to drop below $3,000.


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Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.

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