Ethereum, the second-largest cryptocurrency by market capitalization, has witnessed a significant drop in layer-1 network revenue since March 2024. Despite a surge in monthly users and daily transaction costs on layer-2 solutions, Ethereum’s base layer fees have plummeted by 99%.
The Dencun upgrade, implemented on March 13, 2024, significantly reduced transaction fees for Ethereum layer-2 solutions. This led to a sharp decline in network fees, with the lowest point recorded at $566,000 on August 31st.
The reduction in fees sparked a wave of new layer-2 scaling solutions. Currently, there are over 74 Ethereum layer-2 projects and 21 layer-3 projects, according to L2Beat. This overabundance of solutions has created a highly competitive landscape, with rival platforms vying to offer the lowest transaction fees.
The intense competition among layer-2 solutions has led to a race to the bottom in terms of transaction fees. As platforms strive to attract users, they are offering increasingly lower fees, further reducing the demand for Ethereum’s base layer.
Prior to the Dencun upgrade, Ethereum’s deflationary mechanism, EIP-1559, burned a portion of transaction fees, reducing the overall supply of ETH. However, the lowered transaction costs introduced by Dencun have offset this deflationary pressure.
The decline in transaction fees has led to a reduced demand for ETH, as fewer users need to pay transaction fees on the base layer. This has contributed to the steady growth of ETH’s supply since the Dencun upgrade.
The combination of lower transaction fees and increased ETH supply has put downward pressure on the price of Ethereum. The cryptocurrency’s price has fallen below the $3,000 level, reflecting the lack of demand for ETH on the base layer.
The Ethereum ecosystem has undergone significant changes since the Dencun upgrade. While the proliferation of layer-2 solutions has led to increased efficiency and lower costs for users, it has also had unintended consequences for the base layer.
The decline in network revenue and the growing supply of ETH have put downward pressure on the price of the cryptocurrency. As the Ethereum ecosystem continues to evolve, it remains to be seen whether the benefits of layer-2 scaling will outweigh the challenges posed by the reduced demand for ETH on the base layer.
