Ethereum Layer-1 Network Revenue Dropped – What Caused It?
As of March 2024, Ethereum's Layer-1 network revenue has declined by 99%, despite a dramatic increase in monthly users and Layer 2 daily transaction costs.
According to data from Token Terminal, network payments reached their peak for the year on March 5, 2024 at $35.5 million. The Denkun update – 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 amendment, network payments gradually decreased, reaching a low of $566,000 on Aug. 31 — and rising slightly to $578,000 on Sept. 2, 2024.
Too many L2s?
The drastic drop in Ethereum's L2 fees following the Denko update has sparked an explosion in competing L2 scaling solutions. Layer-2 data resource L2Beat currently lists 74 Ethereum L2 demo projects and 21 Layer-3 projects.
Adrian Brink, CEO of Anoma, argued that the number of L2 solutions currently built on the Ethereum network far exceeds what the market needs. Brink has approximately 10 times the number of Layer-2 sizing solutions than the industry needs.
Related: ETH Dencun upgrade attracts more L2 bots and failed txs: Galaxy Research
Ethereum Layer-2 Average Network Fees per L2 Network. Source: Token Terminal
This highly competitive environment has encouraged competition to the bottom, as rival L2s compete to offer the lowest transaction fees to customers. The resulting competition keeps users away from sitting directly on the Ethereum base layer and acts as a self-reinforcing mechanism, reducing fees on the network.
Low payments create inflation
The reduced transaction costs introduced by Denkun will offset the pressure of price reduction proposed by EIP-1559 – Ethereum Reform Proposal, which introduced a mechanism to burn certain fees on the network.
Ethereum supply. Source: Y Charts
This dramatic reduction in fees will reduce demand for Ether (ETH), the currency needed to pay transaction fees on the network. As a result, the supply of ETH has been growing steadily since the Denkun update went live.
Historically, low transaction costs on Ethereum and a corresponding lack of demand have served as drivers of ETH prices below $3,000.
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