Ethereum’s layer-1 network has experienced a significant drop in revenue, plummeting by 99% since March 2024. According to data from Token Terminal, network revenue reached its peak at over $35 million on March 5. However, by September 2, daily revenue had fallen to a yearly low of around $200,000.
Market observers attribute this decline to the rise of layer-2 (L2) networks and the March Dencun upgrade, which reduced fees for L2 transactions and changed Ethereum’s revenue structure. Token Terminal highlighted that “lower transaction fees on L2s have increased usage but also driven down revenue on the L1.”
With the post-upgrade shift in transaction activity from Ethereum’s mainnet to L2 networks, there has been a notable increase in daily transactions and active users on these platforms. However, this migration has had a significant impact on Ethereum’s fee revenue. For example, Coinbase’s L2 network, Base, generated $2.5 million in revenue in August but only paid $11,000 to settle on the mainnet, highlighting the shift in value from Ethereum’s base layer.
Crypto analyst Kun raised concerns that L2 networks could potentially dominate and move away from Ethereum’s mainnet, especially for consumer applications. He stressed the importance for Ethereum to develop valuable use cases on its mainnet to avoid a severe valuation issue. Kun stated, “ETH L1 needs valuable use cases on mainnet that cannot be competed with, or a massive surge in L2 usage would be required to match the value generated on the mainnet, leading to valuation challenges.”
‘Death spiral’
Bitcoin investor Fred Krueger echoed these concerns, suggesting that Ethereum could enter a “death spiral” if its low revenue situation persists. He highlighted that Ethereum’s current fee revenue of $200,000 per day amounts to $73 million annually, which is far from enough to sustain its market cap of $300 billion. Krueger argued that a more realistic valuation could be closer to $3 billion, emphasizing the disparity between Ethereum’s fee income model and market valuation. He said, “[Ethereum is] not equivalent to a company making $73 million a year in profit, or even a company making $73 million a year in revenue. That $73 million is not even sufficient to buy back all the inflation that naturally comes to ETH validators.”
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Conclusion
In conclusion, Ethereum’s layer-1 network revenue decline highlights the impact of L2 networks and the March Dencun upgrade on Ethereum’s fee structure. As the shift towards L2 networks continues, there is a growing concern about the sustainability of Ethereum’s mainnet revenue. The need for valuable use cases on the mainnet to prevent a valuation crisis is critical. The warnings of a potential ‘death spiral’ and the disparity between revenue and market valuation serve as a cautionary tale for Ethereum’s future. It remains to be seen how Ethereum will adapt to these challenges and secure its position in the evolving blockchain landscape.
