Ethereum’s layer-1 network has seen its revenue plummet by a staggering 99% since the Dencun upgrade, which took effect on March 13, 2024. Despite a noticeable uptick in both monthly users and daily transactions on layer-2 (L2) solutions, this drop underscores a significant shift in Ethereum’s ecosystem.
Prior to the upgrade, on March 5, 2024, Ethereum’s network fees reached a peak of $35.5 million, the highest level recorded for the year. However, the Dencun upgrade, aimed at dramatically lowering fees for transactions on Ethereum’s L2 networks, has had a profound impact. By August 31, network fees had plunged to a mere $566,000, with a slight increase to $578,000 by September 2, 2024. This sharp decline highlights how the upgrade has fundamentally altered Ethereum’s revenue structure.
The introduction of the Dencun upgrade has intensified competition among L2 scaling solutions, with L2Beat currently tracking 74 Ethereum L2 projects and 21 layer-3 projects. This heightened competition has led to a “race to the bottom,” as rival L2s vie to offer the lowest possible transaction fees. Consequently, more users are choosing to transact on these L2 solutions rather than on the Ethereum mainnet, further reducing the network’s fee income.
The drastic reduction in transaction fees has had a ripple effect on Ethereum’s tokenomics. Lower fees have decreased the demand for Ether (ETH), the native cryptocurrency used to pay for transactions, resulting in an increased supply of ETH since the Dencun upgrade. This development has effectively countered the deflationary pressure introduced by the earlier EIP-1559 upgrade, which incorporated a fee-burning mechanism to reduce the supply of ETH.
As a result, the price of ETH has suffered, dropping below the key psychological threshold of $3,000. At present, ETH is trading at $2,519, representing a 5.98% decline over the past week.
The sustained drop in revenue has prompted concerns among market analysts about a potential “death spiral” for Ethereum. With daily revenue now hovering around $200,000, some experts argue that this is insufficient to justify Ethereum’s current market capitalization of approximately $300 billion. Without strong use cases on the mainnet, Ethereum may face serious valuation challenges.
Despite these hurdles, Ethereum co-founder Vitalik Buterin remains optimistic, suggesting that the network has become more resilient even in the face of these difficulties. The long-term effects of the Dencun upgrade and the continued rise of L2 solutions will be crucial in determining Ethereum’s future as the platform adapts to this rapidly evolving landscape.
