The Ethereum network has experienced a 99% drop in revenue following the Dencun upgrade, as competition from layer-2 solutions intensifies. Explore the implications for Ethereum’s future.
In recent months, Ethereum’s revenue has plummeted by nearly 100%, largely due to increased competition from layer-2 (L2) scaling solutions.
The Dencun hard fork, implemented in March, marked a significant turning point for Ethereum. While the upgrade successfully reduced transaction fees, it also brought some negative consequences. Ethereum’s revenue has been steadily declining amid the surge in L2 networks.
According to data from Token Terminal, Ethereum’s revenue has dropped by 99% since the Dencun upgrade. This update lowered fees for L2 solutions, doubled daily transaction volumes, and significantly increased the number of monthly active users.
The intensifying competition among more than 70 active layer-1 and layer-2 solutions, along with emerging layer-3 projects, has driven users away from the Ethereum mainnet. As a result, the network’s revenue has fallen from $35.5 million in March to just $566,000 by the end of August.
Rob Viglione, CEO of Horizen Labs, commented that Ethereum is transitioning from a primary transaction platform to a critical settlement and security layer for L2 solutions. While this shift might hurt Ethereum in the short term, it is expected to strengthen its role in the blockchain ecosystem in the long run. “We may witness market consolidation among L2 solutions, with a few dominant players emerging. Some may explore alternative approaches to data availability, potentially challenging Ethereum’s dominance. However, L2 solutions with unique and valuable use cases will likely remain popular for a long time. Ethereum’s revenue model needs to shift from transaction fees to earnings from processing operations for L2 networks, making it a crucial part of a diverse blockchain ecosystem,” said Viglione.
The reduction in fees due to Dencun has also limited demand for ETH, which is typically used for transaction settlements. This decline in demand has increased the supply of ETH, weakening the deflationary effect initially outlined in EIP-1559. Ethereum has once again become an inflationary asset, with more tokens being minted than burned.
Data from ultrasound.money shows that since mid-April, the total supply of the second-largest cryptocurrency has grown by more than 16,775 ETH.
“We’ve concluded that at the current level of network activity, Ethereum won’t return to being deflationary. The narrative of ‘ultrasound money’ is likely dead, or will require significantly higher network activity to revive,” noted CryptoQuant analysts in a recent report.
Despite concerns over the decline in fees and Ethereum’s deflationary potential, some argue that layer-1 and layer-2 networks are on the verge of financial collapse. They believe that investors may lose up to 80% of their asset value. However, Ethereum co-founder Vitalik Buterin disagrees with this perspective.
