Originally published on: September 02, 2024
The Ethereum layer-1 network has seen a significant drop in revenue, plummeting by 99% since March 2024. Despite an increase in monthly users and daily transaction costs on layer 2s, network fees have hit their lowest levels in recent history.
According to data from Token Terminal, network fees peaked at $35.5 million on March 5, 2024, only to drop dramatically following the implementation of the Dencun upgrade on March 13, 2024. This upgrade aimed to reduce fees for Ethereum layer-2 transactions, leading to a steady decline in network fees, which hit a low of $566,000 by the end of August.
The decrease in fees sparked a rush of competing layer-2 scaling solutions, with 74 Ethereum L2 projects and 21 layer-3 projects currently in the market. However, this oversaturation of solutions has led to a competitive environment where rival L2s are vying to offer the lowest transaction fees to attract users.
This price war has diverted users away from settling transactions directly on the Ethereum base layer and has led to a self-reinforcing mechanism that further reduces network fees. As a result, the decreased transaction costs introduced by the Dencun upgrade have offset the deflationary pressure from the EIP-1559 proposal, which burns a portion of fees on the network.
The lower demand for Ether due to historically low transaction costs has resulted in a steady growth in ETH supply since the Dencun upgrade. This, coupled with the lack of demand, has pushed the price of ETH below $3,000, signaling a challenging time for the Ethereum network.
In conclusion, the evolving dynamics of the Ethereum network are shaping a competitive landscape that is driving network fees down, impacting the demand for Ether, and ultimately influencing the price of ETH in the market.
