Ethereum layer-1 network revenue has plummeted by 99% since March 2024, despite a dramatic increase in layer-2 monthly users and layer-2 daily transaction costs.

According to data from Token Terminal, network fees hit their highest levels for the year on March 5, 2024, at $35.5 million. The Dencun upgrade—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 upgrade, network fees steadily declined, with fees on Aug. 31 hitting a low of $566,000—and marginally increasing to $578,000 on Sept. 2, 2024.

Too many L2s?

The sharp reduction in Ethereum L2 fees following the Dencun upgrade sparked an explosion of competing L2 scaling solutions. According to L2Beat, there are currently 74 Ethereum L2 scaling projects listed and 21 layer-3 projects listed.

Adrian Brink, CEO of Anoma, argues that the number of L2 solutions currently built on top of the Ethereum network vastly outweighs what the market requires. Brink estimates there are roughly 10 times the number of layer-2 scaling solutions the industry needs.

Ethereum Layer-2 average network fees by L2 network. Source: Token Terminal

This highly competitive environment has encouraged a race to the bottom, with rival L2s vying to offer the lowest transaction fees to customers. The resulting competition has drawn users away from settling directly on the Ethereum base layer and acts as a self-reinforcing mechanism that further reduces fees on the network.

Low fees create inflationary supply pressure

The lowered transaction costs introduced by Dencun offset the deflationary pressure introduced by EIP-1559—an Ethereum improvement proposal that introduced a mechanism burning a portion of fees on the network.

Ethereum supply. Source: Y Charts

This dramatic reduction in fees translates into lowered demand for Ether (ETH)—the currency required to pay for transaction fees over the network. As a result, the supply of ETH has been growing steadily since the Dencun upgrade went live.

Historically low transaction costs on Ethereum, and the corresponding lack of demand, acted as drivers that pushed the price of ETH below the $3K level.

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