Author: Vince Quill, CoinTelegraph; Translated by: Deng Tong, Golden Finance

Despite a significant increase in monthly users and daily transaction costs on Layer 2, Ethereum Layer 1 network revenue has plummeted 99% since March 2024.

According to Token Terminal, network fees reached their highest level this year at $35.5 million on March 5, 2024. The Dencun upgrade went live on March 13, 2024, significantly reducing fees for Ethereum Layer 2 transactions.

Ethereum network fees in 2024. Source: Token Terminal

After the upgrade, network fees steadily decreased, hitting a low of $566,000 on August 31, and rose slightly to $578,000 on September 2, 2024.

Too many L2s?

Ethereum L2 fees have dropped significantly following the Dencun upgrade, sparking a surge in competing L2 scaling solutions. Layer 2 data resource L2Beat currently lists 74 Ethereum L2 scaling projects and 21 Layer 3 projects.

Anoma CEO Adrian Brink believes that the number of L2 solutions currently being built on the Ethereum network far exceeds market demand. Brink estimates that the number of Layer 2 scaling solutions is about 10 times the industry demand.

Average network fees for Ethereum Layer 2 L2 network. Source: Token Terminal

This highly competitive environment encourages a race to the bottom, with rival L2s competing to offer the lowest transaction fees to their customers. The resulting competition draws users away from settling directly on the Ethereum base layer and acts as a self-reinforcing mechanism, further driving down network fees.

Low fees create inflationary supply pressure

Dencun’s reduced transaction costs offset the deflationary pressures brought about by EIP-1559, an Ethereum Improvement Proposal that introduces a mechanism to burn a portion of fees on the network.

Ethereum supply. Source: YCharts

A significant reduction in fees means a decrease in demand for Ethereum.

Ethereum’s historically low transaction costs and a corresponding lack of demand have caused the price of ETH to fall below $3,000.