Taking a closer look, the Ethereum network turned a profit in February of this year, with revenue steadily increasing throughout the first quarter. In March, revenue reached $606 million, constituting 51.7% of the total first-quarter revenue. During March, Bitcoin prices soared to historic highs, fueling optimism in the crypto market. This, coupled with a surge in on-chain transaction volume, significantly boosted Ethereum network's average gas fees and total fee revenue.
Comparing network revenue to operating costs, Ethereum network's operational expenses have remained relatively stable, hovering around $4 million per day since the merge in September 2022. However, with the rise in ETH prices and block space demand, this figure started climbing from mid-to-late February and currently sits at around $8 million per day.
In terms of revenue, Ethereum began generating network income following the implementation of EIP-1559 in August 2021, which introduced the gas fee burning mechanism. According to EIP-1559, all base fees required for each transaction are entirely burned, thus, network revenue is directly proportional to on-chain transaction volume and block space demand. The more on-chain transactions and the greater the block space demand, the higher the average base fee burned.
However, when we extend our observation period to the previous bull market cycle, Ethereum's current revenue-generating capacity has actually decreased, which is strongly correlated with market cycles. In contrast, during the peak of the bull market in late 2021, Ethereum's daily average revenue was approximately three times higher than the current figure.
Furthermore, the transition to Proof of Stake (PoS) has indeed become a key factor in Ethereum's financial sustainability. Before transitioning from Proof of Work (PoW) to Proof of Stake, Ethereum still required economically intensive labor in the form of GPU mining to maintain its network, resulting in very high operational costs paid to miners. According to the Ethereum Foundation, before the merge, Ethereum network had to pay miners 2 ETH every 13.3 seconds (i.e., one block), resulting in approximately 13,000 ETH in daily operational costs, including ommer blocks (blocks not included in the longest chain).
With the transition to PoS, validator nodes no longer require costly maintenance, and network operational costs, based on the total staked ETH (about 14 million ETH), now only require spending about 1,700 ETH per day, directly saving the network about 88% of its costs. Therefore, although Ethereum's revenue-generating capacity has declined, compared to the steep decline in costs, the network can still maintain basic financial equilibrium.
Looking at the data comparison between network revenue and net profit, Ethereum network's gross profit margin has generally ranged from 40% to 70% since the merge, with higher congestion resulting in higher profit margins. Additionally, the entire network needs to maintain a daily revenue of $8 million to achieve profitability. For example, although not within the scope of the first quarter, the chart below shows that Ethereum's fee revenue has been declining throughout April due to market trends, leading Ethereum network to once again enter a loss-making state after achieving profitability for two consecutive months. This indicates how challenging it is to make a chain self-sustaining.
Furthermore, observing the comparison between the daily active addresses and the number of contract deployers (ecosystem developer data proxy) on the Ethereum network, we gain some additional insights. In the first quarter, Ethereum network's daily active addresses remained around 420,000, but the number of contract deployers saw a significant decline, dropping from an average of 4,000 per day in January to 2,000 per day in March.
Looking back, the number of ecosystem developers on the Ethereum network seems to have been in a state of stagnant growth since the end of the previous bull market cycle, and even started accelerating its decline after February 2024. While the market entered a new cycle of growth, the Ethereum network found itself in a predicament of developer exodus and slowing growth of active users, which is closely related to the lack of innovation in ecosystem application scenarios.
During the bull market from 2020 to 2022, exciting native crypto innovations such as DeFi, NFTs, GameFi, and SocialFi all emerged from the Ethereum ecosystem, with each narrative having a profound impact on the industry's future development. By 2024, people once again hoped that Ethereum could replicate its miracle and bring forth innovative narrative, but currently, apart from Eigen Layer's re-staking, there are hardly any "new things" within the ecosystem that excite people.
On the other hand, this is also because market expectations are misaligned with industry development trends. The innovative development of an industry and its resulting capital effects often show a causal relationship. Similarly, just because the crypto market cycle occurs every four years, it does not mean that industry innovation should also follow the same rhythm. Of course, there are indeed industries such as AI and nuclear fusion that rely on capital leverage to drive technological progress, but clearly blockchain and Web3 are not in this category.
More importantly, in the past few months, the crypto market has been largely driven by Bitcoin ETF funds, and the macro environment has not brought significant liquidity injection to the market. The meme frenzy surrounding Solana and the brewing "Base Season" narrative undoubtedly are blood-sucking Ethereum ecosystem.
Without playing the "low gas" and "mass consumption" cards, how to increase demand for the blocks sold by the Ethereum network is a core issue that the Foundation and top VCs need to ponder.
