According to BlockBeats, Ethereum's dominance in smart contracts is facing unprecedented challenges. Concerns are growing that users might shift to alternative Layer 1 (L1) solutions like Solana. This has led some community members to advocate for prioritizing technical improvements in the L1 execution layer over increasing rollup data availability bandwidth.
This shift could significantly impact the network and the revenue of various Ethereum infrastructure protocols. Today, we explore how this change in Ethereum's priorities could bring substantial benefits to liquid staking platform Lido and LDO token holders.
Over the past four years, Ethereum L1's daily transaction volume has remained relatively stable at around one million transactions. However, transaction fee revenue has significantly declined. In early 2021, Ethereum's daily transaction fee revenue often exceeded $20 million, but in 2024, achieving this level in a month is considered fortunate.
Despite the evident demand for adjacent block space, as seen in the nearly continuous rise in Layer 2 (L2) transaction throughput, Ethereum's revenue from such activities is minimal. Ethereum's rollup-centric roadmap optimizes it to provide relatively cheap data availability storage for its L2s. This is the only direct service for which Ethereum stakers receive payment, generating only a few cents per transaction.
While rollups and L2s offer fast transaction times and low costs, their users lack the same security guarantees as Ethereum L1, where transactions are processed by a decentralized set of validators, and the blockchain's integrity is maintained by verified economic incentive schemes like slashing.
Ethereum's greatest strength lies in its world-class settlement guarantees, ensuring reliable transaction processing for any user who can afford the necessary fees. Many ecosystem thinkers believe it is time to combine this core capability with improved L1 execution.
Achieving this vision would require significant and potentially controversial changes, such as increased hardware requirements or native parallelization. However, implementing such upgrades could revitalize Ethereum L1 as the default landing point for all valuable on-chain financial transactions, bolstering Ether's narrative power.
Although a sudden shift to execution priority seems unlikely, it is an attractive path forward for the Ethereum ecosystem. The market's forward-looking nature means investors often try to position themselves ahead of actual changes. In this case, LDO could become a leading performer in the coming weeks.
LDO's recent price performance, up 26% from its mid-August low, suggests investors may already be anticipating a bull market for the token. Refocusing on execution would drive more transactions to Ethereum L1, particularly high-value, compute-intensive DeFi transactions. While individual transaction costs might decrease, the total fees generated by all transactions are expected to rise, positively impacting Lido's primary revenue variable: ETH staking yield.
If the available Ethereum L1 leads to a significant increase in block space demand and desirable secondary effects like net Ether deflation, Ethereum could become a more prominent smart contract platform from an investment and usability perspective. If this distinction boosts ETH's price, Lido would see greater dollar-denominated profits at a given level of on-chain activity.
While discussions about changing Ethereum's roadmap priorities are still in early and contentious stages, these potential shifts could provide strong incentives to revitalize L1, making it a place where real users are willing to pay transaction fees for robust settlement guarantees. If this grand vision materializes, LDO could ultimately begin to perform exceptionally well.
