Over the past few months, despite a sharp increase in L2 profits, the ETH burn rate has decreased, resulting in less value flowing into ETH.
Written by: ParaFi Capital
Compiled by: 1912212.eth, Foresight News
We are deeply studying the development of Ethereum after EIP-4844, focusing on the following three important directions:
What is the latest progress of ETH destruction?
What is the appeal of L2 networks?
What is the economic connection between L2 and Ethereum?
After EIP-1559 and the merge upgrade, people were excited about the economics of ETH as a cash flow-generating asset. After the first two upgrades, the supply of ETH did drop, dropping by about 0.38% from September 2022 to April 2024. Since then, however, the ETH supply has been climbing as the burn rate has slowed.
ETH staking reward rates have been trending downward over the past 12 months as the number of Ethereum validators has grown 79% over the past year while L1 transaction fees have fallen.
Although the destruction rate has slowed down, applications or protocols such as Uniswap, Tether, 1inch, and MetaMask continue to drive most of the gas consumption on Ethereum. In 2023, Arbitrum and ZKsync were the main gas consumers, but their data has dropped significantly this year because the EIP-4844 proposal allows L2 to publish data more efficiently, reducing its data storage requirements.
Over the past two and a half years, Ethereum's transaction count has remained relatively stagnant, while L2's total transaction count is expected to exceed L1's by 10 times in August 2024.
The growth in L2 activity can be attributed to the launch of new L2s and the explosive development of some existing L2s. Since March, Base and Arbitrum have both exceeded Ethereum in terms of daily transactions. While this chart aggregates transactions from multiple L2s, each L2 is providing alternative block space to Ethereum, highlighting the general trend of L1 to L2 migration.
The growing popularity of Ethereum L2 is also reflected in the fact that they have attracted a large amount of DEX market share from Ethereum. After the EIP-4844 upgrade, L2 has pushed the DEX market share on the Ethereum mainnet down to below 60%.
However, this also highlights the problem of liquidity fragmentation caused by the continuous development of the Rollup network. Despite the great success of these L2s, they are relatively cheap to publish data on Ethereum due to the EIP-4844 upgrade. EIP-4844 was implemented in March 2024 and introduced a new data storage mechanism called "blobs" to Ethereum, which is a cheaper alternative to the previous Calldata structure.
In March 2024, L2 paid more than 10,000 ETH in fees on Ethereum, but in July, they paid less than 400 ETH, a drop of about 96%. With the reduction in costs, L2 now contributes less to the destruction of ETH and also reduces gas fees on the mainnet.
Since L2s need to publish a large amount of transaction summary data on-chain, they have rapidly adopted blobs. Since the beginning of June, at least 16,000 blobs have been published on Ethereum every day. This has led to a decline in the proportion of total fees paid by major L2s, from 12% to 1% in 2024.
Since the implementation of EIP-4844, L2 operating margins have increased significantly. While total sorter revenue for scaling solutions (i.e. the sum of fees paid on L2 networks) has fallen by an average of ~48% year to date, operating costs have fallen by ~87%, meaning Rollups now retain the majority of revenue. Major L2s now have operating margins of over 90%, even after passing on the bulk of the cost savings to users. Users benefit, with fees falling by ~90% over the past year on networks using blobs, with median transaction costs often below $0.01.
EIP-4844 has a significant impact on Ethereum L1.
Despite the surge in L2 usage, the direct benefit to ETH as an asset is unclear. Over the past few months, while L2 profits have risen sharply, the ETH burn rate has fallen, resulting in less value flowing into ETH.
This leaves the Ethereum ecosystem with a lot of questions to think about:
As L2 usage continues to grow, what role will L2 tokens play? How much value will L2 tokens capture compared to ETH?
Are Rollups offering too much benefit relative to Ethereum? Or is this structure ideal to attract more users and developers to the broader Ethereum ecosystem?
As more L2s are launched, how will users and liquidity interoperate between these different networks?
With fees on Ethereum mainnet now at historic levels, will we see developers reconsider deploying directly on L1, or will L2 remain more attractive?
