Ethereum’s Layer 1 network has seen a drastic drop in revenue, dropping 99% since March 2024.
Token Terminal data reveals that network revenue peaked at over $35 million on March 5. However, by September 2, daily revenue had dropped to an annual low of around $200,000.
Market watchers attribute the decline to the growth of Layer 2 (L2) networks and the Dencun upgrade in March, which reduced fees for L2 transactions and reshaped Ethereum’s revenue structure. Token Terminal said:
“Key indicators that show how lower transaction fees on L2s have increased usage, but also driven down revenue on L1.”
Post-upgrade transaction activity shifted from Ethereum mainnet to L2 networks, leading to an increase in daily transactions and active users on these platforms.
However, this migration has had a significant impact on Ethereum’s fee revenue. For example, Coinbase’s L2 network, Base, generated $2.5 million in revenue in August but only paid $11,000 to settle on the mainnet, highlighting the shift in value compared to Ethereum’s base layer.
Crypto analyst Kun warned that if this trend continues, L2 networks could dominate and potentially abandon Ethereum’s mainnet, especially for mainstream applications. He stressed the need for Ethereum to develop useful use cases on its mainnet or risk a serious valuation problem.
He added:
“ETH L1 needs valuable use cases on mainnet that can’t be sieged or you have to hope that L2 utilization is so large that you need 100,000x utilization on L2 to get the same value as on mainnet with a small fraction, which then creates a valley of valuation problems.”
“Death Spiral”
Bitcoin investor Fred Krueger echoed these concerns, suggesting that Ethereum could face a “death spiral” if its low-return situation persists.
He pointed out that Ethereum’s current revenue of $200,000 per day is equivalent to $73 million per year, which is far from enough to maintain its $300 billion market capitalization.
Krueger argues that a more realistic valuation could be closer to $3 billion, highlighting the disconnect between Ethereum’s fee revenue model and its market valuation. He said:
“(Ethereum) is not equivalent to a company making $73 million a year in profits, or even a company making $73 million a year in revenue. That $73 million is not even enough to buy back all the inflation that naturally accrues to ETH validators.”
