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Ethereum Layer-2 (L2) solutions have experienced significant growth, with monthly active users and daily transaction counts both doubling since March 2024. In contrast, Ethereum Layer-1 network revenue has dropped by 99% over the same period, despite the surge in L2 usage.
The spike in Layer-2 activity began following the Dencun upgrade on March 13, 2024, which substantially reduced fees for {Ethereum} (ETH) transactions. Prior to the upgrade, network fees had reached their highest level for the year on March 5, 2024, at $35.5 million.
The decrease in transaction fees following the Dencun upgrade has led to a proliferation of competing Layer-2 scaling solutions. Currently, L2Beat tracks 74 Ethereum Layer-2 projects and 21 Layer-3 projects. This influx has created a highly competitive landscape, where Layer-2 solutions compete to offer the lowest transaction fees. This competition has diverted users from the Ethereum base layer, reinforcing a cycle of reduced fees and diminished demand for Layer-1 services.
Adrian Brink, CEO of Anoma, has criticized the oversupply of Layer-2 solutions, estimating that the market is saturated with roughly ten times more solutions than necessary. This overcrowding has intensified the race to lower fees, further diminishing the economic activity on the Layer-1 network.
The reduction in fees also affects the economic model of Ethereum. The lowered transaction costs dilute the deflationary impact of EIP-1559, an Ethereum Improvement Proposal designed to burn a portion of transaction fees, thereby reducing the total supply of Ether (ETH). Consequently, the reduced demand for ETH, combined with the increasing supply, has contributed to the price of ETH falling below $3,000.
The combination of historically low transaction costs on Ethereum and the resultant lack of demand for ETH highlights a significant shift in the network's economic dynamics, driven largely by the expansion and competition among Layer-2 scaling solutions.
