The highly anticipated Dencun upgrade to the Ethereum ecosystem has brought about a significant reduction in Layer-2 transaction fees, leading to a substantial increase in user adoption of L2 networks such as Arbitrum and Optimism. However, this shift has resulted in a drastic 99% decline in Ethereum’s mainnet revenue, sparking concerns about the network’s future.

The Dencun upgrade was designed to improve the network’s accessibility by reducing transaction fees. While it has achieved this goal, with fees dropping by over 90% across various networks, it has also led to a significant decrease in Ethereum’s gas fees. This, in turn, has resulted in less ETH being burned, increasing the supply and putting downward pressure on the price.

According to Token Terminal, L1 revenue has dropped from $35.5 million in March to a mere $578,000 in early September. This significant decline has raised questions about Ethereum’s ability to sustain itself as a standalone value store.

Layer-2 Networks Gain Traction, Drawing Users Away from Ethereum Mainnet

As Layer-2 networks become more cost-effective, their user base and transaction counts have increased substantially. With 74 Ethereum L2s and 21 L3s currently in operation, the majority of activity is concentrated on a few chains. Arbitrum and Optimism dominate the L2 space, with total value locked (TVL) of $2.46 billion and $1.49 billion, respectively.

These networks have seen a significant increase in monthly active users, with Optimism currently boasting 14.2 million users and Arbitrum seeing 3 million users. Daily transactions on these networks have also doubled since March, indicating a growing trend towards L2 adoption.

Ethereum’s Revenue Model Set to Shift

The Dencun upgrade has led to a shift in Ethereum’s revenue model, with the network transitioning from a deflationary asset to a settlement and security layer for L2 networks. According to Rob Viglione, CEO of Horizen Labs, Ethereum’s income model is set to shift from individual transaction fees to generating revenue as the settlement layer for L2 networks.

This transition positions Ethereum as critical infrastructure for a diverse blockchain ecosystem, with its energy lying in decentralized applications (dApps) rather than as a standalone value store. The upcoming Pectra upgrade, scheduled for Q1 2025, is expected to further enhance Ethereum’s staking, security, smart contract performance, and scalability.

Key Takeaways:

• Ethereum’s Dencun upgrade has led to a 99% decline in L1 revenue
• Layer-2 networks such as Arbitrum and Optimism have seen significant growth in user adoption and transaction counts
• Ethereum’s revenue model is shifting from individual transaction fees to generating revenue as the settlement layer for L2 networks
• The network is transitioning from a deflationary asset to a settlement and security layer for L2 networks
• The upcoming Pectra upgrade is expected to further enhance Ethereum’s staking, security, smart contract performance, and scalability.