Ethereum, long a dominant force in the blockchain world as the leading platform for decentralised applications (DApps) and smart contracts, is now facing significant challenges. As scaling solutions and technological advancements emerge, Ethereum’s dominance is waning.
Ironically, Layer 2 (L2) solutions, originally designed to support and accelerate Ethereum’s network, have contributed to a significant decline in revenue.
This decline not only reflects reduced activity on Ethereum’s main network but also highlights how Ethereum is now under serious pressure from technologies that were meant to bolster it.
Significant Revenue Decline for Ethereum Due to L2 Competition
According to data from Token Terminal, Ethereum’s revenue from transactions on its main network peaked at $35.5 million on 5 March 2024.
However, since then, this revenue has sharply declined by more than 50%, plummeting to just $566,000 by 31 August 2024. Overall, Ethereum’s revenue has seen a drastic 99% drop over the past six months from its highest point.
One of the primary factors behind this steep decline is the Dencun upgrade, launched on 13 March 2024, which aimed to reduce transaction fees on Ethereum’s Layer 2 networks.
While the upgrade achieved its goal, the unintended consequence was that lower transaction fees on L2 attracted many users to move their activities from Ethereum’s main network to various L2 solutions.
According to L2BEAT, there are currently more than 74 active L2 projects, alongside 21 Layer 3 projects built on Ethereum. The fierce competition among these projects to offer the lowest transaction fees has drawn many users away from the Ethereum mainnet, significantly reducing its revenue.
In this scenario, Ethereum faces a major dilemma. On one hand, the increased adoption of L2 aligns to enhance network scalability and efficiency.
On the other hand, it has also led to a significant revenue drop, which could have long-term implications for the sustainability of Ethereum’s main network. The L2 solutions, which were meant to support Ethereum, have become strong competitors, capturing a substantial share of transactions and revenue that previously belonged to Ethereum.
ETH Price Drops 22% Alongside Falling ETF Transaction Volumes
In addition to network revenue challenges, Ethereum is also facing significant issues as a digital asset. Ethereum’s price (ETH) fell by 22% in August 2024, marking its worst month in two years.
This decline coincides with a decrease in Ethereum ETF transaction volumes, which were initially expected to boost institutional demand for ETH. However, the reality has been quite different.
According to CoinShares data, Ethereum ETFs have experienced significant outflows, with many investors withdrawing their funds, leading to a drop in interest and demand for ETH.
This situation was exacerbated by comments from Ethereum’s creator, Vitalik Buterin, who suggested that DeFi might not be sustainable in the long term.
Furthermore, the Ethereum Foundation’s involvement in selling ETH has added further pressure on the market, highlighting the difficulties Ethereum is currently facing, with decreasing transaction volumes and a significant drop in ETH prices.
Despite these challenges, it is important to remember that Ethereum remains the fundamental backbone of the blockchain ecosystem. Without Ethereum, L2 solutions would not exist, and much of the ongoing innovation still relies heavily on Ethereum’s main network.
Therefore, even though Ethereum is facing significant hurdles, it still has the potential to recover and thrive in the future.
Looking ahead, Ethereum may need to adjust its strategy to maintain its relevance in the face of increasing competition. More measured steps to support and integrate L2 solutions without sacrificing revenue from the main network could be crucial for long-term sustainability.
With continued innovation and technological advancement, Ethereum still holds significant opportunities to regain dominance and remain the backbone of the global blockchain ecosystem.
