Key Points:
- Ethereum network fees dropped 47% in Q3 2024, reaching $261 million.
- Total Value Locked (TVL) decreased 14% during the same period.
- Growth of Layer-2 networks and updates like EIP 4844 impacted fees.
- Uniswap’s new Layer-2, Unichain, may further reduce Ethereum’s revenues.
Ethereum’s Q3 Fee Revenue Plummets to $261 Million
In a recent report by DeFi Report, Ethereum’s network fees saw a sharp decline in the third quarter of 2024, generating just $261 million—a 47% drop from the previous quarter. This marks Ethereum’s lowest fee performance since the fourth quarter of 2020, underscoring the challenges Ethereum’s Layer-1 (L1) network faces amid the rise of Layer-2 (L2) solutions.
Published on October 16, “The ETH Report: Q3-24” highlights several factors that contributed to the decline. The report attributes much of this downturn to the growing adoption of L2 solutions, the introduction of Ethereum’s EIP 4844 update, and a reduction in new crypto users in the market during Q3.
Layer-2 Growth and EIP 4844 Impact on Fees
One of the central themes in the DeFi Report’s analysis is the increasing dominance of Layer-2 networks, which have gradually siphoned off transactions from Ethereum’s L1, resulting in a substantial reduction in fees. The EIP 4844 update, which improved data efficiency and scalability, further contributed to driving down transaction costs, reducing the need for users to rely on the more expensive L1 for transactions.
Despite the drop in fees, Ethereum’s Total Value Locked (TVL)—a measure of the total capital held in its decentralized finance (DeFi) ecosystem—rose 133% over the last year, despite a 14% decline in Q3. However, the price of Ether (ETH) itself fell by 21% during the same period, partly due to more tokens being issued than burned.
The report also highlights the risk of reduced validator revenues as Ethereum moves towards a more scalable model. “We view this as a win-win for app developers, users, and ETH validators or holders,” noted Michael Nadeau, founder of DeFi Report, acknowledging that L2 scaling could initially lead to a temporary dip in L1 revenues.
Challenges from Uniswap’s Unichain
The recent launch of Uniswap Labs’ Layer-2 solution, Unichain, presents another potential challenge for Ethereum. As one of the largest consumers of Ethereum gas fees—accounting for 20% of the total fees paid to validators—Uniswap’s move to its own Layer-2 network could significantly reduce Ethereum’s fee revenue. Nadeau warned that Ethereum validators could lose as much as $368 million in settlement fees that will now be redirected to Uniswap Labs and its token holders.
Uniswap’s decision to build its own L2 solution may further fragment the Ethereum ecosystem, pulling even more users away from its mainnet. “The optics don’t look great,” the report notes, as both Ethereum inflation and competition from new networks like Unichain intensify.
While the report outlines a challenging landscape for Ethereum’s fee generation, Nadeau sees a potential path forward. He suggested that Ethereum validators could respond by lowering transaction fees, which may encourage more usage and increase token burns, ultimately benefiting ETH holders in the long run.
Looking Ahead: Ethereum’s Adaptation to L2 Expansion
As Ethereum continues to evolve, the rise of L2 networks such as Unichain and the broader implementation of upgrades like EIP 4844 may fundamentally reshape how Ethereum generates revenue. Though the initial impact may result in lower L1 fees, there is optimism that increased scalability will drive new use cases, bringing in additional transaction volumes over time.
In the near term, however, Ethereum must navigate a period of transition, balancing the growth of its L2 ecosystem with the need to maintain a robust and decentralized L1. As the DeFi Report concludes, Ethereum’s success in adapting to these shifts will be critical for the network’s long-term sustainability.