Ethereum Layer-2 Revenue Drops but Base Emerges as Unlikely Winner

Key Takeaways

• Ethereum’s (ETH) supply has become inflationary since March.
• Layer-2 (L2) transaction fees have fallen after the Dencun upgrade.
• Are any Layer 2-s benefiting from this reduction in fees?

Ethereum’s L2 landscape has shifted following the Dencun upgrade, leading to a decline in transaction fees. While this was a positive development, it had the unintended consequence of causing a decline in revenue in both Ethereum and the majority of L2s.

Base has emerged as the unlikely winner during this downturn. Let’s dive deep into some of the reasons and ramifications of the revenue decline and how and why Base has gone contrary to the trend and emerged as a leader.

Concerns About Ethereum

Since Ethereum’s Dencun upgrade in March, Layer-2 fees have been reduced drastically. This had the unanticipated effect of making the Ethereum supply inflationary  since less ETH was burned during transaction fees. A proportional increase in transactions did not happen, failing to offset inflation.

The founder of CyberCapital Justin Bons posted a long thread outlining his concerns about Ethereum. They are mainly driven by the fact that Layer-2s are capturing the usage from Ethereum, and only a portion of the fees end up back on the Layer-1. Hence, he suggests that the relationship between Layer-2s and Ethereum is parasitic.

Bons believes that Ethereum will continue to struggle since many decentralized applications (dApps) will move to other L1 and L2 blockchains that are cheaper and more efficient. This has made Ethereum a fragmented ecosystem instead of a unified platform for decentralized finance (DeFi) activities.

What perfectly encapsulates this is Uniswap’s move off-chain since high Ethereum fees make it difficult to operate. Uniswap was responsible for a significant percentage of fees and Total Value Locked (TVL) in Ethereum.

Unless a major shift in strategy happens, Bons believes that Ethereum will continue losing its share to its competitors with far superior technology.

Layer-2 Decline

New data from Growthepie shows that while Layer-2 costs have declined drastically, so have profits. This has led to massive declines in revenue compared to pre-Dencun levels.

Daily revenue for all L2s hovered between $200,000 and $300,000 in the past three months. Comparatively, it reached highs above $3 million one year ago. In the last 30 days, Base is the only L2 that has posted revenue over $1 million, clocking in at $2.64 million.

Scroll, Arbitrum, and Optimism are close to $600,000 monthly revenue. The most precipitous fall has been Polygon , with a monthly revenue of less $40,000 in the past 30 days, a number it was reaching in daily revenue last year.

Since March, the number of transactions has fallen drastically in Zksync, while staying relatively constant in OP, Scroll, and IMX. This has caused the aforementioned decline in revenue since at the lower transaction costs, the same number of transactions led to much lower revenues.

Nevertheless, Layer-2s still have a very high Total Value Locked (TVL) in Ethereum. Data from Growthepie shows that they have more TVL in Ethereum than they do in stablecoins, though the highest category is “Other”, which likely includes wrapped tokens, governance tokens, NFTs, and synthetic assets.

The two outliers in this data are Base and Arbitrum. Arbitrum has posted a modest increase while Base’s transactions have increased 15x since March, reaching a new all-time high of over 6,000,000 daily transactions in October.

Taiko has also posted increases but it launched in May. Taiko is a Based roll-up, meaning Ethereum validators do the transaction sequencing.

With this in mind, let’s look at the on-chain data for Base and see what’s behind this increase.

Base Leads the Way

Nearly every single activity metric for Base has increased rapidly since March 2023. Activity metrics like Active Addresses, Transaction Count, and Throghput are all at all-time highs, and so are the Stablecoin Market Cap and Total Value Locked.

One potential reason for this Base has a targeted use case with Coinbase’s existing user base, creating a demand for its services.

Another possible reason are the memecoins that are thriving in the base ecosystem, more specifically MOG and BRETT. Both have jumped into the top 100 largest cryptocurrencies based on their market caps and are close to new all-time highs.

Nearly a quarter of the transactions on base are on decentralized finance, which is likely memecoin trading.

The memecoin angle is supported by the TVL statistics . They show that most of the increase in TVL comes from the Decentralized Exchange (DEX) Aerodrome Finance.

So, the reduction in transaction fees made memecoin trading in Base more enticing, in turn increasing transactions.

Ethereum and Base Diverge

Ethereum has struggled since the Dencun upgrade, with the supply becoming inflationary and revenues dropping. The ETH price has also underperformed and there are no clear signs that this will stop shortly.

From Layer 2-s, Base has emerged as an unlikely winner, capturing a large share of revenue and transactions. It is well on its way to becoming the leading Ethereum Layer-2 based on activity.