Ethereum L1 Revenue Hits Bottom Following Dencun Update
Fresh data analysis reveals a steep decline in revenue for Ethereum’s L1 protocol. Galaxy Research reports that revenue generated by L2 solutions on Ethereum has dropped to near zero following the Dencun upgrade, a significant development in the platform’s scaling strategy. The team behind Ethereum took to social media to provide a detailed explanation of the current situation.
Galaxy Research highlights several factors contributing to the slump in Ethereum’s L1 revenue. The dominance of L2 solutions like zk-rollups, Arbitrum, and Optimisim plays a crucial role in this decline. These L2 solutions focus on processing transfers off-chain, consolidating and batching them on Ethereum’s L1. Prior to the Dencun upgrade, Ethereum’s L1 still generated revenue through transaction fees associated with these settlements.
However, with the Dencun upgrade, L2 solutions have become more efficient in their interaction with L1. This development significantly reduces the costly interactions between L1 and L2. The upgrade optimizes communication between L1 and L2, particularly regarding rollup costs and data availability. As a result, L2 solutions now require much lower fees paid to Ethereum’s L1.
While this shift reduces transfer charges, it also drastically diminishes direct revenue for Ethereum’s L1 from L2 operations. The near-zero L2 revenue reflects the increasing dominance of L2 solutions, which handle the majority of Ethereum’s transaction volume. Consequently, these scalability solutions outsource a significant portion of mainnet activity.
This development raises concerns about the long-term sustainability of Ethereum’s security model. Galaxy Research highlights that Ethereum relies on transfer fees to reward validators and maintain security. As L2s shoulder more of the transfer load, the long-term sustainability of this security model could be at risk if no alternative revenue sources or incentives are available.