The Cancun upgrade, specifically the implementation of EIP-4844, has brought significant changes to Ethereum. This article delves into the post-upgrade developments, focusing on three key areas: the latest trends in ETH burn rates, the growing appeal of Layer 2 (L2) networks, and the evolving economic relationship between L2 and Ethereum.
ETH Burn Rate Trends
After the EIP-1559 and the Merge upgrades, there was excitement around ETH becoming a cash-flow generating asset. Initially, ETH’s supply did decrease, dropping by approximately 0.38% from September 2022 to April 2024. However, this trend reversed as the burn rate slowed, leading to a steady increase in ETH supply.
Over the past 12 months, the reward rate for staking ETH has been on a downward trend. This decline is mainly due to the 79% increase in Ethereum validators over the past year, coupled with a decrease in Layer 1 (L1) transaction fees. While the burn rate has slowed, applications and protocols like Uniswap, Tether, 1inch, and MetaMask continue to drive significant gas consumption on Ethereum.
In 2023, Arbitrum and ZKsync were the major gas consumers, but their activity has significantly decreased this year. This decline is largely attributed to EIP-4844, which allows L2 networks to publish data more efficiently, reducing their data storage requirements.
The Growing Appeal of L2 Networks
Over the past two and a half years, the number of transactions on Ethereum has remained relatively stagnant, while the total number of transactions on L2 networks surpassed L1 by a factor of ten as of August 2024.
The growth in L2 activity can be credited to the launch of new L2 networks and the explosive growth of existing ones. Since March, both Base and Arbitrum have consistently recorded higher daily transactions than Ethereum itself.
Although this chart aggregates transactions from multiple L2s, each L2 provides an alternative block space for Ethereum, highlighting the significant shift from L1 to L2. This shift is also reflected in the DEX market share, where L2s have reduced Ethereum’s dominance to below 60% since the EIP-4844 upgrade.
However, this growth has also led to liquidity fragmentation across the Rollup networks. Despite their success, L2s are now paying significantly less to publish data on Ethereum due to the EIP-4844 upgrade. This upgrade, implemented in March 2024, introduced a new data storage mechanism called “blobs,” which is a more cost-effective alternative to the previous Calldata structure.
Economic Dynamics Between L2 and Ethereum
In March 2024, L2s paid over 10,000 ETH in fees to Ethereum, but by July, this figure had plummeted to less than 400 ETH, a 96% decrease. As costs have dropped, L2s now contribute less to ETH burns, reducing gas fees on the Ethereum mainnet.
Given the need for L2s to publish vast amounts of transaction summary data on-chain, they quickly adopted blobs. Since early June, Ethereum has seen the publication of at least 16,000 blobs daily. This resulted in a sharp decline in the proportion of total fees paid by major L2s, dropping from 12% in 2024 to just 1%.
Since the implementation of EIP-4844, the operating profit margins for L2s have significantly improved. Although the total sequencer revenue (fees paid on L2 networks) has dropped by approximately 48% this year, operating costs have decreased by around 87%, allowing Rollups to retain most of their revenue. Mainstream L2s now boast operating profit margins exceeding 90%, even after passing substantial cost savings on to users. Users have benefited from this, with fees on networks using blobs decreasing by around 90% over the past year, with median transaction costs typically falling below $0.01.
Impact on Ethereum L1 and Future Considerations
Despite the surge in L2 usage, the direct benefits to ETH as an asset remain unclear. In recent months, the significant increase in L2 profits has coincided with a decline in ETH burn rates, resulting in less value flowing into ETH.
This raises several important questions for the Ethereum ecosystem:
- The Role of L2 Tokens: As L2 usage continues to grow, what role will L2 tokens play? How much value will L2 tokens capture compared to ETH?
- Economic Balance: Are the benefits flowing to Rollups at the expense of Ethereum excessive, or is this balance ideal for attracting more users and developers to the broader Ethereum ecosystem?
- Interoperability and Liquidity: With more L2s launching, how will users and liquidity interact across these different networks?
- Developer Choices: With Ethereum mainnet fees now historically low, will developers reconsider deploying directly on L1, or do L2s still present a more attractive option?
These considerations will shape the future of Ethereum and its relationship with the expanding L2 ecosystem.
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