Ethereum continues to lead in terms of stablecoins and tokenization, with its stablecoin supply reaching a staggering $130 billion and tokenized treasuries such as BUIDL surpassing $1.8 billion in assets. However, despite this notable liquidity surge, activity on Ethereum has experienced a decline compared to previous years.
In fact, ether’s performance weakened further in Q1, as the ETH/BTC ratio sunk to a five-year low.
According to Coin Metrics’ latest report, this disconnect between Ethereum’s network, its Layer 2 expansion, and ETH’s market value appears to be influenced by a range of factors, particularly its approach to scaling through Layer 2 solutions and the current absence of significant value accrual to ETH via network fees.
Ethereum Faces Value Leakage
The introduction of blobspace with EIP-4844 in the Dencun upgrade significantly altered Ethereum’s network economics. In March 2024, the blockchain generated nearly $30 million in fees; however, one year later, that figure plummeted to around $500,000.
Coin Metrics indicated that this sharp decline stems from execution shifting to Layer 2s, leading to minimal value returning to the main chain. Platforms like Base, Arbitrum, and Optimism have collectively paid just $13 million in blob fees while enjoying over 90% profit margins from sequencer revenue. This shift has sparked concerns regarding value leakage since Ethereum bears the security costs while Layer 2s capture the majority of economic benefits.
Moreover, blob fees constitute merely 0.07% of total fees, resulting in lower ETH burn.
Over the past week, Ethereum has burned approximately 70 ETH per day. This decline in burn has caused net issuance to rise, pushing the annual inflation rate up to 0.79%. While this is currently exerting downward pressure on ETH’s price, the network’s long-term scaling efforts through Layer 2s may need additional time to deliver significant results.
What’s Next for Ethereum?
As blobspace becomes more commoditized and Layer 2 business models continue to grow more profitable, the number of Layer 2s and blob transactions is expected to increase. With nearly 21,000 blobs posted daily, Ethereum consistently meets its target of 3 blobs per block.
With the upcoming Pectra upgrade and the Fusaka deployment soon after, Ethereum plans to gradually expand blob capacity through EIP-7691, which aims to reduce transaction costs and stimulate additional Layer 2 activities. This approach is anticipated to enhance aggregate blob fees. Consequently, Ethereum seeks to scale its Layer 1 by raising gas limits and concentrating on high-value sectors such as stablecoins, tokenization, and DeFi, thus creating a potential pathway for long-term value growth in ETH.
As Pectra brings forth improvements, attention may increasingly turn to Ethereum’s staking ecosystem, with issuers preparing to launch staked Ether ETFs in the forthcoming quarter.
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