ETH Fees Hit Lows Amid L2 Competition
The L2 Race Heats Up; Mainnet Slows Down
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This week, we dive into the current dynamics between Ethereum and layer 2 (L2) projects. We evaluate the current status for Ethereum revenues, competition and differentiation in the L2 space, and analyze ETH’s long-term outlook.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether
- Fees on the Bitcoin blockchain decreased by 22% due to Runes and Ordinals transactions falling sharply
- Ethereum fees dropped to a 6-month low, as activity on Mainnet dwindles
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
ETH Fees Hit Lows Amid L2 Competition
Ethereum fees have been heading lower, and reached a 6-month low this week. While on the surface this may seem bearish for ETH, the reason behind it shows signs of promise.
For years Ethereum has been building towards activity moving to L2 networks built on top of Ethereum Mainnet (L1). Vitalik’s roll-up centric roadmap from 2020 has very much come into fruition, with more than 50 L2s currently live in production.
This has led transaction activity to shift into L2s, while reducing the total amount of fees accrued by Ethereum.
Record Share for L2s — The share of transactions happening on L2s hit an all-time high of over 82% in April
- This figure is accounting only for the largest three L2s (Arbitrum, Optimism and Base), pointing to the actual share including L2s likely being above 90% of all Ethereum transactions
- The trend towards L2s has accelerated since the launch of EIP 4844, which reduced fees by over 10x
- Transactions of Mainnet have since decreased by 10%, resulting in less fees being burnt, and ETH becoming inflationary again
As activity on L2s increases, the main players have been finding ways to differentiate from the long-tail.
Institutions Pick Arbitrum; Retail the OP Stack
- Arbitrum accounted for 73% of the ETH transaction volume among the top 3 L2s last week
- Conversely, Arbitrum made up only 39% of the number of transactions, while Base had 50% share
- This week, Blackrock and Securitize submitted an application to bring the BUIDL real-world assets fund to Arbitrum
- On the other hand, “SocialFi” applications have been driving activity on top of Optimism’s OP Stack:
- Coinbase’s Base L2 recorded a surge in transactions from the user-owned group chat application FriendTech distributing its airdrop
- A new social media-based card game Fantasy.top recorded $6M in fees this week alone, on top of the Blast L2
It is clear that Arbitrum has earned the crown for DeFi and institutional activity, while Optimism has been targeting retail through a distribution of multiple L2s with creative applications on top. The growth of both has led to a heated competition in terms of the market cap of the largest L2s.
OP Returns to #1 Spot in Terms of Market Cap
- Optimism’s OP token has been outperforming with a 48% increase from it’s lows on April 13, compared to ARB’s 22% gain
- OP is now worth more from both a circulating market cap ($2.9B vs $2.8B) and fully diluted valuation ($11.4B vs $10.4B) perspective than ARB
- Venture capital fund a16z also recently disclosed a $90M private purchase of OP, further boosting the projects resources and credibility
Overall, the L2 race remains heated, with not just Optimism and Arbitrum, but also a myriad of new entrants looking to compete. While this is resulting in lower fees for Ethereum in the near-term, it is creating a broader ecosystem of applications and spurring economic activity that will be positive-sum long-term.
