Income from Ethereum (ETH) activity is no longer guaranteed to support the network as a separate Layer 1 entity. Due to recently lowered gas prices, even validators have seen a limited flow of base fees.
Ethereum (ETH) successfully lowered its fees, with some of the DEX, swapping and NFT traffic offloaded to rollup chains. This also means that as an L1, Ethereum is no longer a viable source of direct fees, and this shift in conditions will be felt in the coming months.
Data from Token Terminal determined Ethereum was a prime source of fees on a six-month basis, easily surpassing TRON. However, in the short term, weekly fees have fallen off a cliff and the L1 chain generated only $7.2M in fees.
The full effect of the newly lowered gas fees may not yet be reflected in the bottom line of validator nodes. Previously, validators have survived periods of relatively low fees with the increased compensations they get on days of heightened activity.
Ethereum fees also rose three times in just a day, after dipping under 1 gWei in early September. There are also signs that the lowered activity levels may continue, as traffic and liquidity continue to grow on the leading L2 chains.
The shrinking of Ethereum L1 revenues arrives at a time when Bitcoin (BTC) mining is still viable. Other L1 chains are also still producing fees and rewards. However, Ethereum may be the first to see the breakdown of the L1 narrative.
Node reward slowly drops for Ethereum stakers
More than 27% of all ETH is locked for staking, valued at more than $125B in total. That value was intended to secure the network while allowing for annualized gains of up to 2.89% until recently.
Ethereum staking reward has been sliding, and it has gone down by around 11% for the past month. The lower fees led to a reward of 2.05%, much lower than previously estimated calculations.
For a single-stake node of 32 ETH, even at current prices an individual would have to invest more than $80,000. For that locked-up value, daily rewards are around $8. Staking at this point in the market also contains price and volatility risk, meaning the returns may be inadequate compared to the initial investment.
What saves staking and L1 revenues is the fact that most deposits are still in the money, being made at a much lower ETH price. Also, some of the validators use ICO treasuries and other sources of ETH accrued at a lower price, so their outright investment is much lower.
Ethereum validators turn to MEV fees for higher income
In 2024, securing the Ethereum network is not enough, requiring validators to resort to Maximum Extractable Value (MEV). This approach orders transactions in a block in a way that brings the biggest possible revenues from gas fees, priority fees, or other payments for specific block composing.
The difference between block propagation and the basic transaction execution is dramatic. Base returns from Ethereum transactions have an APY of only 0.29%. The inclusion of MEV boost and transaction ordering raises that yield to 2.89% with some validators.
Overall, ETH rewards have slid slowly since late 2022, both for execution and consensus. The presence of MEV and block builders already makes up to 90% of blocks produced. Block-building also creates different economic incentives, as fees get redirected to entities like BeaverBuild.
The current situation on Ethereum arrived slowly, after multiple resolutions that the L1 layer was not suitable to directly trade and build apps. In the past two years, traffic and apps moved away. However, the L1 block space to secure L2 activity was infact not as expensive and valuable.
The recent episode of low fees also revived the talk of Ethereum’s L1 being a dead chain. However, the network still carries its usual level of more than 330K daily active wallets. Direct on-chain activity comes from Tether (USDT) and other stablecoin transfers.
Additionally, L1 cannot be considered dead if it is instrumental to the functioning of rollup chains. All big L2 have a regular schedule of posting blobs on Ethereum, though this is not a major source of revenue for validators.
Ethereum may also revive its influence and direct usage, mostly because of its liquidity. At this point, USDT and other assets are still more widely accepted in their Ethereum version. Some users may be reluctant to bridge their assets back and forth, or risk being caught in a smaller, less liquid ecosystem.
Cryptopolitan reporting by Hristina Vasileva
