Ethereum (ETH) is turning the tides on L2 applications. In the past month, fees to use the L1 network started growing.
Ethereum (ETH) is leaving behind its period of ultra-low fees and is becoming more expensive for L2 apps. The right balance between L1 and L2 has not been struck and is still shifting. There is no consensus whether it’s better to have expensive ETH services or let L2 retain their fees.
Ethereum fees rose from under $1M daily to more than $7.98M per day as of September 23. The days of gas fees under 1 GWei are also gone, and gas rallied to 45 GWei for regular transactions. Ethereum’s L1 can switch to being highly expensive relatively fast, as it happened in the span of two weeks.
Along with the increased gas fees, ETH went through a price recovery. The token increased its market dominance to 14.2% while trading at $2,640.54.
Ethereum inflation slashed in half
Higher gas prices immediately lead to a more active token burn in each block. As a result, Ethereum inflation fell from a recent peak at 0.74% annualized, down to 0.33%. Inflation rates can vary within even the span of a day,
The lower ETH production means each year, a projected 550K ETH will be created, instead of over 990K ETH. Each week, 7,272 additional ETH are added to the circulation, instead of close to 16K ETH. Ethereum’s inflation is also lower compared to other leading chains. Even with extra new token production, inflation since the all-time high is a net 1.51%. At the same time, the main competitor Solana (SOL) expanded its supply by more than 55% since 2021.
Even if Ethereum inflation is small, it can affect the ecosystem of L2 apps and the flows from Ethereum onto those platforms. Ethereum is still a net donor with more than $1B in inflows in the past three months.
Previously, high fees were seen as a bullish factor for Ethereum. They were also a signifier of higher on-chain activity. Ethereum active addresses are now down to 364K, but DEX trading and other high-speed activities are raising fees.
Most Ethereum blocks rely on block builder services, offering transaction composing and guaranteed block inclusion. This competitive landscape to use L1 with priority is boosting the bottom line for validators.
Ethereum is still paying out validators more than $5M in staking fees daily, which is the distribution of new ETH. Additionally, validators receive $1.6M in transaction fees, which are not contributing to Ethereum inflation.
L2 pressured by higher ‘rent’
Ethereum is becoming more expensive for L2 which needs to wrap some of their transactions on the main chain. L2 are facing the challenge of scaling Ethereum while having to pay more and even losing its profitability.
For some, an Ethereum chain that extracts too much value from L2 can actually destroy the purpose of the rollups and remove the incentives for those chains.
In the past month, most of the leading L2 saw their ‘rent’ to Ethereum increase several times. For all chains, fees paid to Ethereum doubled in the last 24 hours. L2 chains require a scheduled record on Ethereum, by posting so-called blobs.
Currently, blobs are mostly filled to 80% of their capacity, and not all blocks on Ethereum carry blobs. However, even at this rate of utilization, the blob economy is becoming expensive for L2, with quickly shifting market conditions.
Some L2 are subsidizing their high transaction levels. Overall, the goal of L2 is to run apps and depend on the fees and commissions from those apps. L2 networks are not primarily a tool for fee extraction, as their main promise is negligibly cheap transactions.
Most L2 still pay relatively low fees on Ethereum. Even some of the fastest new chains pay fees that were easily achieved within a day of NFT trading hype in 2021.
From the point of view of the L2, even the relatively low fees mean the network is operating at a loss. L2 can choose to subsidize transactions or reduce their schedule of using Ethereum to achieve the right balance. L2 can also choose other Data Availability (DA) layers to secure their transactions, such as Eigen Layer.
Cryptopolitan reporting by Hristina Vasileva
Source: https://www.cryptopolitan.com/ethereum-inflation-slashed-in-half-l2-expenses-soar/