Are ETH’s L2s Cannibalizing Its Revenue?

Key takeaways 

• Ethereum’s scalability solution is outsourced to layer 2s
• Layer 2s are driving explosive user and transaction growth
• Ethereum revenue is declining despite higher network usage
• L2s trade revenue for reach and adoption
• Ethereum’s economic model is evolving 

The rise of layer 2 adoption 

Throughout Ethereum's history, it has gone through periods of heavy network congestion, where people had to wait several hours and pay much higher gas fees just to get their transactions through. A clear example of this was in 2020, when the DeFi boom and a wave of token airdrops caused average gas fees to skyrocket. Then again in 2022, the ENS airdrop led to another spike, with average transaction costs reaching nearly $57. 

These moments made it obvious that Ethereum needed to scale. The solution that emerged is what’s called a modular design: an approach where a complex system is divided into smaller, independent, and interchangeable parts. This approach aligns with Ethereum’s decentralized governance model, where major roadmap decisions are reached through broad community consensus rather than dictated by a single authority. In simple terms, Ethereum outsourced its scalability to Layer 2s (L2s). 

One way to think about it is like a congested highway. Instead of just adding more lanes, Ethereum built a high-speed train above it to take pressure off the road and move people faster. That’s what L2s are doing for Ethereum. 

Here’s how it works: people bridge (i.e. transfer) their assets to a Layer 2 of their choice. Once there, they can access faster and cheaper transactions, all while still benefiting from Ethereum’s security and decentralization. Behind the scenes, these L2s bundle thousands of individual transactions together and post them as one single transaction back on Ethereum (referred to here as the mainnet). This approach massively boosts efficiency, allowing thousands of transactions per second (TPS), compared to Ethereum’s current base layer limit of around 20 TPS on average. 

(Source: Token Terminal)

Looking at the chart above, Ethereum’s monthly active addresses, the number of unique addresses that interacted with the network over a rolling one-month window, have fluctuated between 4.4 million and 8.2 million between 2021 and 2025. But as of August 2025, Ethereum has broken past its previous ceiling, reaching a new all-time high of over 8.3 million monthly active users, a clear sign of renewed interest and activity on Ethreum. 

Moreover, looking at the aggregated monthly active users across Ethereum’s major Layer 2s, we’ve seen explosive growth. From virtually zero in 2022 to over 45 million active addresses in July 2025. While some addresses may be double-counted (for example, if the same user interacts with multiple L2s) this doesn’t take away from the significance of the achievement. Ethereum has successfully expanded its user base beyond the main chain by scaling through its Layer 2 ecosystem. 

Looking at transaction volume tells a similar story. Between 2021 and 2025, Ethereum’s weekly transaction count has fluctuated between 6.5 million and 11 million. Due to complex smart contract usage and network limitations, there’s a natural ceiling to how many transactions Layer 1 can handle. In May 2025, Ethereum rolled out the Pectra upgrade, which introduced several scalability improvements, most notably, cheaper gas fees. That likely helped push Ethereum to a new all-time high in weekly transactions in July, coinciding with the recent spike in active addresses. 

Importantly, Pectra was also designed to improve Layer 2 integration, and the impact is clear. L2s have seen record transaction volumes since May, matching the sharp growth in user activity. In July 2025 alone, over 120 million transactions were processed weekly across major L2s, nearly 12x the volume seen on Ethereum. 

(Source: Token Terminal)

It’s clear that Ethereum’s strategy to outsource scalability to Layer 2s has paid off. On average, transaction fees on Ethereum sit around $0.56, and can spike to over $7 when the network is congested. In contrast, most L2s offer consistently low fees, rarely rising above $0.05 per transaction. 

This dramatic improvement in cost, speed, and scalability has successfully pushed more users toward L2s. By most adoption metrics, Ethereum’s L2 ecosystem is a clear success. But this raises a key question: While L2 adoption is booming, how has it impacted Ethereum’s revenue, and ultimately, its long-term value? 

 Ethereum’s fees and revenues 

Each time a person or a smart contract interacts with Ethereum, they must pay gas fees to cover the cost of computation. These fees are, in essence, Ethereum’s version of “protocol revenue”. But unlike a traditional company where net earnings flow back to shareholders, Ethereum’s value accrual is more nuanced. A portion of the fees is paid to validators, who secure the network using staked ETH. The other portion is burned, permanently removed from circulation, reducing the total supply of ETH. 

Ethereum token holders, the network’s equivalent of shareholders, can be broadly split into two groups: 

• Staked ETH earns ongoing yield for helping secure the network, similar to a special class of shares with dividend rights.
  
  
• Non-staked ETH does not earn yield, but both groups benefit from the burn mechanism, which can support long-term value by reducing supply. 
   

Any ETH holder can opt in or out of staking at any time. Currently, about 29% of ETH is staked, meaning only that portion of holders earns staking rewards, while 100% benefit from the burn. 

Let’s break down how gas fees work to better understand Ethereum’s revenue structure and how it supports value accrual.  

• Gas refers to the amount of computational effort needed to execute a transaction. A simple token transfer requires less gas, while more complex interactions, like calling a smart contract, demand more. In essence, it's not unlike a car needing more gas to go uphill than downhill: the harder the task, the more fuel (or gas) it consumes.
  
  
• Ethereum’s fee market includes two main components: the base fee and the priority fee (also known as a tip), both paid in ETH.
  • The base fee adjusts automatically based on how congested the network is. The base fee portion (gas_used * base_fee) is burned.
    
  • The priority fee portion (gas_used * priority_fee) paid directly to the validator who includes the transaction. 

So, the total cost of a transaction is calculated as: gas used × (base fee + priority fee) 

This fee distribution, burning the base fee and giving only tips to validators, has important economic implications. Periods of high activity can burn large amounts of ETH, slowing supply growth or even making ETH deflationary if the burn exceeds new issuance.

The sum of all transaction fees makes up Ethereum’s total revenue. Since gas fees are paid in ETH, revenue is also naturally denominated in ETH. To express Ethereum’s revenue in USD terms, we simply multiply the ETH denominated revenue by the prevailing ETH/USD price. Below is Ethereum’s revenue shown in both ETH and USD. 

(Source: Coinmetrics)

Ethereum’s revenue, expressed in both ETH and USD, has been volatile and cyclical, with clear peaks and valleys over time. At its height, daily revenue reached nearly 7,000 ETH in a single day, worth over $230 million at the time. However, since 2022, revenue appears to be in a structural downtrend, with only brief spikes, most notably in May 2023 and again in 2024. When looking at ETH denominated revenue, the bulk of it came during the DeFi boom of 2020–2021, when interacting with smart contracts required more complex computation, driving up gas usage and, in turn, revenue. Meanwhile, USD-denominated revenue was especially inflated in late 2021, primarily due to ETH/USD reaching its all-time high. 

More importantly, going back to the role of L2s, we explained that they bundle thousands of transactions on their own networks and submit them as a single transaction to Ethereum. While that one transaction is relatively gas-intensive, due to the amount of data and computation involved, it’s still far less expensive than if each of those individual transactions had occurred directly on Ethereum. In that sense, L2s are effectively cannibalizing part of Ethereum’s revenue. The cost savings are real, for users and for scalability, but it also means fewer high-fee transactions happening on Ethereum itself. This becomes visually clear in the chart below, which shows a clear inverse relationship between Ethereum’s revenue and the rise in transaction volume across major L2s. 

(Source: Coinmetrics, Token Terminal)

Yet, blaming Ethereum’s revenue decline entirely on L2s would be misleading. In fact, as of August 2025, Ethereum’s mainnet transaction count hit an all-time high but revenue is still nowhere near its 2021 peak. Monthly revenue now sits around $39 million, a far cry from the $1.8 billion peak in November 2021. Since then, Ethereum has continued to upgrade its protocol, most notably with the Dencun upgrade in March 2024 and the Pectra upgrade in May 2025. These improvements, among other things, have helped reduce costs for both L2s and certain on-chain operations. In short, Ethereum has become more efficient and that means it’s now less gas-hungry. While great for users and long-term scalability, this shift naturally reduces revenue, even if activity on the network is higher than ever. 

If L2s and Ethereum's upgrade reducing its revenue, what does it mean for its long-term value? 

Ethereum’s shifting economic model 

Ethereum is a commodity, powering the computational resources behind transactions and smart contract execution. It’s also a form of fixed income, offering a staking yield to those who stake their ETH and help secure the network. At the same time, it functions as a store of value, with its burning mechanism designed to offset issuance over time and eventually reach a supply-demand equilibrium. In this way, Ethereum represents a new, hybrid asset class, and valuing it is no easy task. 

What we do know is that Layer 2 adoption and Ethereum protocol upgrades impact all three value pillars. 

• More efficient computation reduces gas usage.
• Less gas means lower rewards for validators.
• It also means less ETH is burned, softening the supply reduction narrative. 

So, what does the burning mechanism look like in practice? 

As mentioned earlier, only base fees are burned. The more transactions occur, or the more computationally intensive they are, the more ETH gets burned. In fact, the burn rate closely mirrors the revenue chart we looked at earlier. During periods of high network activity, such as in 2021, over 15,000 ETH was burned daily. But to understand whether ETH is becoming deflationary, we need to compare burned ETH to new issuance. 

Each time a validator confirms a block, they earn block rewards and tip fees. On average, Ethereum issues around 2,500 ETH per day in new block rewards. So, by subtracting the daily ETH burned from the ETH issued, and comparing that to the total circulating supply, we get Ethereum’s net inflation (or deflation) rate. 

(Source: Coinmetrics)

As seen in the chart, Ethereum’s burn mechanism was introduced in late 2021 through a major protocol upgrade. Since then, ETH inflation has fluctuated considerably. The most important shift came with The Merge in 2022, which significantly reduced Ethereum’s block rewards. This is clearly reflected in the chart, where Ethereum became deflationary for a sustained period, at one point reaching an annual inflation rate as low as -3.7%. However, as gas fees have declined, so too has the burn rate, diminishing its deflationary impact. Since early 2024, Ethereum’s inflation rate has hovered between 0.5% and 0.8%. While not extreme, this range is no longer deflationary either. 

In theory, basic economic principles suggest that, given constant demand, a lower supply should lead to higher prices. So, while protocol revenue alone may not be sufficient to value Ethereum, tracking these dynamics remains critical. To meaningfully increase revenue again, Ethereum will need to scale further through its Layer 2 ecosystem, and potentially find new ways to bring value back to L1. 

Conclusion 

So, are Layer 2s cannibalizing Ethereum’s revenue? In a narrow sense, yes. Many transactions that would once have been executed on L1 now occur on L2, reducing direct gas fee revenue. But the bigger picture is more complex. L2 adoption has expanded Ethereum’s total user base and driven protocol upgrades that make it more efficient. The challenge for Ethereum is ensuring that this growth at the edges continues to translate into sustainable value accrual at the base layer. 

Indeed, Ethereum has a history of ongoing upgrades and has already introduced entirely new economic models. How this evolves in the years ahead will be an important trend to watch, especially for those thinking about Ethereum not just as tech infrastructure, but as an investable asset.