Ethereum Gas Fees Fall to 2 Gwei Amid Declining Mainnet Activity

Ethereum gas fees have plummeted to their lowest levels in years, dropping below two gwei due to a significant decline in activity on the Ethereum mainnet. 

The reduction in gas fees is primarily attributed to the increasing migration of users to Layer-2 (L2) networks, which offer lower transaction costs and faster processing times. This shift has left the Ethereum mainnet struggling to maintain its transaction volume as users opt for more efficient alternatives.

Layer-2 networks outpace Ethereum mainnet

Layer-2 networks have seen substantial growth in user adoption, particularly following the Dencun upgrade, which drastically reduced transaction costs on these networks. As a result, the Ethereum mainnet has found it increasingly difficult to compete, even as its gas fees reach historic lows. Data from blockchain analytics firm IntoTheBlock reveals that by April 2024, the top three L2 networks were responsible for 82% of all Ethereum transactions. 

This marked a significant increase in the dominance of L2 networks, which had already accounted for approximately 50% of Ethereum transactions in 2022. The Dencun upgrade has played a crucial role in this shift, with gas fees on L2 networks like OP Mainnet dropping to as low as $0.00009 for ETH transfers, according to GasFees.io.

Ethereum L2s continue to gain more transaction share on the network – IntoTheBlock

The appeal of L2 networks extends beyond just lower fees. They also offer higher transaction speeds than Ethereum’s mainnet. For instance, data from L2Beats shows that Base processes 39 transactions per second (tps), while Arbitrum manages 17.28 tps, significantly outpacing Ethereum’s 12 tps. This combination of cost efficiency and speed has made L2 networks an increasingly attractive option for users.

Impact of low fees on Ethereum’s economy

While the drop in gas fees may seem like a positive development for users, it has introduced challenges for the Ethereum network’s economic model. The cost reduction has led to the network becoming inflationary, as the amount of ETH issued as staking rewards now exceeds the amount of ETH burned through gas fees.

According to data from Ultrasound Money, the ETH supply has increased by 0.67% annually over the past week, with the network issuing 18,069.04 ETH while burning only 2,655.46 ETH. This shift toward inflation began three months after the Dencun upgrade, reversing the deflationary trend that had persisted since the merger in 2022.

The inflationary pressure on ETH could impact its price, prompting stakeholder concerns. Martin Koppelmann, co-founder of Gnosis, highlighted the need for increased Layer-1 (L1) activity on the Ethereum network to address this issue. He suggested that raising the gas limit could be a strategy to stimulate more activity and help the network return to a deflationary state. According to Koppelmann, the Ethereum network requires a base fee of 23.9 gwei to burn enough gas fees to offset the ETH issued as staking rewards.

Ethereum staking and market volatility

In addition to the inflationary concerns, Ethereum has experienced its largest outflow from staking pools since May, with over 122,000 ETH withdrawn this week. This coincides with a period of volatility for the digital asset, which saw a 9% increase in value over the past week, followed by a 4% decline in the last 24 hours.

As Ethereum faces these challenges, the network’s future will likely depend on its ability to balance user demand for low fees and fast transactions with the need to maintain a healthy economic model. The ongoing development and adoption of L2 networks will play a critical role in shaping this balance as the Ethereum ecosystem continues to evolve.

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