Dwindling Ethereum Revenue Pressures Staking Yield

Ethereum revenue “fell off a cliff” in the third quarter of 2022, squeezing staking yields in the process, according to a recent report from crypto research firm Messari.

Ethereum generated almost 137,000 ETH in transaction fees, also known as “gas fees,” between July and October, down from a million-plus in the first three months of the year. The drop was most pronounced between the second and third quarters, with fees dropping 74%.

Ethereum Income Statement

Ethereum Revenues

Coupled with the falling price of Ether, the decline in fees has meant that Ethereum generated about $200M in the third quarter, down over 90% from the $2B to $3B it averaged in each quarter of 2021, according to Tom Dunleavy, a senior research analyst at Messari and one of the report’s co-authors.

Ethereum traded above $3,800 to start the year, according to data from The Defiant Terminal. On Wednesday, it was hovering around $1,350.

The authors attribute the drop to the bear market, increased adoption of Ethereum’s Layer 2 blockchains, and an upgrade to gas-guzzling NFT marketplace OpenSea.

Layer 2 Scaling

Ethereum’s fluctuating and often sky-high transaction fees have been one of the blockchain’s main obstacles to wider adoption, and several “Layer 2” blockchains built on top of Ethereum aim to solve this.

“Ethereum’s rollup-centric scaling plan is finally materializing,” the authors wrote. “While the average transaction count for Ethereum may have remained range-bound, there was meaningful growth in L2 transactions.”

The most popular Layer 2 protocols on Ethereum are Arbitrum and Optimism, each of which has tripled its daily transactions since the beginning of the year.

Arbitrum Transactions Quadruple After Upgrade

Surge of Activity and Addresses Bolsters L2 Blockchain

The Defiant

OpenSea Upgrade

The overall cost of transacting on Ethereum also fell in the second quarter due to an upgrade at NFT marketplace OpenSea, one of the most popular platforms on the blockchain.

Upon the launch of the upgrade, OpenSea estimated it would cut the cost of buying and selling NFTs on its platform by more than one-third.

OpenSea To Slash Gas Fees by a Third With Shift to Seaport Protocol

NFT Marketplace to Let Bidders Seek Whole Collections

The Defiant

Ether Staking Rewards

In order to secure Ethereum, users must “stake,” or lock up, their ETH in return for a modest reward, which currently sits at about 5%, according to stakingrewards.com. That reward is based, in part, on the fees paid during each transaction.

While the base fee continues to be burned in accordance with EIP-1559, the tip fee that previously went to miners now flows to ETH stakers after the Merge.

If network activity continues to fall, it may cut even further into the staking yield, according to the co-authors. Whether that happens, however, is anyone’s guess, Dunleavy acknowledged in a message to The Defiant.

But the proliferation of L2s, he continued, “likely means this level of fees (or around this level) will be maintained.”