Hello readers,

Standard Chartered made headlines last month with a report titled “Ethereum - Midlife Crisis.” The report estimates that Base removed $50b from Ethereum’s market cap while taking its GDP. The conclusion? ETH’s year-end price target was cut from $10k to $4k.

Which begs the question: is Standard Chartered capitulating on ETH at the bottom of the L2 “J-Curve?”

Or will the structural decline continue?

In this week’s report, we challenge Standard Chartered’s conclusion while drawing our own.

[In case you missed it, our analysis today pairs well with our recent report on Ethereum’s REV and “blobs.”]

Disclaimer: Views expressed are the author’s personal views and should not be relied upon as investment, legal, tax, business, or any other advice.

Let’s go.

The “Partnership” Between Base and Ethereum

Imagine you’re Ethereum. I’m Base. We’re both building key infrastructure for web3. One day, I approach you with an idea: instead of building another L1 and competing, why don’t we partner instead?

Here’s what I (Base) want out of the partnership:

1. I want to leverage Ethereum for security and settlement — because it’s really hard (and costly) to bootstrap my own validators and decentralize.

2. I want native, secure bridging so that Ethereum users and assets can easily move to my chain.

3. I want access to Ethereum’s deep liquidity and developer ecosystem.

4. I want to reduce my operating costs.

5. I want to be compatible with the EVM, its network effects, developer tooling, data oracles, user analytics, etc.

Here’s what you (Ethereum) want out of the partnership:

1. Access to Coinbase’s distribution/new users entering the Ethereum ecosystem via Coinbase.

2. More demand for ETH (via user transactions and onchain services).

3. An enterprise customer who can provide invaluable feedback as you grow together.

4. Transaction fees for your validators.

5. Increased throughput and a better user experience.

We both conclude that 1+1= 3. We do the deal.

Now. Here we are two years later. Hindsight is 20/20.

So, let’s hop onchain and see how things have gone.

Base Economics & Onchain Data

User Fees

Since its inception, Base has accumulated $24.8 million in base fees and another $81.9 million in priority fees. In 2024, Base revenues ($74m) drove 1.1% of Coinbase’s top-line revenue for the year.

Base is the fastest-growing and most profitable Ethereum L2 today. It launched 2 years after its closest competitor (Arbitrum).

Base GDP

Since inception, the applications on Base have accumulated $768m in fees (cumulative “GDP”). The largest contributors are Uniswap, Aerodrome, Virtuals, SynFutures, Aave, Moonwell, Morpho, Pancakeswap, SushiSwap, and Layer3.

“GDP” measures the USD value of what end users pay in fees to interact with a chain’s applications. It excludes gas fees paid to the chain.

Shout out to our friends at Token Terminal for recently adding “GDP” for all chains on the platform. A tool that can be used for relative analysis and to filter out noise from TVL.

Daily New Addresses

Over the last 30 days, Base is averaging 412k new users/active addresses per day. Since launching in August of ‘23, Base has had over 155 million new addresses interact with the chain.

Base is driving new users to the Ethereum ecosystem.

ETH Bridged to Base

There are currently 1,917,625 ETH on Base (including LSTs). This represents 1.6% of the circulating supply.

Base is creating net-new demand for ETH and onchain services.

Daily Bridged Net Flows

Above, we can see the daily net flows between Base and Ethereum moving through the native bridge.

On average, roughly $50 - $200m of value is moved between the L1 and L2 on a daily basis, with ETH representing roughly 80% of the volume. Over the last 30 days, $503m has left Base to move back to Ethereum. Over the last 90 days, that figure is $3b — highlighting Ethereum L1 as the central “hub” for storing and moving assets between chains.

Stablecoin Supply

Base currently has $4.2 billion of stablecoin supply onchain, with USDC representing 91% of the value.

Base is creating more utility within Ethereum and establishing a solid foundation for its apps to build upon.

Total Value Secured

Base is currently securing $9.9b of value. $6b of this is “native,” meaning the assets were issued on Base. $3.3b is “canonical,” meaning the assets were bridged from Ethereum. And $600m is considered “external,” meaning the assets were bridged from other chains.

Again, Base is creating net-new demand for ETH via natively tokenized assets.

Key Takeaways: Base Economics & Onchain Data

In less than two years’ time, Base has leveraged Ethereum to:

1. Become the largest and fastest-growing L2, earning over $106m in user fees.

2. Onboard 157m new addresses to the Ethereum ecosystem (acknowledging that many of these users were likely L1 users).

3. Bootstrap an ecosystem of applications that have generated $768 million in user fees (Base GDP).

4. Bridge 1.9 million ETH onchain — creating additional demand for ETH (to transact) and for onchain services within Base.

5. Add nearly $4b in stablecoin value — growing the network effects of USDC (which Coinbase owns roughly 50% of).

6. Issue $6b of native assets onchain, while bridging in another $3.3b from Ethereum L1.

We think Ethereum has held up its end of the deal here. 1+1 = 3 for Base.

Is it the same for Ethereum?

Base’s Contribution to Ethereum as a Customer of its “Security Franchise”

Total Rent Paid to L1

Since its inception, Base has driven $4.5 million of fees (which are burned by the L1) for “blobs” and settlement. Over the last 6 months, Base’s onchain margin (does not include salaries and other “offchain” overhead) is 91%.

*Please note that Base has driven a total of $24m in fees to the L1 since inception. However, 80% of those fees were paid prior to switching to much cheaper “blobs” post EIP4844. We are not including the prior call data fees in our current or forward-looking analysis.

Base Transactions Per Second

Over the last six months, Base is averaging 93 transactions per second.

Base is scaling Ethereum and creating a better user experience.

Ethereum GDP

Ethereum’s weekly GDP is up about 75% from the time that Base launched in August of ‘23, but is down roughly 80% from the peak in early ‘22. The network of applications running on the L1 is doing $57m/day currently.

Meanwhile, Base applications are currently averaging roughly $6.8m in weekly GDP.

Back to the original question: Is Base “stealing Ethereum’s GDP?”

Yes!

That’s the point of the L2 roadmap. Some of Ethereum’s best apps and protocols are expanding to Base (Uniswap, Aave, USDC), and other new projects are now launching directly on Base instead of Ethereum L1 (Aerodrome, Morpho, Virtuals, Moonwell).

As this plays out, users shift to the L2. Fees and burned ETH on L1 drop. And Ethereum shifts to a more “enterprise or B2B business model.”

But this should only be seen as a “bug” for Ethereum if L2s fail to replace those fees via “blobs” fees in the future.

Projecting Base’s Growth & Future Value Accrual to ETH

Based on the data above, we can see that Ethereum is making an investment in its long-term future via the L2 roadmap. It’s sacrificing GDP, fees, and ETH burned in the short run in the hope that Base can scale, create a template for others (TradFi?), and the ecosystem can grow in an economically viable positive-sum way for everyone.

So, let’s try to forecast what that future could look like.

A few notes before we hop in:

• L2s are currently processing roughly 165 transactions per second (combined) and have to compete with each other for Ethereum’s blob space.

• 3-4 L2s are consistently filling the target blobs/block currently. When this happens, L2s have to bid against each other for blob space, driving up fees.

• Target blobs/block are currently three (max of six), but will be increasing to six next month (nine max blobs/block) via the Pectra upgrade. Therefore, we assume the six-blob target and a max of nine in our initial scenario analysis.

• We’re using the Blob Simulator created by Tim Robinson.

The current state:

As we can see, there is almost no impact on Ethereum’s economics in the current state, while average L2 transaction fees remain quite low at $.0002.

5x increase in Base average transactions per second:

A 5x increase in Base TPS results in slightly higher L2 fees, while driving significantly more value back to Ethereum L1 ($24.5 million annualized).

10x increase in Base average transactions per second:

A 10x increase in Base TPS results in blob fees paid to L1 increasing by 200x ($4.9b annualized).

This is what the validators want to see.

But we’ve created another problem at the same time. $.35 per L2 transaction is too high.

Of course, more upgrades to blobs/block are coming via the PeerDAS upgrade (to enable larger blob counts by reducing bandwidth needs) and Fusaka upgrade, which increases blobs/block to 12, with a plan to ultimately scale to 48 blobs/block and a max of 72 blobs/block. Initial implementation of Fusaka is anticipated for Q3/Q4 of this year.

As such, let’s see what a 10x increase in Base TPS looks like when further increases to blobs/block are implemented.

10x increase in TPS impact after initial Fusaka upgrade implementation:

A solid middle ground here where we’ve kept L2 cost/transaction low at $.0018 while driving annualized fees to Ethereum L1 to $48.9 million.

Of course, Base isn’t the only L2. So, let’s assume that Arbitrum and Optimism scale 10x over the same period, creating additional competition for Ethereum’s blob space.

The numbers look great for Ethereum L1 as blob fees would grow to an annualized rate of $17.7 billion (nearly double peak fees achieved in 2021).

But once again, we’ve created a bottleneck where the average L2 cost/transaction rises to $.64. That doesn’t work.

Let’s optimistically assume that Ethereum keeps shipping, with target blobs/block growing to 24 over the next year.

In this scenario, blob fees to Ethereum L1 drop to $9.6 billion annualized. But again, the average cost/L2 transaction seems too high at $.17.

In order to keep average L2 transaction costs under $.02, Ethereum L1 would need to scale to 33 target blobs/block. In doing so, the simulator indicates that this would reduce Ethereum blob fees to $1.4b annually.

Guess what?

Ethereum did $1.4b in fees over the last 365 days.

Right back to where we started.

Key Takeaways:

• We’re keeping the analysis very simple with the goal of understanding how increases in L2 transactions per second impact blob pricing + how increases in the target blob/block on L1 impact the economics for Ethereum and user fees on L2. In reality, we acknowledge that conditions are dynamic and unpredictable, with potentially hundreds of L2s competing for blob space in the not-too-distant future.

• We believe a significant amount of activity will stay on the L1, driving additional fees and burned ETH. However, the use cases and volume of transactions are unclear today.

• Our analysis peaks at 2,790 combined transactions per second from the L2s, assuming three L2s doing 10x the TPS that Base is doing today. As we could see from the simulator results, it appears that this level of activity would overwhelm Ethereum even after the coming Pectra technical upgrade ($.35 per L2 transaction).

• For reference, over the last 90 days, Solana is seamlessly processing 1,078 transactions per second with an average fee of $.016 (base + priority fees). In reality, user fees are significantly lower than this due to dynamic pricing for different types of transactions on the network. Not to mention, Firedancer hasn’t even launched yet.

Final Thoughts

• The phrase “there are no solutions, only trade-offs” comes to mind here. Base took a shortcut by bootstrapping seamlessly on Ethereum as an L2. It’s getting everything it wants out of the deal right now.

• But it’s also tied itself to Ethereum and its scaling roadmap, which it has no control over. This creates “vendor lock-in” and potential technical debt in the future if Ethereum fails to scale blobs to meet its needs.

• Ethereum appears to be getting what it wants out of the deal. An enterprise customer that can create additional demand for ETH, onchain services, and a better user experience. It disrupted itself in the process by giving up L1 fees and burning ETH.

• With that said, it’s unclear if the economic relationship will work out in the long run. As the scenario analysis indicates, Ethereum may continue to run into bottlenecks as it scales. If this happens, or the L2s fail to scale rapidly, the economics may not be enough to support Ethereum validators and economic security without inflating the ETH supply (currently on pace to exceed BTC after being deflationary prior to EIP4844).

• We think Base is happy with how this is going at present. However, if Ethereum’s inability to scale blobs/block starts to constrain growth, it’s possible they will seek alternative solutions for data availability, such as Celestia. It’s unclear how complex disentangling itself from Ethereum could be.

• We believe it is in the best interest of Ethereum to transition its culture away from “vibes, alignment, and values” and more towards a franchise business that sells “Security as a Service” to enterprise customers.

Circling back to the original question: is Standard Chartered capitulating on Ethereum at the bottom of the “L2 J-Curve?” Or will the structural decline continue?

We think the structural decline of Ethereum’s fundamentals will continue in the near term. To date, the market has not taken kindly to this. While sentiment could improve as TradFi increasingly does more onchain, we see no catalyst for Ethereum’s fundamentals to meaningfully improve anytime soon.

As such, we continue to believe the below chart may have a long way to go.

We’ll continue to go deeper and refine our approach with this work. We welcome the community to challenge our views and the scenario analysis we shared in this report.

Take a Report.

And Stay Curious.

Disclosure: We currently own a small amount of ETH. We fully exited our SOL position last Dec/Jan. We’d like to accumulate more SOL under $80.

Disclaimer: Individuals have unique circumstances, goals, and risk tolerances, so you should consult a certified investment professional and/or do your own diligence before making investment decisions. The author is not an investment advisor and may hold positions in the assets covered. Certified professionals can provide individualized investment advice tailored to your unique situation. This research report is for general educational purposes only, is not individualized, and as such should not be construed as investment advice. The content contained in the report is derived from both publicly available information as well as proprietary data sources. All information presented and sources are believed to be reliable as of the date first published. Any opinions expressed in the report are based on the information cited herein as of the date of the publication. Although The DeFi Report and the author believe the information presented is substantially accurate in all material respects and does not omit to state material facts necessary to make the statements herein not misleading, all information and materials in the report are provided on an “as is” and “as available” basis, without warranty or condition of any kind either expressed or implied.

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