Hello readers,

Ethereum generated $261m in fees in Q3, its worst performance since Q4-20. Liquidity is bifurcating on L2s. Token issuance turned inflationary in Q3. The ETF has done -$99.7m in net flows through 9/30. And the token was down 21%.

Meanwhile, Uniswap — which is responsible for 20% of Ethereum’s gas consumption — just announced a move to Unichain, a general-purpose L2 that they’ll control.

The optics (and numbers) don’t look great.

But isn’t the Ethereum Foundation, and the broader developer community executing on its roadmap as planned?

Weren’t we expecting to see a “glut” of new supply of block space post-EIP4844 that would lower fees?

A direct quote (page 79) from The Ethereum Investment Framework:

“By unlocking scalability and eventually privacy, we believe L2s will enable new use cases for app developers throughout the ecosystem. Driving down fees and increasing transaction throughput should ultimately benefit Ethereum validators and token holders via increased transactions and burned tokens. We view this as a win/win/win for app developers, users, and ETH validators/holders.

With that said, as L2s scale, we expect that there could be a period where L1 validator revenues drop until the new supply of block space is ultimately filled by new use cases coming to market.”

It’s all playing out as expected. Even the market reaction — as the loudest voices call for ETH’s demise.

At the end of the day, we view ETH as a complement to L2s. Typically, when you reduce the price of a product or service in the market, demand for its complement increases. For example, lowering the cost of computers increases demand for internet services. Lower cost of hot dog buns increases demand for hot dogs. Lower costs of flights to Miami increase demand for hotel rooms in Miami. You get the point.

In this case, lowering the cost of execution services on L2s should ultimately drive demand for ETH — the asset required as a gas token on L2 and for settlement to L1.

However. We think it’s going to take some time for this to play out as new developers need to come in, build cool apps, and drive exponential growth in transaction volume. It’s not a guaranteed outcome. But it’s all going as planned.

We just happen to be at the bottom of the J-Curve today.

For this reason, we think the calls for ETH’s demise are wildly overstated.

But you don’t have to take our word for it.

Download The Q3-24 installment of The ETH Report and come to your own conclusions.

It includes 78 pages of charts with brief analysis & takeaways covering the following:

Operating Metrics
Token Economics
Stablecoins
DeFi
Onchain P&L
Valuation Analysis
Correlation Analysis
Layer 2’s
ETH vs SOL

We hope you find some value in it. If you do, please share the link with your friends and colleagues so that more people can access our data-driven analysis.

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.

The ETH Report: Q3-24

Ethereum fees were down 47% last quarter. Time to panic?