Hello readers,

Ethereum ended Q4 in a clear period of transition. Network activity continued to scale. Stablecoin supply hit record levels. Yet economic output failed to keep pace, with Real Economic Value falling 16% during the quarter and L2 rent paid to L1 remaining deeply compressed.

It raises the question.

Is Ethereum’s L2-first strategy an Amazon-style land grab designed to prioritize scale and market share over margins? Or a sign that value capture is permanently shifting away from the base layer?

In the latest addition of The Watch List, we share an update on the Ethereum Network’s Q4 performance. If you’d like to be notified if/when we increase our ETH position, you can sign up for TDR Pro here.

Disclaimer: Views expressed are the author’s personal views and should not be relied upon as investment advice.

Let’s go.

Operating Performance

Real Economic Value

Data: The DeFi Report

Real Economic Value measures Base Fees, Priority Fees, MEV, and Blob Fee payments for L1 blockspace. Base Fees + Blob Fees are burned by the network, accruing value to passive holders of ETH. Priority Fees + MEV accrue to validators and stakers.

Base Fees were down 47% in Q4, and 86% in 2025
Priority Fees were down 29% in Q4, and 50% in 2025
MEV Tips were up 40% in Q4, but down 35% in 2025. The increase in MEV during the quarter is largely attributable to a massive spike during the 10/10/25 liquidation event, when over $27m of MEV (70x the average/day in Q4) was captured by block builders and validators.
Blob Submission Fees were down 9% in Q4, and 42% in 2025

In total, Real Economic Value declined 16% in Q2, and 73% during 2025 — highlighting the transitional phase the network has been in for the last two years. While UX and throughput are improving, we’ve yet to see that translate into meaningful fee capture at the L1 level.

Real Onchain Yield

Data: The DeFi Report

Real Onchain Yield = Priority Fees + MEV paid to validators (apy). Stakers/tokenholders receive the real onchain yield, net of operator payments & validator commissions (if applicable).

The average Real Onchain Yield during Q4 was 0.22% - unchanged from Q3, but down 48% in 2025. As user activity continues to migrate to L2s, we see less contention for block space on L1, reducing MEV and Priority Fee capture for stakers and validators. Hence, the transition we noted in the intro.

Total Onchain Yield

Data: The DeFi Report

Total Onchain Yield = Priority Fees + MEV + Issuance paid to validators & stakers (apy, operator fees not included).

Q4-25: 2.94% (average yield for the qtr, annualized), down 12% vs last year
Issuance made up 2.72% of the yield in Q4
Priority Fees & MEV made up just 0.22% in Q4

We cover how this impacts network inflation later in the report.

Network Fundamentals

GDP

Data: Token Terminal

Network GDP in Q4 was $2.29b, down 5% in the quarter, but up 15% in 2025.

In total, start-ups operating on Ethereum L1 generated $8.6b of onchain fees in 2025. The top 10 list (total revenue generated exclusively on Ethereum L1):

Tether: $2.6b
Circle: $1.6b
Lido: $820m
Aave: $719m
Uniswap: $463m
Ethena: $381m
Sky/MakerDAO: $358m
Flashbots: $328m
Ether dot Fi: $234m
Spark: $148m

Why does GDP matter?

Ethereum L1 GDP vs ETH Price

Data: Token Terminal, The DeFi Report

In some ways, network GDP can help lay a foundation for network price stability. It’s something we keep a close eye on for this reason.

RWA’s Onchain

Data: rwa.xyz

There are currently $4.6b of tokenized U.S. Treasuries on the Ethereum L1, down 23% in Q4, but up 64% over the last year.
Commodities make up 34% of RWAs onchain, up 65% in Q4 and 236% over the last year.
Public equities now make up 3% of all RWAs onchain ($353m), up 15% in Q4.

In total, the Ethereum L1 now has over $10b of RWAs onchain, up 5% during the quarter and 144% in 2025.

Cost to Produce $1 of Real Economic Value

Data: The DeFi Report

Ethereum’s Cost (supply side issuance) to Produce $1 of REV was $11.54 in Q4 — its highest level since we began tracking the metric.
It was up 60% in Q4 — this indicates that more issuance (network inflation) was required to secure the network, relative to the real value produced during the quarter (network costs/overhead are rising, relative to network fees).

L2 Rent Paid to L1

Data: The DeFi Report

In total, the L2s paid just $766k to the L1 during Q4. This was up 31% over Q3, but down 94% on the year.

What’s the story?

The Pectra upgrade, implemented in May 2025, expanded blob throughput at the L2 level, following the initial introduction of blobs under the Dencun upgrade in March of 2024.

A subsequent increase in blob targets on January 7th further expanded data availability capacity. As a result, L2 rent paid to L1 has continued to compress, and is likely to remain under pressure until L2 demand scales sufficiently to consistently exceed blob targets, at which point higher blob fees and priority pricing could emerge — increasing value capture at the L1 level in the process.

This is classic supply/demand. L2 blob space supply is expanding faster than demand at the moment.

ETH Staked

Data: The DeFi Report

As of 12.31.25, 36.04m ETH were staked on the network, representing 29% of the circulating supply. ETH staked was up 5.34% in 2025.

The impact on tokenholders?

More ETH staked = lower staking yields if onchain fees do not increase proportionally.

Why?

Increases in staking translate into proportionally smaller increases in issuance. If onchain fees and/or burn do not cover the gap, staking yields fall, and network inflation rises (as we saw in Q4).

Stablecoins

Stablecoin Supply

Data: The DeFi Report

Total Stablecoin supply on Ethereum L1 finished the quarter at $181b
This was up 1.4% in Q4, and 43% over the last year
USDT makes up 52% of the supply and was up 8.3% in Q4
USDC makes up 29% of the supply, and was up 7% in Q4
USDe (Ethena) makes up 3.4% of the supply and was down 55% in Q4
USDPY (Paypal) now has over $1b of supply, growing 713% in 2025

Stablecoin Velocity

Data: The DeFi Report

Effective Stablecoin Velocity measures the daily turnover rate of each dollar of stablecoin supply onchain. This metric filters out noise pertaining to wash trading and circular transactions to arrive at true velocity, measured as the net USD transfers per day/circulating supply. A rising value indicates increased economic activity on the Ethereum L1.

Average stablecoin velocity in Q4 was 0.0294 (down 1.65% during the quarter), but up 1% on the year.
This indicates that, on average, Ethereum L1 “turns over” roughly 3% of its stablecoin supply each day.

Token Economics

Network Dilution Rate

Data: The DeFi Report

The Net Dilution Rate (applies to non-stakers holding ETH) was 0.80% (annualized) in Q4, up 3.49%
Despite lower onchain fees and higher issuance, network inflation was still just 0.74% in 2025 (lower than Bitcoin)

DeFi

DEX Volumes

Data: The DeFi Report

L1 DEX volumes increased 9% in Q4 and 51% during 2025. With that said, we’ve seen a significant decline in volumes since mid-October.

Meanwhile, combined DEX volumes on L2s declined 17% in Q4, but were up 39% in 2025. Base volumes were down 10% in Q4 and make up 59% of all L2 volumes. Combined, the L2s make up about 36% of all DEX volumes on Ethereum.

Active Loans in DeFi

Data: The DeFi Report

Active Loans on Ethereum L1 were down 27% in Q4, but up 33% in 2025 (Aave was down 26%). Aave has $18.6b active loans and a 71% market share on L1.

On L2s, active loans declined 32% during the quarter, but were up 59% in 2025. Combined, the L2s make up 12% of all active loans in the Ethereum ecosystem.

Base has 51% of L2 active loans — dominated by Morpho (62% market share on Base), and Aave (31% market share on Base).

Layer 2 Ecosystem

L2 Fees

Data: The DeFi Report

L2 fees were up 7% in Q4, but down 60% on the year. In total, the L2s combined for $117m in fees in 2025, with Base accounting for 66% of the market.

The L2s combined to produce 21% of Ethereum L1 fees during the quarter — up from 16% in Q3. For the year, the L2s combined 15.3% of Ethereum L1 total REV.

L2 Active Users

Data: The DeFi Report

Average daily active addresses on L2s (combined) were down 42% in Q4, but up 5% in 2025. The trend has been in significant decline since last summer.

With that said, combined average daily active addresses on L2s outpaced L1 by 284% in 2025.

Base accounts for roughly 60% of L2 active addresses, which were down 44% in Q4.

L2 Transactions

Data: The DeFi Report

The L2s combined for 22.5m tx/day in Q4 (14.5x more than L1). That was up 13% during the quarter and 98% on the year. However, similar to active addresses, the trend is in decline.

Base accounts for 57% of all L2 transactions, which increased 26% during the quarter (albeit with the trend in decline).

Layer 2 Stablecoins

L2 Stablecoin Supply

Data: The DeFi Report

Stablecoin supply on the L2s grew to $11.1b in Q4, up 1% during the quarter and 13% on the year. Combined, the L2s represent 6% of the stablecoin supply on Ethereum L1.

Base accounts for 41% of the supply, and were up 26% on the year. Arbitrum has 40% of the supply and was up 5% on the year.

L2 Stablecoin Velocity

Data: The DeFi Report

L2 stablecoin velocity was down 9% in Q4, but up 58% on the year. On average, 5% of the combined L2 stablecoin supply “turned over” each day during 2025.

ETFs & Treasury Firms

ETF Net Flows

Data: Glassnode

Net ETF flows were -$1.4b during Q4, after ETH saw $9.6b of inflows in Q3 (!).

Combined, the ETFs currently hold 6,066,509 ETH, or 4.9% of the total ETH supply. This figure is down from a peak of 6,901,703 ETH on 10.8.25 (down 12%).

ETH Held in Treasury

Data: strategicethreserve.xyz

ETH held in the treasury rose 24% in Q4, accounting for 5.5% of the circulating supply.

Bitmine (BMNR) currently holds over 4 million ETH, a 58% increase during Q4. This represents 60% of all ETH held in treasury, and 3.2% of the total ETH supply. For reference, MicroStrategy has 3.3% of the BTC supply.

Closing Thoughts

The Ethereum Network remains in a transitional phase as recent Layer 2 upgrades have meaningfully improved throughput and user experience, but have yet to translate into sustained fee generation or economic value accrual at the base layer.

Ethereum’s network economics weakened in Q4 as operating performance continued to compress despite steady growth in several underlying network fundamentals. Real Economic Value declined 16% during the quarter and finished the year down 73%, reflecting lower fee generation and reduced economic value capture at the base layer. Real Onchain Yield remained subdued at 0.22%, while Total Onchain Yield fell to 2.94% due to a modest increase in ETH staked. Generally speaking, the network continues to rely primarily on issuance rather than fee-based rewards to compensate validators.

Despite the reliance on issuance, the ETH circulating supply increased just 0.73% in 2025 — a level below Bitcoin’s current inflation rate.

Network activity remained resilient but uneven. Ethereum GDP declined 5% in Q4 to $2.29 billion, though it still finished the year up 15%. Real World Assets continued to scale, reaching $10 billion onchain, with U.S. Treasuries accounting for nearly half of the supply. However, economic efficiency deteriorated, as the cost to produce $1 of Real Economic Value rose 60% to an all-time high of $11.54, signaling fewer fees available to compensate validators.

Stablecoin growth slowed in Q4 but remained a structural tailwind. Ethereum L1 stablecoin supply reached $181 billion, up 43% in 2025, though velocity softened, with roughly 3% of supply turning over daily.

DeFi activity showed mixed signals: L1 DEX volumes grew 9% in Q4, while lending activity declined across both L1 and L2s in Q4, despite strong year-over-year growth.

Layer 2s continued to absorb activity, but monetization remained challenged. L2 transactions rose 13% in Q4, and L2s generated 21% of Ethereum’s L1 fees, up from 16% in Q3. However, L2 rent paid to L1 fell sharply year over year, and L2 active users declined materially during the quarter.

L2 stablecoin supply grew modestly, while velocity declined quarter over quarter.

As noted in the intro, ETH is currently on The Watch List. If you’d like to be notified if/when we add to our ETH position, you can sign up for TDR Pro here.

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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 Watch List: Ethereum Q4 Update

Topics Covered