- Gas efficiency improvements have reduced the fees paid by users for each transaction.
- The decline in fees has been exacerbated by the rise of L2 solutions, which allow users to transact on the Ethereum network with lower transaction fees.
It’s no secret that Ethereum has been facing some severe scalability issues. The network is constantly congested, and transaction fees have been rising steadily.
To alleviate these issues, the team behind Ethereum has been working hard on several upgrades, the most recent being the Merge. While this upgrade is still in its early stages, it doesn’t seem to solve all Ethereum’s problems.
According to an analysis by BanklessTimes.com, Ethereum's Protocol Revenue, the primary source of income for ETH's development, has dropped by 52% in the last two weeks. It was reduced from $3.1 million to $1.5 million.
This nosedive was primarily due to the fall in transaction fees owing to the bear market in crypto prices, increased usage of L2 solutions such as Plasma and ZK-rollups, and gas efficiency improvements.
The drop in protocol revenue comes at a time when Ethereum has upgraded to ETH 2.0 - the so-called "Merge", designed to improve the scalability and performance of the Ethereum network.
According to BanklessTimes CEO Jonathan Merry,
Ethereum's protocol revenue is vital to the long-term health of the network and its development. If these trends continue, it could have a serious impact on Ethereum's ability to fund itself and continue its development.BanklessTimes CEO, Jonathan Merry
Ethereum's protocol revenue comes from various sources, including transaction fees, staking rewards, and gas prices. The fee decline will likely impact the staking rewards paid to Ethereum users who lock up their ETH to participate in the network.
The Merge
Last week, Ethereum transitioned from its proof-of-work system to a proof-of-stake model. This switch means that Ethereum will no longer rely on miners to validate updates to its decentralized ledger – instead, it will use a less energy-intensive method.
The proof-of-stake system will allow users to earn rewards for locking up their ETH to validate transactions. The amount of ETH required to participate will depend on the total amount of ETH staked by all users.
The new system is designed to improve the scalability and performance of the Ethereum network. However, it remains to be seen how successful it will be in practice. End users eagerly await the Merge's impact, hoping Ethereum will eradicate long-standing network issues like latency and congestion.
The network's newfound energy efficiency was the Merge's first and most immediate impact. Unlike mining, staking does not require computation-heavy hardware, significantly reducing its environmental footprint.
Not Yet There
Since the Merge, ETH's value has decreased significantly. Nevertheless, reduced issuance has been a source of hope for ETH holders: With fewer ETH in circulation, each individual token is worth more.
Although the developers guaranteed many changes with the Merge- such as reduced energy consumption and heightened security- a short-term price increase was not one of them. Unfortunately, the Merge has not mended Ethereum's congestion issues in the short term.
Instead, it simply laid the groundwork for future infrastructure that might address its issues in the future. Anyone who anticipated Ethereum would look or operate differently from the start was sorely disappointed.
Ethereum 2.0 is a long-term project, and The Merge was only the first step. It will take time to see the full effects of this upgrade. In the meantime, Ethereum's protocol revenue continues to take a hit.
The team behind Ethereum is aware of these issues and is working hard on solutions. However, it remains to be seen whether they will be able to address the problem in time.
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