The rapid rise of Layer 2 (L2) scaling solutions has sparked widespread debate about whether Ethereum’s dominance as a Layer 1 (L1) blockchain is under threat. However, recent on-chain data and network dynamics suggest a different narrative—one where Ethereum not only withstands the shift but actually strengthens its foundational advantages.
Despite flat price action over recent months, Ethereum continues to accumulate value beneath the surface. Bolstered by accelerating L2 adoption and sustained demand for ETH staking, the network is quietly building a deeper and wider economic moat. This analysis explores how Ethereum maintains financial resilience, enhances utility through L2 innovation, and reinforces its position as the bedrock of decentralized application ecosystems.
Ethereum’s Hidden Value Accumulation
At first glance, Ethereum’s price performance may appear stagnant. Yet this surface-level observation masks significant underlying improvements in network fundamentals.
Two key trends underscore Ethereum’s strengthening foundation:
- Explosive growth in L2 adoption
- Resilient, even expanding, value accrual on L1
While transaction activity on Ethereum’s base layer has declined compared to previous highs, critical metrics such as ETH staking, fee revenue, and smart contract utilization reveal a more robust picture. In fact, despite being in a broader crypto bear market, Ethereum has entered a deflationary issuance regime—a stark contrast to its pre-merge inflation rate of over 4%.
Moreover, ETH staked across the network surged by 38% within just three months, signaling strong investor confidence and long-term holding behavior. The number of non-zero balance addresses now exceeds 100 million, with over 1.7 million wallets holding at least 1 ETH—further evidence of growing ownership and network trust.
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Layer 1 Utilization: Quality Over Quantity
Although L1 active addresses have dropped by 37% year-over-year to 379,000, this decline doesn’t reflect weakening fundamentals. Instead, it illustrates a strategic migration of user activity to L2 rollups—precisely the outcome Ethereum’s architects envisioned.
What matters more than raw activity is how ETH is being used. Notably:
- ERC-20 active addresses increased by 27%
- 31% of total ETH supply is locked in smart contracts, primarily via staking
- Daily fee revenue has tripled since Q4 2022 lows
These figures indicate that while casual or low-value transactions have moved off-chain, high-value use cases—such as staking, DeFi interactions, and tokenized asset management—remain firmly anchored on Ethereum.
The shift also explains why on-chain transfer value (in USD) has fallen by 30% despite an 8% increase in ETH’s price. With cheaper and faster transactions now available on L2s, users naturally route routine payments there—preserving L1 for finality, security, and settlement.
Fee Revenue Outpacing Price: A Bullish Signal
One of the most telling signs of Ethereum’s strengthening economy is the divergence between fee revenue growth and price appreciation.
So far this year:
- L1 daily fee revenue has increased by 176% (in USD terms)
- ETH price has risen by only 53%
This means the network is generating significantly more economic value per dollar of market cap—a powerful indicator of improving efficiency and demand. During the last bull cycle, fee growth eventually outpaced price gains after two years of decline, foreshadowing sustained momentum. History may be repeating itself.
Currently, Ethereum generates around $6 million in daily fees, with 80% burned through EIP-1559, effectively reducing supply, and the remainder distributed to validators. This deflationary pressure enhances scarcity and long-term value accrual.
The L2 Success Story: Expansion, Not Erosion
Ethereum’s strategy to scale via L2 rollups—such as Optimism, Arbitrum, and zkSync—is proving highly effective. Over the past 12 months:
- L2 active addresses grew by 245%
- Hundreds of thousands of new users entered Web3 through L2 platforms
Rather than eroding Ethereum’s relevance, L2s amplify its network effects. Every transaction on a rollup ultimately settles back on L1, requiring users to pay gas fees in ETH. This creates a recursive economic loop: more L2 usage → higher L1 settlement demand → increased fee revenue and value lock-in.
Already, fees paid by rollups to Ethereum now account for nearly 14% of total L1 fees, up 2.8x this year. Projections suggest this could reach 20% by year-end and potentially 50% within three years—a testament to the growing symbiosis between layers.
Meanwhile, NFT activity on L1 has declined sharply—down 80% in fee contribution—as frictionless L2 marketplaces attract creators and collectors. While this shift reduces certain revenue streams on base layer, it strengthens the overall ecosystem by expanding accessibility and usability.
Frequently Asked Questions
Why isn’t L2 growth hurting Ethereum’s revenue?
Because all major L2s rely on Ethereum for data availability and transaction finality. Every batch of rollup transactions must be posted to L1, generating gas fees in ETH. As L2 usage grows, so does this settlement demand.
Is Ethereum becoming deflationary?
Yes. Since the Merge and the implementation of EIP-1559, Ethereum has frequently entered deflationary periods where more ETH is burned than issued. With rising fee pressure from L2s, sustained deflation could become the norm.
How does staking contribute to Ethereum’s moat?
Over 31% of ETH supply is locked in smart contracts via staking. This reduces liquid supply, increases holder alignment with network health, and secures consensus—making attacks exponentially more expensive.
Are L2s a threat to Ethereum’s dominance?
No—they’re an extension of it. Unlike competing L1s that operate in isolation, Ethereum’s L2s inherit its security and composability while offering scalability. This hybrid model creates a stronger, more adaptable ecosystem.
What does “economic finality” mean for users?
It means that once a transaction is confirmed on Ethereum (either directly or via L2 settlement), it is secured by the world’s second-largest proof-of-stake network. This level of trustlessness and immutability is unmatched by standalone chains.
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The Bigger Picture: A Platform Built to Scale
Ethereum can be likened to a sovereign digital nation providing infrastructure—roads, legal frameworks, and security—for autonomous economic zones (L2s). These zones operate with lower “taxes” (fees) and minimal bureaucracy (via optimized execution layers), enabling faster innovation and better user experiences.
Yet they remain fully integrated into the core economy. Just as special economic zones benefit from national defense and legal systems without undermining central authority, L2s thrive because of Ethereum—not despite it.
This layered architecture allows Ethereum to maintain its role as the ultimate source of truth while delegating scale to specialized environments. The result? A resilient, adaptive network capable of supporting global-scale applications without sacrificing decentralization or security.
Conclusion: A Deepening Competitive Advantage
Far from being eroded by Layer 2 expansion, Ethereum is leveraging it to build a broader and deeper competitive moat. The network’s ability to generate increasing fee revenue amid declining on-chain activity demonstrates structural strength. Meanwhile, rising staking participation, deflationary issuance, and growing settlement demand from rollups all point toward long-term value accretion.
As adoption spreads across both retail and institutional sectors, Ethereum’s hybrid model—combining a secure base layer with scalable execution environments—positions it uniquely among blockchain platforms.
The story isn’t about survival; it’s about evolution. And right now, Ethereum is evolving faster than ever.
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Core Keywords: Ethereum, Layer 2 scaling, ETH staking, deflationary blockchain, rollup settlement, network fee revenue, smart contract utilization, blockchain moat