Ethereum’s revenues have taken a massive hit, plunging 85% in the third quarter of 2022 compared to the same period last year.
The Ethereum network generated $274.1 million in revenue during the third quarter of this year, according to a StockApps.com data presentation. That figure is a far cry from the $1.96 billion it generated during the third quarter of 2021.
If this trend continues, it will directly impact staking yields. Ethereum stakers rely on fees to generate a return, and yields will decline if fees continue to fall.
This fall could incentivize users to shift spending elsewhere, leading to more people withdrawing their ETH from staking pools.
What’s behind Ethereum’s declining revenues?
This decline in Ethereum’s revenues comes as the cryptocurrency market has seen a general slowdown in growth. Ether’s price is nearly 50% down from its all-time high, and transaction volumes have also fallen sharply.
Additionally, the protocol saw an uptick in the transaction volumes of its L2 solutions. These two factors, plus Ethereum’s protocol upgrade, contributed to its revenues nosediving.
Ethereum’s popularity as a smart contract platform has led to explosive growth in the number of L2 Ethereum transactions. These transactions are processed off-chain, which means they’re cheaper and faster than traditional on-chain Ethereum transactions. However, this growth has come at the expense of the network’s primary revenue stream: transaction fees.
“Ethereum’s L2 solutions have been a huge draw for users looking to transact on Ethereum without breaking the bank,” says TradingPlatform’s financial expert Edith Reads.
She continued, “However, there’s one big catch: Ethereum’s L2 solutions are eating into Ethereum’s revenues. As more and more users turn to L2 solutions, the mainnet’s revenues are drying up.
“This is a big issue for Ethereum and its developers, who rely on those revenues to fund critical protocol functions.”
Other key matrices
Ethereum’s daily active addresses have increased despite the decrease in the protocol’s revenues. These grew from nearly 491,000 to about 506,000, a 3% growth. This growth is likely due to Ethereum’s declining gas costs.
That decline has positively impacted Ethereum usage. As gas prices have fallen, more individuals, contracts, and bots have been able to transact on Ethereum. It’s important to remember that gas prices fluctuate based on network usage.
However, the trend seems to be moving toward lower gas prices, which is good news for anyone looking to use the network.
ETH staking also recorded significant growth over the past year, with the number of staked ETH increasing by 80.2% from 7.81M to 14.08M. This growth was due to anticipation of the ETH 2.0 merge and the adoption of liquid staking services. The latter supports users earning staking rewards while maintaining the liquidity of their ETH holdings.
DeFi TVL shrunk sharply
That said, the protocol’s total value locked in decentralized finance protocols (DeFi TVL) declined sharply from $76.27 billion to $31.55 billion. This shift represented a drop of 58.6%. And while several factors may have contributed to this decline, the main drivers appear to be bearish market conditions and falling on-chain yields.
Much of DeFi TVL comprises volatile assets such as ETH and wBTC, which have seen substantial price declines in recent months. Additionally, the fall in on-chain yields has made deploying capital less attractive, leading to liquidity outflows from DeFi protocols.