Bloomberg Analyst Layer 2 Strategy Strengthens Ethereum’s Position as the ‘King of Public Chains

Bloomberg Analyst L2 Strategy Boosts Ethereum's Position as 'King of Public Chains

Author: Jamie Coutts CMT, Bloomberg Intelligence Cryptocurrency Analyst Compilation: Luffy, Foresight News

I am increasingly convinced that Ethereum has the potential to create more value than alternative L1s, for two main reasons:

  • L2 adoption is growing rapidly

  • L1 erosion is lower than expected

In this tweet, I will briefly analyze the dynamic changes in the fundamentals of the Ethereum network.

The smooth price fluctuations of ETH disguise its value accumulation.

  • Driven by L2 growth and slight monetary tightening, Ethereum prices are back on track for growth

  • Despite being in a bear market, ETH has entered a deflationary state (pre-merge inflation rate exceeding 4%)

  • Despite cooling network activity, ETH staking has increased by 38% in the past 3 months

L1 Network Adoption

The ambition of Ethereum to expand its network through L2 Rollup is evident in on-chain data. Although L1 activity declined last year, ETH utilization increased, and the network’s financial condition is thriving.

Compared to a year ago, active L1 addresses have decreased by 37% to 379,000, but active ERC-20 addresses have increased by 27%. Smart contracts lock up 31% of the total ETH supply (most of which comes from staking), and overall ETH utilization has improved.

The on-chain transaction value (measured in USD) has decreased by 30% compared to a year ago, while the ETH price has risen by 8%. Considering that on-chain transfers are now cheaper and faster on L2, this decline is not surprising.

Despite the decline in network activity, investors continue to exhibit positive hoarding behavior. The number of non-zero balance addresses exceeds 100 million, with over 1.7 million wallet addresses containing at least 1 ETH.

Fee Revenue Growth Exceeds Price Growth

Looking at the two-year cycle, Ethereum network activity has declined, and the Ethereum economy hit bottom in the fourth quarter of 2022, with a recovery pace consistent with the start of a new bull market cycle. As expected, the rapid growth of L2 has eroded L1 network activity, but its impact on network finances is not as significant as anticipated.

Although the network fee income (in USD) has significantly decreased compared to 2021, it has increased threefold compared to the low point in the fourth quarter of 2022. L1 generates approximately $6 million in fee income per day, 80% of which is burned, and the rest is paid to validators.

Since the beginning of this year, Ethereum L1’s daily fee income (in USD) has increased by 176%, while the price of ETH has only increased by 53%. The relationship between the two is inspiring, as during the last bull market, fees surpassed prices after experiencing a two-year decline in 2020.

In analogy to nation-states, L1 provides infrastructure (roads, communication) and security guarantees (property rights) to economic special zones or city-states (L2) in order to establish and compete for business capital (decentralized applications).

Operating in these places means lower taxes (fees) and the bureaucracy of national institutions (ETH validators), which reduces friction for applications and provides cheaper and faster customer service.

L2 Network Adoption Metrics

It is proven that Ethereum’s migration to L2 last year has been a huge success. In the past 12 months, hundreds of thousands of new users have joined Web3, and L2 active addresses have increased by 245%.

The growth of L2 fees (an average of $600,000 per day) helps alleviate the erosion of L1 revenue, but more importantly, L2 is amplifying network effects.

Given the rapid increase in L2 adoption, by the end of the year, L1 fees paid through Rollup could account for 20% of total fees and reach 50% within 3 years. In classified data, the proportion of fees paid to L1 through Rollup has increased 2.8 times this year, slightly below 14%.

One consequence of L2 growth is a significant decrease in NFT activity on L1, as the lower friction costs of L2 NFT markets win over users. The proportion of fees paid for NFTs has decreased by 80%, currently slightly below 6%.


As a leading L1, Ethereum’s performance is very strong. Under the rapid expansion of L2, Ethereum is being eroded to a much lesser extent than our previous expectations, and its moat is constantly deepening and widening.