Ethereum (ETH) users witnessed a remarkable shift in the blockchain’s landscape as the total daily transaction fees on Layer 1 (L1) plummeted to a six-month low of 1,719 ETH, equivalent to approximately $2.8 million on August 27th.
This staggering decline marked a 97% drop from the all-time high of 84,000 ETH recorded on May 1st earlier in the year. Concurrently, data from IntoTheBlock revealed that the average daily fee paid per transaction experienced a substantial 70% reduction.
Total daily fees on Ethereum reached a 6-month low on Sunday, registering at 1.72k $ETH. Could this be a sign of investor caution in today’s market landscape?
Dive deeper into the data🔗https://t.co/af9A4ahkBq pic.twitter.com/XiMapAQvx2
— IntoTheBlock (@intotheblock) August 28, 2023
This dramatic reduction in network fees on Ethereum’s leading Layer 1 can be attributed to a combination of factors. Chief among them is the decline in network usage, with the daily transaction volume falling by a significant 78% from its year-to-date peak of $13.42 billion on March 14th.
Additionally, the growing adoption of Layer 2 (L2) scaling solutions in recent months has contributed to the diminishing reliance on the Ethereum L1 for transactions.
Impact on Ethereum’s Ecosystem
Decrease in Network Revenue
The consequences of this fee reduction are not limited to users’ wallets. Ethereum’s network revenue has also taken a hit, decreasing by 22% in the past 30 days, according to data obtained from Token Terminal.
Correlation with Bitcoin
One of the contributing factors to Ethereum’s recent woes has been its correlation with Bitcoin (BTC). On August 17th, Bitcoin experienced its most significant single-day sell-off of the year, briefly dipping below the $25,000 price mark.
Given the strong correlation between the two cryptocurrencies, Ethereum bore the brunt of this event. Data from Coinglass indicated a significant drop in Ethereum’s open interest, which stood at $4.69 billion at the time of writing, marking a 29% decrease since the deleveraging event. On August 23rd, Ethereum’s open interest reached a year-to-date low of $4.67 billion.
Such a substantial decline in open interest typically signals negative sentiment among investors. It suggests that a significant number of market participants are closing their positions due to bearish expectations.
Meanwhile, Ethereum’s price managed to hold support at the $1,600 level but remained stuck in a narrow trading range. This lack of price movement left many investors uncertain about the cryptocurrency’s future direction.
Negative funding rates
Investors who chose to hold onto their Ethereum positions after the deleveraging event appear to be betting against the cryptocurrency’s price. This speculation is evident in the negative funding rates observed across various crypto exchanges since August 17th, according to Coinglass.
These negative funding rates suggest that a substantial amount of short-selling pressure has been placed on Ethereum, potentially exacerbating further price declines.