The rise of Ethereum (ETH) in the first quarter of 2024 has been nothing short of impressive, with a nearly 100% increase in price action. Not only that, but the Ethereum blockchain has also managed to generate substantial profits of up to $369 million during this period. This unforeseen profitability has sparked inquiries into how a blockchain like Ethereum can actually be profitable.
According to a recent analysis by the on-chain data platform Token Terminal, the collection of transaction fees plays a crucial role in Ethereum’s business model. All users on the network are required to pay fees in ETH when interacting with applications on the blockchain. This serves as a significant source of revenue for Ethereum. After the transaction fees are paid, a portion of the ETH is burned and permanently removed from circulation. This process, known as “ETH buyback,” benefits existing ETH holders by increasing the scarcity and value of the remaining ETH tokens.
While the burning of ETH contributes to the economic benefit of existing ETH holders, Ethereum also issues new ETH tokens as rewards to the network’s validators for each new block added to the blockchain. However, it’s important to note that the issuance of new ETH tokens dilutes the holdings of current ETH holders. The difference between the daily USD value of the burned ETH (revenue) and the newly issued ETH (expenses) reflects the daily earnings for existing ETH holders, essentially the owners of the Ethereum blockchain.
The launch of the Dencun upgrade to the Ethereum ecosystem at the end of the first quarter of 2024 brought significant changes, including the introduction of a revolutionary data storage system called blobs. This upgrade has decreased congestion on the Ethereum network and significantly reduced transaction costs on Layer 2 networks such as Arbitrum (ABR), Polygon (MATIC), and Coinbase’s Base. The implementation of the Dencun upgrade, along with the adoption of blobs and Layer 2 networks, has notably impacted Ethereum’s revenue.
According to Token Terminal data, Ethereum’s revenue has witnessed an 18% annualized increase, totaling an impressive $3.3 billion. These revenue gains can be attributed to reduced transaction costs, making Ethereum a more appealing platform for users and developers. However, market corrections and dampened investor interest in the second quarter of 2024 have had an impact on Ethereum’s revenue. Over the past 30 days, Ethereum’s revenue has declined by over 52%.
During the same period, Ethereum’s market cap (fully diluted) has decreased by 15.2% to $358.47 billion, while the circulating market cap has also declined by the same percentage. Additionally, the token trading volume has seen an 18.6% decrease over the past 30 days, amounting to $586.14 billion. Currently, ETH is trading at $3,042, reflecting a 0.4% increase in the last 24 hours.
As Ethereum continues to navigate through market fluctuations and varying levels of investor interest, it remains to be seen how the reduction in fees and potential increase in trading volume will impact the price of ETH in the second quarter. The changes in market dynamics and investor sentiment will play a crucial role in determining the future trajectory of Ethereum’s profitability. Investors are advised to conduct thorough research and consider the risks involved before making any investment decisions based on the information provided here.
The economic model of the Ethereum blockchain is a complex interplay of transaction fees, ETH burning, issuance of new tokens, network upgrades, market dynamics, and investor sentiment. Understanding these factors is essential for investors looking to assess the profitability and potential risks associated with owning Ethereum.