Over 25k subscribers
For web3 to succeed, blockchains must scale.
Plain and simple. 🤷
We can’t go mainstream without faster and cheaper transactions.
Not only for the UX experience of users but also to make this a viable technology for businesses to build on top of.
It’s likely that in the future web3 users won’t have to pay or think about gas fees (the fee required to transact on a blockchain). Not because gas fees won’t exist, but because the application layer will subsidize this cost for their users.
Transaction fees will likely become a common expense for applications, similar to the current fees around hosting and servers today. 💭
We can see this trend already taking place with the likes of Reddit, Starbucks, and Immutable (a gaming/NFT Ethereum L2) already covering fees for their users.
However, for this to work, the costs of transacting on a blockchain must come down. This is why we’ve seen so many new fast and cheap blockchains launch in the last few years. ✅
The issue in most of these blockchains is that it’s not just important to have fast and cheap transactions, they must also occur on a secure, permissionless, and censorship-resistant blockchain (aka a decentralized blockchain).
Without the decentralization property, fast and cheap is irrelevant. We already have fast and cheap centralized technologies which power our internet today, there is no use in recreating that on a centralized blockchain.
At the moment, Ethereum is our best option to reach all 3 of these properties. But is Ethereum actually scaling?
We’ve been hearing that Ethereum will scale for many years, yet Ethereum was nowhere near “scalable” during the 2020-21 bull run.
Even today, in the depths of the bear market, it costs a few dollars to make a transaction on Ethereum. There’s no way that a business could cover these costs for its users while still remaining profitable. ❌
But what if I told you that in the last 6 months, Ethereum was actually pushing all-time highs in transactions, higher than during the bull market of 2020-21? And this is without gas fees significantly increasing!
Not only that, but depending on where you transact, you could settle your transaction on the decentralized blockchain of Ethereum, for pennies.
Well, friends, that’s the world we’ve just entered. Take a look at the chart below for proof (I will explain what this means below).
In this report, I’m going to show you how during this “bear market”, Ethereum has actually been having an on-chain bull run, in terms of users, transactions, deployments, and more. And during this bull run, Ethereum has managed to lower its fees by orders of magnitude.
Why is no one else talking about this “on-chain” bull run? Because the industry is still behind in regards to how it analyzes Ethereum.
You see, Ethereum is now a modular blockchain rather than a monolithic blockchain.
What this means is that Ethereum now executes transactions across multiple blockchains (layer 2 blockchains) within its ecosystem, while still settling those transactions on Ethereum.
This is Ethereum's roadmap to scaling to the masses. 📈
What this means is that we now have to track Ethereum's numbers differently. We need to start viewing Ethereum's numbers collectively across the consensus layer (Ethereum) and its execution layers (Layer 2s), rather than as a stand-alone blockchain like Solana or Binance Smart Chain.
It means that when we look at weekly active wallet addresses on Ethereum we go from < 2 million:
To a more accurate number of weekly active addresses in the Ethereum ecosystem of > 4 million.
This is an exciting and new paradigm for tracking the Ethereum ecosystem. When we do it this way (the right way), we uncover just how much Ethereum has been growing and scaling, even throughout the 2022-23 bear market.
But before we dive deeper into the numbers, there’s a little announcement! 🥳
👉 We secured a Lens Protocol handle for all PRO members reading this! Lens is a decentralized social graph and potentially the future of social media. And we want you, as PRO member on there!
So, if you submitted the Kazm Form before Monday (13th Feb), you’re eligible to claim your handle by visiting this link!
If you haven’t filled out the Kazm Form yet, please do! (Find it at the bottom of this report). You’ll also get your PRO/FOUNDERS Pass (NFT) airdrop, along with your Lens handle. ;)
But that’s it for now… Let’s 👀🔛⛓️ to determine how the Ethereum ecosystem is scaling. 👇
Before we get into more charts, let's get a bit more clear on what I mean by the Ethereum ecosystem.
Ethereum = The base layer (consensus layer) of the Ethereum ecosystem. This is where the ecosystem settles all its transactions and where the ecosystem derives its security (aka Proof of Stake).
Layer 2 = The execution layer of the Ethereum ecosystem. This is where users/applications create (aka execute) transactions. The Layer 2s then roll up thousands of transactions into 1 and then settle it using the Ethereum blockchain.
This is a very generalized explanation, but for the purpose of this report, there is no need to understand it in more detail.
To help you visualize this, below is a picture from L2beats that charts the Total Value Locked (TVL) in smart contracts across 26 of the Layer 2s on Ethereum.
Ethereum is currently securing $5.68 billion in value on L2 smart contracts.
Now of course, anyone can also transact and build on Ethereum without using L2s, which is why Ethereum currently secures a TVL in smart contracts of $28.73 billion.
This brings the total TVL of the Ethereum ecosystem to $34.41 billion. However, we can’t see that in one place currently (I’m using a chart from Defillama for Ethereum and L2beats for the L2s).
Why?
Because the L2 ecosystem is still new and developing so fast that the industry has yet to adapt to tracking the Ethereum ecosystem as one, rather than in segmented parts. 💁♂️
In this report, we’ve used Dune analytics to combine numbers across the Ethereum ecosystem. That said, it’s not yet possible for me to do that completely, so most of these charts will show the stats of Ethereum + its two largest L2s, Aributrm and Optimism.
The other 20-30 L2s don’t yet have significant or meaningful numbers anyway, so we’ll leave them out for now.
I started off the report by showing the chart which totals the weekly transactions of Ethereum + Arbitrum and Optimism.
It shows exactly what we want to see, transaction numbers going up while gas on Ethereum remains relatively low.
What’s even better is that for about 50% of those total transactions (the ones in red and orange on layer 2s), the cost to transact was < $0.12 on Optimism (red) and < $0.05 on Arbitrum (orange), compared to the ~$1+ costs on Ethereum.
Now, let’s take this chart one step further and add Polygon's weekly transactions. While Polygon is not technically a layer 2, it is what's referred to as a sidechain of Ethereum and was created to help Ethereum scale.
Polygon has its own POS and settlement layer and does not roll up transactions on Ethereum. However, its roadmap is to eventually transition into a rollup on top of Ethereum.
I debated including Polygon in this report because of this, but the numbers are significant and it is very much a big part of the overall Ethereum ecosystem. 🤝
You can see below that when we include Polygon, total transactions across the Ethereum ecosystem more than double, meanwhile 80% of those transactions continue to cost less than $0.12.
As you can see, Polygon and the L2 ecosystem were not impacted by the bear market in terms of usage.
But let’s continue…
In the chart below we can see the number of NFTs launched across Ethereum, Arbitrum, and Optimism.
L2s do not make up a large portion of the total NFTs here, though if we were able to include the deployments of NFTs on Immutable (another Ethereum L2), we would see a pretty significant increase (but that's for another day!).
However, if we add Polygon to the mix we can see a 5x growth in NFT deployments across the entire ecosystem.
In terms of tokens (aka ERC-20s or fungible tokens), we are seeing sustained growth across Ethereum and the L2s.
Polygon brings less growth here, as their focus has been on onboarding big tech and big brands into web3 with the use of NFTs, which is why they far surpass other blockchains based on weekly NFT deployments.
And finally, in terms of smart contract use, the overall deployments have seen significant activity throughout the bear market.
Ethereum still overshadows the L2 ecosystem here, so let's remove Ethereum from the chart so we can take a look at the trend of Optimism and Arbiturm. We can see that both have been picking up steam from the end of 2022.
Polygon however is the dominant smart contract deployer in the ecosystem and is showing no signs of slowing down.
We can see that the user base in the Ethereum ecosystem is growing and so is the activity. Meanwhile, the gas prices on Ethereum are remaining lower than usual for this type of activity.
This was exactly how Ethereum planned to scale.
Ethereum maxes out at around 16 transactions per second (TPS), nowhere near enough to satisfy the needs of this growing industry. However with every new L2 plugged into Ethereum, its throughput grows. 🚀
We can see below that the addition of Arbitrum and Optimism (which are nowhere near maxed out yet) have already enabled the Ethereum ecosystem to double in TPS
When we add Polygon, the TPS of the Ethereum ecosystem is now 5 times more than Ethereum alone.
To be fair, these numbers are still extremely low in terms of what is required for the world to move on-chain. However, we are seeing the blossoming of an entirely new ecosystem happening right in front of our eyes. 👀
Today it’s only 5x the TPS but in a few years, this will be hundreds to thousands of times more TPS across the Ethereum ecosystem.
The Ethereum Ecosystem isn’t just growing on-chain, it’s growing off-chain too. Let’s take a look at developer growth.
Below is a chart showing the total number of developers on Ethereum since its launch. Ethereum reached a peak of about 7,000 developers in 2022 and has since dropped to around 5,750 total developers.
Just like we did with the on-chain activity, we need to start combining the numbers of the entire Ethereum ecosystem, rather than leaving it segmented.
Below we can see there are another 1,250 developers on Polygon.
Additionally, we can see that there are 220 developers building on Arbitrum and another 200 on Optimism. Starknet (in gray on the left) is also building L2 technology in the form of ZK-Rollups, which adds an additional 380 developers.
This doesn’t include the 100s of other developers working on the 20-30+ other layer 2s on Ethereum, like Immutable, for example.
When we combine these numbers we see that the Ethereum ecosystem has grown to over 8,000 developers and is by far the largest of any blockchain ecosystem. 💪
I want to make it clear that when the real bull run returns, Ethereum’s gas prices (the consensus layer) will go through the roof once again. This is by design in order to ensure that the base layer of the Ethereum ecosystem remains secure and decentralized.
The gas prices of Ethereum will not be reduced meaningfully until sharding is implemented years from now.
That said, it doesn’t mean that the entire Ethereum ecosystem can’t and won’t be able to provide cheap and fast transactions like it is today.
As we already saw, more than 50% of Ethereum ecosystem transactions are already occurring across Ethereum Layer 2s and more than 80% when you include Polygon.
This trend will only continue to increase as the great migration from L1 to L2 unfolds. Currently, developers, applications, and users are slowly but surely bridging their assets and moving their smart contracts and protocols to the faster and cheaper L2s.
As centralized exchanges and wallets continue to innovate and provide easier access to these L2s, the trend will only speed up. ⏩
The other big catalyst for the L2 migration is that the best web3 applications, protocols, and games are all being built there. As these continue to launch and create new use cases across web3 (that simply weren’t possible on Ethereum) the demand will continue.
Finally, it’s important to note that many of the L2s are still very new and are currently throttling their performance.
As they continue to innovate and mature, the scalability of these L2s will only be amplified, bringing transactions to less than a penny. Some L2s are already at that point or very close and we’re still just getting started!
It’s time to see Ethereum for what it is, a modular blockchain with various layers to suit any type of user.
Moving forward, the Ethereum base layer will be saved for high-value transactions, for example, whales and L2s settling their transactions. Whereas most users and applications will be interacting with L2s.
Though, in the not-too-distant future, users won’t have to worry about any of this, as blockchain and fees will all be abstracted away behind the application layer.
In the meantime, it’s clear that Ethereum's roadmap to scale is working. The ecosystem is seeing growth from all levels during what has been a gruesome bear market and fortunately, much of that growth is coming from the newly launched L2s. 🙌
It will be interesting to see how the distribution of activity plays out during the next bull run. Of course, as a PRO member, we will keep you informed as it all unfolds.
By the way, one last piece of advice if you are an Ethereum user. I highly recommend you bridge your assets to Arbitrum now while gas is still relatively low.
I don’t see these levels remaining for much longer and I would hate to see you forced into paying $50+ transaction fees like back in 2021. Unless you’re a whale, it's time to migrate! ⌚
That's a wrap friends, thanks again for reading this one.
As usual, leave a comment and let me know if you liked/disliked this report, and don’t hesitate to ask any questions.
See you in the next one!
Kyle Reidhead
Founder of Web3 Academy and Impact3
Find him: Twitter
All PRO members who submitted the Kazm Form before Monday, have been whitelisted for Lens Protocol.
Simply click here to claim your profile. You need to connect your wallet first.
As a PRO, you’re entitled to your PRO/FOUNDERS Pass, which unlocks different perks & benefits across the web3 ecosystem.
We airdrop these passes each Monday & Thursday. To get yours, make sure to fill out this Kazm Form!
If you already hold your Pass, make sure you head to Discord to unlock access to the exclusive PRO channels!
If you’re in or around Cleveland, OG, USA at the beginning of May (1st-3rd), we recommend you attend the Creator Economy Expo!
Kyle will speak at the event and we secured a $100 discount for all of our PRO members!
To grab your discount, head here and apply 'W3A100' at checkout.
Collect this post as an NFT.