ETH Earnings Report Q2 2025

This episode reveals how Ethereum's recent network upgrades are creating a paradox: surging Layer 2 activity is driving down Layer 1 revenue, forcing investors to re-evaluate ETH's value accrual model.

Introduction: The ETH Report for Token Holders

• The report is a public service compiled from on-chain data by The DeFi Report, not affiliated with the Ethereum Foundation.
• Michael Nato emphasizes the report's theme: “network upgrades, user migration to L2s, and we're going to cover sort of what that means for ETH holders.”

Opening Remarks: The Petra Upgrade and the J-Curve

• Michael Nato identifies the Petra upgrade on May 7th as the defining event of Q2. This technical update was designed to further scale Layer 2s (L2s) by reducing their data posting costs to the main Ethereum chain (L1).
• The upgrade led to a significant drop in L1 revenue but a corresponding increase in L2 user activity and a decrease in L2 transaction costs.
• Nato frames this as Ethereum being in a “J-curve” transition, where near-term revenue is sacrificed for long-term ecosystem growth and user adoption on L2s.
• Strategic Insight: Investors should view the current drop in L1 revenue not as a failure but as a planned investment in the L2 ecosystem's growth, anticipating that future L2 volume will eventually translate back into L1 value.

State of the Network: Operating Performance Analysis

• The direct economic consequence of the Petra upgrade was a sharp decline in Ethereum's on-chain revenue and yield. Michael Nato's analysis shows a clear cause-and-effect relationship between the network upgrade and reduced value accrual to token holders in Q2.
• Real Economic Value (REV): This metric, which measures direct user payments from base fees, priority fees, MEV, and blob fees, fell to $144.8 million, a 53% decrease from the previous quarter.
  • Blob fees (payments made by L2s to post data to L1) dropped 80%.
  • Base fees dropped 67%.
  • MEV (Maximal Extractable Value, or profit from transaction ordering) dropped 52%.
• Real On-Chain Yield: The yield derived from user transaction fees (MEV and priority fees) paid to stakers averaged just 0.4% APY for the quarter, down 28%. This component now only makes up 12% of total staking yield.
• Total On-Chain Yield: When including new ETH issuance, the total yield was higher but still impacted. Issuance itself was down 5% for the quarter.
• Actionable Insight: The data confirms that L1 revenue is currently highly sensitive to technical changes aimed at scaling L2s. Investors must monitor whether the resulting L2 growth can generate enough aggregate transaction volume to offset these lower per-transaction fees in the long run.

The Layer 2 Growth Story: A Stimulated Economy

• While L1 revenue declined, the L2 ecosystem boomed, validating the strategic intent behind the Petra upgrade. Ryan Sean Adams describes the upgrade as a “stimulus to the L2 economy,” evidenced by strong growth in users and transactions alongside plummeting costs.
• Active Users: Combined daily active users on L2s grew 17% to nearly 2 million, now 5x the daily active users on L1. Growth was driven by Unichain (+438%) and Base (+26%).
• Transactions: L2s processed an average of 16.9 million transactions per day, 12.7x higher than L1.
• L2 On-Chain Margin: This metric shows the profitability of L2s. Base, for example, achieved a 97% gross profit margin, collecting user fees while paying significantly less "rent" to L1 post-Petra.
• User Transaction Fees: The average L2 transaction fee fell by 50% to just 1.5 cents. Michael Nato notes the significance: “You have costs actually dropping as user activity is scaling. I think that's pretty interesting.”

ETH Token Economics: Navigating a Low-Burn Environment

• The reduction in L1 network congestion and fees directly impacted ETH's tokenomics, temporarily halting its deflationary trend.
• ETH Issuance: Issuance rose 2% in Q2, driven by a 4% increase in the amount of ETH staked, which is now at an all-time high.
• ETH Burn: The amount of ETH burned via transaction fees dropped 55% in Q2, a direct result of the Petra upgrade reducing base fees.
• Circulating Supply & Net Dilution: Consequently, ETH's supply saw a minimal increase of 0.08% for the quarter. The annualized net dilution rate (issuance minus burn) was 0.73%, meaning non-stakers experienced slight inflation.
• Strategic Insight: Ryan and Michael speculate that the burn rate has likely bottomed out and that ETH's supply will oscillate around the 120 million mark. This highlights the effectiveness of the tokenomic model even in a low-activity environment, but reinforces that deflation is dependent on high network demand.

ETH as a Store of Value: The Off-Chain Narrative Strengthens

• While on-chain yield weakened, the narrative of ETH as a store-of-value asset gained significant traction, driven by institutional adoption and capital rotation.
• ETFs: Assets under management in ETH ETFs grew 20% in Q2, primarily led by Fidelity's fund (FFEH).
• Corporate Treasuries: The amount of ETH held in corporate treasuries reached 1.9 million ETH across 48 entities, with notable additions from companies like Bit Digital.
• ETH on Exchanges: The balance of ETH on centralized exchanges fell to an 8-year low, suggesting capital is moving into ETFs, DeFi, and self-custody. Michael Nato states, “we think that is strengthening ETH as a store of value.”

Network Fundamentals: A Healthy and Growing Economy

• Despite lower L1 revenue, the broader Ethereum economy showed signs of health and expansion, particularly in real-world assets and lending.
• Ethereum L1 GDP: This metric, measuring the sum of fees for applications on L1, was $1.7 billion for the quarter. Though down 15%, the overall trend remains a secular increase, indicating the application layer can grow even as L1 value accrual temporarily dips.
• Real-World Assets (RWAs): The value of tokenized RWAs (excluding stablecoins) on Ethereum grew 48% to $7.5 billion, driven by US Treasuries.
• Active Loans: Lending activity hit an all-time high of $23.9 billion, up 43% for the quarter, signaling strong confidence in using ETH and other assets as collateral in DeFi.

Analyst Q&A: The L2 Fee Debate and AI's Role

• The discussion shifts to analyst opinions, addressing the core tensions highlighted by the report.
• How much should L2s pay L1? Michael Nato calls this the “million-dollar question,” suggesting the market and future upgrades like native roll-ups will eventually find an equilibrium. Ryan Sean Adams offers two frames for investors:
  1. Negative View: L2s are “sucking value” from ETH holders.
  2. Strategic View: Ethereum is intentionally subsidizing L2s to stimulate long-term growth, while ETH's value is backstopped by its strengthening store-of-value narrative.
• How much is AI driving ETH right now? Michael Nato's data-driven perspective is clear: “I haven't seen that just yet.” He notes that while bots and algorithms exist, the anticipated wave of sophisticated on-chain AI agents driving significant, measurable activity has not yet arrived.
• Actionable Insight for AI Researchers: The lack of a clear AI-driven activity signal in the on-chain data indicates the Crypto x AI intersection is still in its infancy. Researchers should focus on identifying the early, nascent indicators of on-chain agent activity as a leading signal for future growth.

Conclusion

The Q2 report reveals a critical trade-off: Ethereum is sacrificing short-term L1 revenue for explosive, low-cost L2 growth. Investors must now balance ETH's strengthening store-of-value case against temporarily lower on-chain yields, while monitoring if L2 transaction volume can eventually restore robust value accrual to the protocol.