# Are "blob fees" the only thing that matters long-term for Ethereum? _A data-driven analysis of Ethereum's Economics at the block building layer_ April 7, 2025 • Michael Nadeau --- # Are "blob fees" the only thing that matters long-term for Ethereum? ## A data-driven analysis of Ethereum's Economics at the block building layer Michael Nadeau April 07, 2025 Hello readers, We’re stepping up our game, and we need your help to shape the future of The DeFi Report! If you’ve received value from our content, we would really appreciate it if you could [take a few minutes](https://docs.google.com/forms/d/1lUkjAa42s8PmUzXossxzJhZ4BshRzAJyGiSjC6edurY/edit?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=are-blob-fees-the-only-thing-that-matters-long-term-for-ethereum) to let us know what you’d like to see moving forward. Your feedback will help us deliver a better experience moving forward. Please take the brief survey [here](https://docs.google.com/forms/d/1lUkjAa42s8PmUzXossxzJhZ4BshRzAJyGiSjC6edurY/edit?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=are-blob-fees-the-only-thing-that-matters-long-term-for-ethereum). Back to business. Standard Chartered made headlines a few weeks ago with a report that slashed their year-end price target for ETH from $10k to $4k. The report points to the L2 roadmap as the primary catalyst for Ethereum’s struggles, claiming that L2s are “taking Ethereum’s GDP.” The conclusion was that Ethereum’s future value needs to be adjusted as a result. We’re going to run our own analysis on this topic and share our findings with you. But before we do that, we feel it’s prudent to break down the trends in Ethereum’s economics from the *ground up*. This will set a foundation for future analysis and illuminate the need for Ethereum to grow and scale “blobs,” i.e., Ethereum’s data availability network. That’s the focus this week. We’ll have updated views on the market as conditions evolve. For now, we’re looking for bottom/structural shift signals and hanging out in cash. Topics Covered: - [Ethereum’s Real Economic Value (REV)](#ethereums-real-economic-value-rev) - [Token Incentives](#token-incentives) - [Off-Protocol Revenue (Block Builders)](#off-protocol-revenue-block-builders) - [Closing Thoughts](#closing-thoughts) ***Disclaimer:**** Views expressed are the author’s personal views and should not be relied upon as investment, legal, tax, business, or any other advice. * Let’s go. # Ethereum’s Real Economic Value (REV) Shout out to Blockworks Research for coining the term “Real Economic Value.” Reporting standards in our nascent industry are the foundation for transparency, regulatory compliance, valuation frameworks, and investor confidence. We’re happy to adopt this one. ##### Defining Real Economic Activity (REV) REV = value derived from user activity that accrues directly to Ethereum service providers and ETH holders. It does not include token incentives or payments made to block builders (which we cover later in the report). Four primary components: - Base Fees: This is the minimum amount of ETH that a user must pay to process a transaction on Ethereum L1. Base Fees adjust dynamically based on network congestion to target a specific block utilization level (50%). As far as value accrual, base fees are “burned,” or removed from ETH in circulation. To the extent that they offset ETH issuance, “burned ETH” can make the supply deflationary, accruing value to ETH holders — similar to stock buybacks for a traditional company. Data: The DeFi Report, Dune ##### Base Fees: Key Takeaways - Over the last 90 days, Ethereum’s Base Fees make up 50% of the total Real Economic Value generated by Ethereum validators. - In total, 48,007 ETH have been burned and removed from circulation ($94m at current ETH prices). 3.7% of this has come from the L2s, with Base leading the way. This offsets ETH issuance (token incentives paid to validators) of 239,492 over the same period, resulting in annualized inflation of .6% over the last 90-day period. - When we zoom out below, we can see the destruction to Ethereum’s base fees over the last four years. Ethereum averaged just 102.7 ETH/day in base fees in March. For reference, that’s less than 1% of what the network did in November of ‘21 (11,809 ETH/day in base fees), and just 8% of the lows in base fees that Ethereum did at the bottom of the bear market in ‘22. - The drop in base fees highlights the impact of EIP4844 — a technical upgrade allowing for cheaper L2 transactions, which was implemented in March of last year. This is the key decision made by the Ethereum Foundation to scale Ethereum via the “L2 roadmap,” which led to Standard Chartered reducing its price target for ETH. More to come on this in our future analysis. Data: The DeFi Report, Dune - Priority Fees: Priority fees are paid by Ethereum users in *excess* of Base Fees, to ensure time-sensitive (e.g., Arbitrage, sandwich attack, liquidation) transactions are moved from Ethereum’s mempool into validated blocks. These fees accrue to Ethereum validators (which are shared with passive stakers of ETH). Over the last 90 days, Ethereum validators have earned 25,169 ETH in priority fees ($46.7m at current prices). This represents 26% of validator REV. ##### Priority Fees: Key Takeaways - While Ethereum’s Priority Fees are at a 4-year low, we can see that the destruction has been less severe than the drop off in Base Fees. Why? Priority Fees apply only to L1 transactions, whereas a significant portion of Ethereum’s Base Fees have moved to L2 over the last year. The network has averaged 218 ETH/day in priority fees in March — down 88% from the peak late in ‘21. Compared to the lows of the ‘22 bear market, priority fees are currently down 55%. - As more of Ethereum’s execution activity moves to L2s such as Base, we should anticipate priority fees to continue to drop on Ethereum L1. - Blob Fees: “Blob Fees” are fees that L2s pay to Ethereum for Data Availability. These are the new fees that were introduced by EIP4844. Similar to base fees, blob fees are “burned,” and removed from circulation. Data: The DeFi Report, Dune ##### Blob Submission Fees: Key Takeaways - Over the last 90 days, 1,605 ETH ($3.5m) has been paid to Ethereum L1 from the L2s within the ecosystem (2% of total REV). Base has driven 39% of these fees, followed by Taiko (18%), Worldchain (15%), Arbitrum (14%), and OP (4%). In total, the top 5 L2s are driving about 80% of the blob submission fees today. - Given Ethereum’s intention to scale via L2s, we think it’s reasonable to anticipate the vast majority (95% +) of transaction execution occurring on L2s in the future. Therefore, blob submission fees (for data availability) should make up the vast majority of payments to Ethereum L1 validators as L2s scale. - For Ethereum to replace its *current *REV via *current* DA fees only, it would require 1.4 billion transactions/day (16,303 tx/second) from the L2s. That’s a 92x in terms of total L2 transactions/day currently. With that said, blob fee pricing is dynamic, such that fees will increase with demand in a non-linear fashion (similar to L1 fees). - We ran some analysis with the [Blob Simulator that Tim Robinson](https://x.com/timjrobinson/status/1851222337787740425?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=are-blob-fees-the-only-thing-that-matters-long-term-for-ethereum) put together. The results were somewhat concerning. Why? Just a 2.5x increase in L2 tx/second results in Ethereum L1 congestion. L2 fees would spike to $.40 in this scenario. That’s not good. That said, protocol updates to blob targets (Pectra, PeerDAS projected mid '25) are coming. A doubling of the target blobs/block (scheduled for May 7th via Pectra upgrade) is required to get the cost/tx down to $.01 if L2s scaled 2.5x. With that said, we’ll see how fast future upgrades come to support further scaling at the L2 level. Source: [https://ethereum-blob-simulator.netlify.app/](https://ethereum-blob-simulator.netlify.app/?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=are-blob-fees-the-only-thing-that-matters-long-term-for-ethereum) Basically, you have 3-4 L2s that are meeting the target blobs/block (3) consistently. This makes up about 70% of blob space demand. So, that means other L2s need to compete for blob space, driving up the fees. This is essentially the same scaling problem Ethereum has at the L1 level. We expect Ethereum to grow its blob size and target blobs/block via protocol updates such as PeerDAS, the Fasaka upgrade, etc. But this is not an easy thing to do. It takes time. And Ethereum is running out of time. How long will the L2s put up with scaling roadblocks before seeking alternative options? Data: The DeFi Report, Dune - MEV: MEV is paid by users (bots) that are often called “searchers.” Basically, you have bots that are trained to look for arbitrage between DEXs/CEXs, liquidations, and opportunities to “sandwich” other users within Ethereum’s “Mempool” — where transactions go before they are bundled into blocks for validators. When they identify transactions to make (based on the mempool), they will submit them to “block builders” — paying priority fees + extra “tips.” These fees (paid by users/bots) are received by the block builders, who then use the funds to bribe validators to validate the block. Block builders kept about 30% (these are “off-protocol” fees, which we get to later in the report), with the validators taking roughly 60% of MEV (which is shared with stakers through MEV boost). Searcher bots keep roughly 10% of the MEV created from the transactions they submit.  Data: The DeFi Report ##### MEV: Key Takeaways - Over the last 90 days, Ethereum validators have earned 21,159 ETH ($39m) in MEV Tips (22% of total REV). Again, these fees are paid to block builders (who receive the $ from bots/”searchers” that have time-sensitive transactions to make). - We analyzed the past 30 days of “searcher” transaction activity to determine which transactions drive the most MEV. Here’s what we found: Arbitrage Volume: $3.6b (searcher profit of $1.9m) - Sandwich Volume: $6.3b (searcher profit of $135k) - Liquidation Volume: $86.4m (searcher profit of $176k) Generally speaking, searchers are keeping about 10% of the value extracted from the MEV created from their transactions. Builders are keeping roughly 30%, with the validators (and passive stakers) receiving about 60%. - At the height of onchain activity late in ‘21, validators were earning roughly 1,619 ETH/day from MEV. Over the last 90 days, the value has dropped to 230 ETH/day (down 86%). - We can see from the chart that MEV rewards are inconsistent, spiking aggressively during periods of high congestion/time-sensitive transactions. The most profitable MEV day on record for validators occurred on May 3rd, 2023 (11,228 ETH in MEV earned). This was related to the Pepe memecoin launch. - MEV pertains only to transactions made at the L1 level. Therefore, as transaction activity moves to L2, we should continue to see MEV earned by Ethereum validators diminish. # Token Incentives As noted in the intro, Real Economic Value includes value paid to Ethereum validators (shared with ETH stakers) via *user* *transactions only*. But that’s not the only way that validators get paid. The final piece is token incentives/network issuance. This is ETH that is paid to Ethereum validators as consensus rewards for securing the network. We can see below that token incentives dropped roughly 80% when Ethereum moved from proof-of-work to proof-of-stake via the merge. Token incentives are used for the initial bootstrapping of a decentralized validator set in blockchain networks. But over time, we should see them drop, with user fees compensating the supply side for security. This is what we’ve seen historically from Ethereum, but we can now observe token incentives *rising* again due to the reduction in user fees related to EIP4844. Data: Token Terminal, The DeFi Report ##### Token Incentives: Key Takeaways - Over the last 90 days, Ethereum has paid out 2,631 ETH/day ($4.7m) on average to validators in new issuance. - Over the same period, 515 ETH/day ($926k) has been received by Ethereum validators from MEV and priority fees. - This means that only 16% of Ethereum validators’ earnings are coming from user activity today. The rest comes from token incentives/network issuance. ##### Validator Yield The four components of REV + Ethereum’s Token Incentives make up Ethereum’s dynamic yield, which can also fluctuate based on the amount of ETH staked on the network (currently 34.3m ETH or 28% of the supply). Data: Compass Technologies Finally, below we can visualize validator earnings in terms of new ETH issuance vs REV (priority fees & MEV). Over the last 90 days, the network issued 239k ETH to validators, who also earned 46k ETH from priority fees & MEV (about 16% of the total value received). # Off-Protocol Revenue (Block Builders) In addition to the value derived from user transactions that accrue to Ethereum validators (and passive stakers), Ethereum has “hidden” value coming from user transactions that is paid directly to Block Builders. The workflow: Users submit transactions —> Ethereum Mempool —> “Searchers” (bots) identify value (arbitrage, sandwich tx, liquidations) —> submit additional transactions to Block Builders (w/tips) —> Block Builders bundle transactions —> Submit to Validators (w/tips) —>Validators approve transactions, keeping most of the tip (with the Block Builder and Searcher keeping a portion). The portion that the Block Builder and Searcher keep is the “off protocol” revenue since it is not shared with validators & passive ETH stakers. Data: The DeFi Report, Dune ##### Block Builders: Key Takeaways - 90-95% of Ethereum blocks are currently built by “Block Builders” today using protocols such as MEV-Boost. This outsources the block building function for validators (reducing complexity) while allowing them to earn MEV (which is shared with stakers). - Over the last 90 days, Block Builders have earned 12,524 ETH. This is roughly 30% of the total MEV over that period. - Roughly 20% of Block Builder income was paid back to users via “kickbacks” over the same period (2,550 ETH). “Kickbacks” apply when a user allows their transaction to be “back run” — meaning a “searcher” is submitting a transaction *after* the user transaction (not impacting the user transaction), but creating more profit for the “searcher” transaction nonetheless. Users can make their transactions eligible for kickbacks by using protocols such as Cowswap that leverage private RPCs that share some of the transaction details in the mempool. - 3 Block Builders were responsible for building 87% of Ethereum’s blocks over the last 30 days. They are BeaverBuild , Titan Build, and Rsynch Builder. Data: The DeFi Report, Dune If you’re curious, here’s an example of an arbitrage transaction on Ethereum in which 21 tokens were swapped across 49 trading venues, resulting in a profit of $108,881. Source: EigenFi - Searcher address: 0x346C802df3404BEC2f265603db28B815321251Ee - Contract address: 0xe6b1DE575e7e610889ea21024834e120f92033a3 (handles the arbitrage + pays the builder) - Builder: Titan Builder Below, we can see one of the payments to the Titan block builder from the contract address on Etherscan: # Closing Thoughts Thanks for bearing with us as I know this wasn’t the easiest read. There’s quite a bit of complexity to sift through when deconstructing Ethereum’s economics from the ground up. But I hope this serves as a solid foundation for further analysis that we’ll be conducting to assess the viability of the Ethereum roadmap and value accrual to ETH via “blobs.” Some key observations and questions arise as a result of this work: - Ethereum disrupted itself via the L2 roadmap. It now needs to rebuild its economics in a more B2B model (L2s as customers) rather than a B2C model (individual users as customers). - As users continue to move to L2s for better execution, Ethereum’s base fees, priority fees, and MEV *should *continue to diminish. - These fees will need to be replaced by “blob fees,” i.e., data availability fees. We think this will *require massive scale, lots of L2s, technical upgrades to L2 scaling, and a MOAT for Ethereum DA.* - We believe the vast majority of execution activity on Ethereum will move to L2s. This may not be realistic, as it’s possible that the L1 will always maintain a cohort of users. How big this cohort is, and what use cases would remain on L1, are still unclear to us today. - For the roadmap to work, we believe L2s will need to proliferate on the scale of websites. Furthermore, Ethereum needs to create a moat around data availability. This could come in the form of “blob fees,” but it could take a long time to play out. - Given that just three block builders are currently responsible for building roughly 85% of Ethereum’s blocks, we think that centralization and censorship concerns are valid. - As institutions seek to tokenize equities in the coming years, will they allow MEV to leak to Ethereum validators? Will regulators allow “sandwich” attacks to persist? For this reason, we think institutions will seek to launch L2s, where they can capture tx fees + MEV. This could be good for Ethereum, but again will require massive scale. The good news is that the demand is there. For reference, all of TradFi processes roughly 100-200 billion transactions per day across equity and derivatives markets, payments, and other financial instruments. - The loss in fees on Ethereum L1 this cycle went to L2s, which is why Standard Chartered cut its price target for Ethereum. At the same time, L2s *are being adopted*. Data: The DeFi Report, Dune What will this chart look like when every bank and fintech has a stablecoin and equities are tokenized? As Charlie Munger (RIP) liked to say: “show me the incentives and I’ll show you the outcome.” Given that TradFi firms will be able to control execution and MEV by building L2s, we think they may be incentivized to build on Ethereum over Solana. The key question is whether Ethereum will scale “blobs” fast enough to service them. In summary, we think Ethereum’s future is all about “blob fees” (data availability) and its ability to grow a network effect amongst L2s. Our future work in this area will focus on forecasting the scalability of “blobs” and value accrual to ETH via dynamic pricing mechanisms and scenario analysis. Take a Report. And Stay Curious. ***Disclaimer****: Individuals have unique circumstances, goals, and risk tolerances, so you should consult a certified investment professional and/or do your own diligence before making investment decisions. The author is not an investment advisor and may hold positions in the assets covered. Certified professionals can provide individualized investment advice tailored to your unique situation. This research report is for general educational purposes only, is not individualized, and as such should not be construed as investment advice. The content contained in the report is derived from both publicly available information as well as proprietary data sources. All information presented and sources are believed to be reliable as of the date first published. Any opinions expressed in the report are based on the information cited herein as of the date of the publication. Although The DeFi Report and the author believe the information presented is substantially accurate in all material respects and does not omit to state material facts necessary to make the statements herein not misleading, all information and materials in the report are provided on an “as is” and “as available” basis, without warranty or condition of any kind either expressed or implied.*