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Hello readers,
Since 2022, the Ethereum network has transitioned to Proof of Stake, leaned into its Layer 2 scaling roadmap, and become the foundation for nearly $200 billion in stablecoins and RWAs. It has done all of this while strengthening L1 security and keeping ETH inflation below 1% — even as onchain fee capture at the base layer has diminished meaningfully.
Meanwhile, Ethereum has recently established itself as the early leader in the race to become quantum-ready.
In this week’s edition of The Watch List, we take a look at how the ecosystem performed in Q1 and what to look for next.
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Disclaimer: Views expressed are the author’s personal views and should not be relied upon as investment advice.
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Real Economic Value measures Base Fees, Priority Fees, MEV, and Blob Fee payments for L1 blockspace. Base Fees + Blob Fees are burned by the network, accruing value to passive holders of ETH. Priority Fees + MEV accrue to validators and stakers.
The Ethereum L1 did just $82m in REV in Q1, its worst quarter on record.
Base Fees were down 72% in Q1, and 87% y/y.
Priority Fees were down 34% in Q1, and 51% y/y.
MEV Tips were down 37% in Q1, and 55% y/y.
Blob Submission Fees were down 83% in Q1, and 92% y/y.
In total, Real Economic Value declined 43% in Q1, and 71% y/y — highlighting the “risk-off” environment throughout the quarter. While UX and throughput are improving at the L2 level, we’ve yet to see that translate into meaningful fee capture at the L1 level.
Given the current “risk-off” market conditions in crypto and depressed yields in DeFi, we expect the current trend to persist in the short- to medium-term.
Real Onchain Yield = Priority Fees + MEV paid to validators (apy). Stakers/tokenholders receive the real onchain yield, net of operator payments & validator commissions (if applicable).
The average Real Onchain Yield during Q1 was 0.20% - down 9% for the quarter, and down 64% y/y.
As user activity continues to migrate to L2s + target blobs increase, we see less contention for block space on L1, reducing MEV and Priority Fee capture for stakers and validators.
Total Onchain Yield = Priority Fees + MEV + Issuance paid to validators & stakers (apy, operator fees not included).
The total onchain yield in Q1 was 2.80% (average yield for the qtr, annualized), down 5% in Q1, and 13% y/y.
Issuance accounted for 93% of the yield in Q1, down 0.21% during the quarter but up 9% y/y.
Priority Fees & MEV (the “real” portion) accounted for just 0.20% in Q1, down 9% from Q1 and 64% y/y.
We cover how this impacts network inflation later in the report.
GDP = Total fees generated by the top applications on the chain (does not include chain fees). A total of 108 applications are included in this dataset. Data sourced from Token Terminal.
Network GDP was down 17% in Q1, but up 8% y/y.
In total, start-ups operating on Ethereum L1 generated $1.94b in onchain fees in Q1 (23x the L1 REV).
The top 10 list (total revenue generated exclusively on Ethereum L1 during the quarter):
Tether: $698.5m
Circle: $397.5m
Lido: $185.5m
Aave: $155.3m
Sky: $119.2m
Ethena: $65.2m
Uniswap: $58.8m
Ether Fi: $44.6m
Flashbots: $43m
Maple Finance: $25.3m
Why does GDP matter?
In some ways, network GDP can help lay a foundation for network valuation. It’s something we keep a close eye on for this reason.
Real World Assets Onchain = tokenized representations of physical and traditional financial assets that are issued, traded, and managed on Ethereum L1. Stablecoins are tracked separately below. Data sourced from RWA.xyz.
There are currently $6.5b of tokenized U.S. Treasuries on the Ethereum L1, up 37% in Q1 and 85% y/y. BlackRock’s BUIDL fund was up 94% in Q1, but it’s down 44% y/y. Why the drop year-to-year? Assets were moved to Avalanche, Solana, BNB, and a few L2s. In total, the BUIDL AUM is up 11% y/y across all chains.
Commodities ($5.1b) make up 31% of RWAs onchain, up 48% in Q1 and 312% over the last year. The driver of this category is tokenized Gold (99% of tokenized commodities). Tether and Paxos are the largest issuers of tokenized Gold.
Public equities now make up 2% of all RWAs onchain ($349m), up 22% in Q1.
In total, the Ethereum L1 now has over $16b of RWAs onchain, up 27% during the quarter and 225% y/y.
Cost to Produce $1 of REV = Daily Issuance paid to Ethereum validators/REV. This metric measures how efficient the chain is at turning security expense into REV. When this metric is greater than $1, it indicates the chain is spending more on security than it is earning in REV.
Ethereum’s Cost (supply side issuance) to Produce $1 of REV was $13.79 in Q1 — its highest level since we began tracking the metric.
It was up 20% in Q1 — this indicates that more issuance (network inflation) was required to secure the network, relative to the real value produced during the quarter (network costs/overhead are rising, relative to network fees).
L2 Rent Paid to L1 = L1 fee + blob submission fee paid by L2s to Ethereum L1. L2s include arbitrum, base, blast, bob, linea, optimism, scroll, soneium, starknet, worldchain, and zksync.
In total, the L2s paid just $135k to the L1 during Q1 (the lowest quarter on record). This was down 82% in the quarter, and 89% y/y.
What’s the story?
The Pectra upgrade, implemented in May 2025, expanded blob throughput at the L2 level, following the initial introduction of blobs under the Dencun upgrade in March of 2024.
A subsequent increase in blob targets on January 7th further expanded data availability capacity to 14 blobs/block. With average blobs/block currently running in the 3-4 range, L2 rent paid to L1 has continued to compress, and is likely to remain under pressure until L2 demand scales sufficiently to consistently exceed blob targets.
If this happens (likely not until the next bull market), higher blob fees and priority pricing could emerge — increasing value capture at the L1 level in the process.
This is classic supply/demand. L2 blob space supply is expanding faster than demand at the moment.
Ethereum L1 disrupted itself via the L2 roadmap. This was necessary to scale the network, improve the UX, and make it economically viable to build on.
The trade-off is that user activity is migrating to L2s, reducing contention for block space on L1 and lowering onchain fee capture for validators/stakers.
The question moving forward: does it matter that Ethereum L1 is losing its ability to generate real user fees for validators/stakers?
Said another way, can Ethereum become more successful via the L2 roadmap (adding TradFi L2s + TradFi assets) and grow its valuation while fee capture at the L1 level does not follow the trend in L2 growth?
We explore this idea later in the report.
As of 3.31.26, 38.7m ETH were staked on the network, representing 31.7% of the circulating supply (highest level on record).
The impact on tokenholders?
More ETH staked = lower staking yields if onchain fees do not increase proportionally.
Why?
Increases in staking translate into proportionally smaller increases in issuance. If onchain fees and/or burn do not cover the gap, staking yields fall, and network inflation rises (as we saw in Q1 and in prior quarters).
Total Stablecoin supply on Ethereum L1 finished the quarter at $180b.
This was down 0.55% in Q1, but up 30% y/y.
USDT (Tether) makes up 53% of the supply, down 6% in Q1 but up 27% y/y.
USDC (Circle/Coinbase) makes up 30% of the supply, up 5% in Q1 and 38% y/y.
USDS (Sky) makes up 4.6% of the supply, up 50% in Q1 and 87% y/y.
USDe (Ethena) makes up 3.3% of the supply, down 7% in Q1, but up 12% y/y.
USDPY (Paypal) now has over $1.5% of supply ($2.9b), up 8% in Q1 and 360% y/y.
In the last bear market, the stablecoin supply peaked on 4.1.22, nearly 5 months post BTC peak (USDC didn’t peak until July of ‘22).
We’ve now been flatlining for roughly 5 months as capital flows into crypto stall and reflexive yields in DeFi have dropped off a cliff.
For this reason, we think that stablecoin supply may have peaked for this year.
Effective Stablecoin Velocity measures the daily turnover rate of each dollar of stablecoin supply onchain. This metric filters out noise pertaining to wash trading and circular transactions to arrive at true velocity, measured as the net USD transfers per day/circulating supply. A rising value indicates increased economic activity on the Ethereum L1.
Average stablecoin velocity in Q1 was 0.019, down 30% in the quarter and 10% y/y.
This indicates that, on average, Ethereum L1 “turned over” roughly 2% of its stablecoin supply each day. For reference, Solana turned over 6.8% of its stablecoin supply/day on average in Q1.
While onchain velocity is dropping due to “risk-off” conditions, Ethereum continues to serve as the home for onchain assets (the highest TVL chain), while Solana has established itself as the home for fast trading/velocity.
Stablecoin velocity is a great way to track this.
Net Dilution Rate = Protocol issuance less burned ETH/circulating supply (annualized). A negative Net Dilution Rate is accretive to ETH holders. A positive Net Dilution Rate is dilutive to ETH holders (who are not staking).
The Net Dilution Rate (applies to non-stakers holding ETH) was 0.84% (annualized) in Q1, up 4.4% in the quarter and 55% y/y.
Despite lower onchain fees and higher issuance, network inflation (annualized) was still just 0.79% over the last year (lower than Bitcoin).
We continue to believe that this is the most important chart for Ethereum.
Why?
Onchain fees paid to validators and stakers continue to trend down, and it is hard to see that changing anytime soon.
At the same time, ETH staked is rising.
That means Ethereum security is as robust as ever, with its supply side receiving the least amount of compensation since The Merge.
That’s interesting. Because Ethereum is demonstrating that it can:
Scale via L2s and grow the network effect (Robinhood L2 currently in testnet).
Maintain (and grow) security at the L1 level, even as fees paid to validators/stakers are at all-time lows.
Keep the ETH inflation rate lower than Bitcoin's.
We think this can bolster the story around ETH as a “store of value” (low inflation) that also pays a yield (2.8% in Q1) while securing hundreds of billions of value.
L1 DEX volumes declined 43% in Q1, but were up 24% y/y.
Combined DEX volumes on L2s declined 29% in Q1, but were up 10% y/y.
Base volumes were down 19% in Q1 and made up for 30% of all L2 volumes in the quarter (down from 59% in Q4).
Combined, the L2s accounted for 45% of all DEX volumes on Ethereum in Q1, up from 36% in Q4 (risk-on environments counterintuitively lead to more trading activity on L1).
In total, Ethereum L1 + the L2s combined for $330b of DEX volume in Q1 vs $286b for Solana.
Active Loans on Ethereum L1 were down 22% in Q1, but up 35% y/y.
Aave has $16.5b in active loans (down 24% in Q1) and a 73% market share on L1.
Morpho has $3.8b (up 22% in Q1) and a 16.7% market share.
On L2s, active loans declined 10% during the quarter, but were up 66% y/y. Combined, the L2s accounts for 14% of all active loans in the Ethereum ecosystem.
L2 fees were down 46% in Q1, but up 6% y/y.
In total, the L2s combined for $117m in fees in 2025, with Base accounting for 66% of the market.
The L2s combined to produce 31% of Ethereum L1 fees during the quarter — down from 52% in Q4.
Average daily active addresses on L2s (combined) were down 28% in Q1, and 18% y/y. The trend has been in significant decline since last summer, but may have hit a low in Q1.
Combined average daily active addresses on L2s outpaced L1 by 12% during the quarter, down from 130% in Q4.
Base (56% of L2 active users) was down 31% in Q1.
The L2s combined for 19.7m tx/day in Q1 (8.9x more than L1, down from 14.5x in Q4).
That was down 13% during the quarter, but up 68% y/y.
Base (down 22% in Q1) accounted for 51% of all L2 transactions during the quarter.
The L2s currently have $11b stablecoins, down 1% in Q1, but up 49% y/y. Combined, the L2s represent 6% of the stablecoin supply on Ethereum L1.
Base (up 3% in Q1) accounts for 42% of the supply. Arbitrum (down 10% in Q1) has 36%.
Net ETF flows were -$978m in Q1, a subtle improvement over the $1.4b of outflows in Q4.
Combined, the ETFs currently hold 4.7% of the total ETH supply (down from 4.9% in Q4).
Total ETH under AUM (in ETH) is currently down 17% from the peak established on October 8th last year. For reference, the Bitcoin ETF's AUM is currently down 5.5% from its peak last year.
ETH held in the treasury hit another all-time high in Q1, increasing 7% during the quarter. 5.9% of the supply is currently “held in treasury,” up from 5.5% last quarter.
Bitmine (BMNR) currently holds over 4.6 million ETH, up 12% during the quarter. This represents 64% of all ETH held in treasury, and 3.8% of the total ETH supply. For reference, MicroStrategy has 4.2% of the BTC supply.
The Ethereum Network went into full “reset” mode in Q1. Some of the most important KPI we track are at all-time lows, or back to levels last seen in early ‘23.
At the same time, network security is at an all-time high. Over $300b of assets are secured onchain. The foundation has a renewed focus on scaling and improving the L1. BitMine continues to buy. And regulation is coming for TradFi adoption.
It’s our view that for ETH to “win” (outperform BTC) the next cycle, it needs to position itself as:
The most secure smart contract network (100% uptime), with the most onchain value (stablecoins, RWAs, etc.).
The “home for TradFi” to build on public chains. We’re keeping an eye on Robinhood’s L2 launch — which is currently in testnet.
A Store of Value (low inflation) that pays a yield (2.8% in Q1).
The most “quantum-ready” public blockchain.
As noted in the intro, ETH is currently on The Watch List. If you’d like to be notified if/when we add to our ETH position (or any other assets), you can sign up for TDR Pro and get one month free here.
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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.