# The Watch List: Ethereum Q2 Update _Ecosystem performance for serious investors_ July 3, 2026 • Michael Nadeau --- # The Watch List: Ethereum Q2 Update ## Ecosystem performance for serious investors Michael Nadeau July 03, 2026 Hello readers, Ethereum’s Q2 performance raises some important questions. Revenue moved modestly higher quarter-over-quarter, but remains well below last year’s levels. Meanwhile, onchain yield, L1 GDP, DeFi activity, and L2 engagement all continued to materially soften. At the same time, ETH’s annualized dilution remained near Bitcoin-like levels despite muted fee capture and limited value flowing back from L2s. Is this simply the low point in Ethereum’s adoption and development cycle? Or evidence that value accrual to ETH the asset is impaired? In this week’s edition of [The Watch List](https://thedefireport.io/price-targets?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=the-watch-list-ethereum-q2-update), we cover Q2 performance, break down the key trends beneath the surface, and discuss what they could mean for ETH going forward. Topics covered: - [Operating Performance](#operating-performance) - [Network Fundamentals](#network-fundamentals) - [Stablecoins](#stablecoins) - [Token Economics](#token-economics) - [DeFi](#de-fi) - [Layer 2 Ecosystem](#layer-2-ecosystem) - [Layer 2 Stablecoins](#layer-2-stablecoins) - [ETFs & Treasury Firms](#et-fs-treasury-firms) - [“Fair Value” KPIs](#fair-value-kp-is) - [Closing Thoughts](#closing-thoughts) ***Disclaimer:**** Views expressed are the author’s personal views and should not be relied upon as investment advice. * *The DeFi Report is powered by **[Galaxy](https://www.galaxy.com/?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=the-watch-list-ethereum-q2-update)**: helping the world invest, build, and transform — relentlessly. * [](https://www.galaxy.app/product/crypto/staking?utm_source=TheDeFiReport&utm_medium=Newsletter&utm_campaign=Staking+Launch)With GalaxyOne Staking, you can earn up to an estimated 6.50% in variable staking rewards with 0% platform commission through 2026*. While other platforms can charge up to 35% in commission, GalaxyOne charges 0% through the rest of the year. Other fees may apply, see terms. Let’s go. # Operating Performance ##### Real Economic Value Data: [The DeFi Report](https://dune.com/the_defi_report/the-ethereum-ecosystem?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=the-watch-list-ethereum-q2-update) *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. * - Total REV in Q2 was $88.4m, up 7% in Q2, but down 68% y/y. - In total, the L1 captured 4.9% of the value created on the application layer of L1 (REV/L1 GDP). - Base Fees were up 112% in Q2, but down 86% y/y. - Priority Fees were up 11% in Q2, but down 46% y/y. - MEV Tips were *down* 17% in Q2, and 53% y/y. - Blob Submission Fees were up 35% in Q2, but down 99% y/y. ##### Key Takeaway UX and throughput are improving. But we’ve yet to see this translate into meaningful fee capture at the L1 level, which still tends to outperform during “risk-on” market conditions. For Ethereum to smooth out the cyclicality of its economic cycles, we think it needs to onboard RWA’s and serve as the *settlement layer* for that activity. More on this topic later in the report. ##### Real Onchain Yield Data: [The DeFi Report](https://dune.com/the_defi_report/the-ethereum-ecosystem?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=the-watch-list-ethereum-q2-update) *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 Q2 was 0.17% - down 14% q/q, and 61% y/y. - As user activity continues to migrate to L2s, we see less contention for block space on L1, reducing MEV and Priority Fee capture for stakers and validators. Hence, the *transit*ion we noted in the intro. - On a positive note, it looks like ETH’s Real Onchain Yield may have bottomed in Q4/early Q1. ##### Total Onchain Yield Data: [The DeFi Report](https://dune.com/the_defi_report/the-ethereum-ecosystem?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=the-watch-list-ethereum-q2-update) *Total Onchain Yield = Priority Fees + MEV + Issuance paid to validators & stakers (apy, operator fees not included). * - Total onchain yield in Q2 was 2.68% (average yield for the qtr, annualized), down 4% in Q2, and 15% y/y. - This was the lowest level ever (due to low onchain activity, but near all-time high staked ETH). - Issuance made up 94% of the yield in Q2, up 0.41% q/q and 9% y/y. - Priority Fees & MEV made up just 0.17% in Q2, down 15% q/q. This indicates low user activity/state contention on the L1 during the quarter. We cover how rising issuance as a % of the yield impacts network inflation later in the report. # Network Fundamentals ##### GDP Data: [The DeFi Report](https://dune.com/the_defi_report/the-ethereum-ecosystem?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=the-watch-list-ethereum-q2-update) *GDP = Total fees generated by the top applications on the chain (does not include chain fees). A total of 122 applications are included in this dataset. Data sourced from Token Terminal.* Network GDP was down 9% in Q2 but up 9% y/y. In total, businesses operating on Ethereum L1 generated $1.79b of onchain fees in Q2 (20x the L1 REV). The top 10 list (total revenue generated exclusively on Ethereum L1): - Tether: $684.4m - Circle: $405.3m - Lido: $153.6m - Aave: $105m - Sky: $101.5m - Ethena: $48.4m - Uniswap: $47.4m - Flashbots: $35.9m - Ether dot Fi: $27.6m - Maple Finance: $23m Why does GDP matter? ##### Ethereum L1 GDP vs ETH Price Data: [The DeFi Report](https://dune.com/the_defi_report/the-ethereum-ecosystem?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=the-watch-list-ethereum-q2-update) In some ways, network GDP can help lay a foundation for ETH’s floor. Historically, when the ETH price detaches from Network GDP, it has served as a signal for undervaluation. The last time Network GDP and ETH price diverged at the level we see today was in April of ‘25 (when ETH dropped to $1.5k). ##### RWA’s On-chain Data: [The DeFi Report](https://dune.com/the_defi_report/the-ethereum-ecosystem?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=the-watch-list-ethereum-q2-update) *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*](https://rwa.xyz?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=the-watch-list-ethereum-q2-update)*.* - There are currently $7.6b of tokenized U.S. Treasuries on the Ethereum L1, up 4% in Q2, and 43% y/y. - Commodities make up 27% of RWAs onchain, down 18% in Q2, but up 174% y/y - Public equities now make up 4% of all RWAs onchain ($653m), up 86% in Q2, and 35404% y/y. In total, the Ethereum L1 now has over $15.7b in onchain RWAs, down 6% during the quarter but up 90% y/y. For reference, this is 375% higher than Solana. With that said, Solana's average daily trading volume in RWAs in Q2 was $42m. Ethereum was $28m. This highlights the importance of *velocity* — which drives more onchain economics than simply TVL. ##### Cost to Produce $1 of Real Economic Value Data: [The DeFi Report](https://dune.com/the_defi_report/the-ethereum-ecosystem?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=the-watch-list-ethereum-q2-update) *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 means 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 $10.75 in Q2. This was down 23% in Q2, but *up* 229% y/y. This indicates that *less* issuance (network inflation) was required to secure the network, relative to the real value produced during the quarter (network costs/overhead were lower in Q2, relative to network fees). ##### L2 Rent Paid to L1 Data: [The DeFi Report](https://dune.com/the_defi_report/the-ethereum-ecosystem?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=the-watch-list-ethereum-q2-update) *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 *$83k* to the L1 during Q2. This was down 39% over Q1, and 87% 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. Data: [The DeFi Report](https://dune.com/the_defi_report/the-ethereum-ecosystem?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=the-watch-list-ethereum-q2-update) 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. ##### Key Takeaway 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 ETH the asset accrue value as the network becomes 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 further later in the report. ##### ETH Staked Data: [The DeFi Report](https://dune.com/the_defi_report/the-ethereum-ecosystem?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=the-watch-list-ethereum-q2-update) As of 6.30.26, 40.3m ETH were staked on the network, representing 33% of the circulating supply. This represents a 3% decrease over Q1, but a 13% increase y/y. 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’ve seen in recent quarters, with the total onchain yield at all-time lows). # Stablecoins ##### Stablecoin Supply Data: [The DeFi Report](https://dune.com/the_defi_report/the-ethereum-ecosystem?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=the-watch-list-ethereum-q2-update) - Total Stablecoin supply on Ethereum L1 finished the quarter at $172.9b - This was down 4% in Q2, but up 26% y/y. - USDT (Tether) makes up 56.2% of the supply, up 1% in Q2 and 32% y/y. - USDC (Circle) makes up 29.4% of the supply, down 7% in Q2, but up 24% y/y. - USDS (Sky) makes up 4.4% of the supply, down 9% in Q2, but up 84% y/y. - DAI (Sky) makes up 2.7% of the supply, up 5% in Q2 and 28% y/y. *USDS is the updated version of DAI. - USDe (Ethena) makes up 2.6% of the supply, *down* 24% in Q2, and 16% y/y. - USDPY (Paypal) now has over $1.8b of supply, down 39% in Q2, but up 137% y/y ##### Key Takeaway One of the key catalysts for the decline in stablecoin supply in ‘22/’23 was the seizure of the SEN and Signet settlement networks run by Silvergate and Signature Bank by the FDIC (the assets were, we think, illegally disallowed in resale during “Operation Choke Point 2.0.” The FDIC Chairman later resigned in disgrace). Given that we now have new laws and government support for stablecoin adoption, we may not see a significant drop in supply this bear market. ##### Stablecoin Velocity Data: [The DeFi Report](https://dune.com/the_defi_report/the-ethereum-ecosystem?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=the-watch-list-ethereum-q2-update) *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 Q2 was 0.018, down 5% during the quarter, and 14% y/y. - This indicates that, on average, Ethereum L1 “turns over” roughly 1.8% of its stablecoin supply each day. - It’s our view that *velocity* matters more for onchain economics. Today, Ethereum has a materially lower velocity than its top competitor, Solana. # Token Economics ##### Network Dilution Rate Data: [The DeFi Report](https://dune.com/the_defi_report/the-ethereum-ecosystem?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=the-watch-list-ethereum-q2-update) *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 0.85% (annualized) in Q2, down 0.4% in the quarter, and up 40% y/y. - Despite lower onchain fees and higher issuance, network inflation (annualized) was still just 0.85% in Q2 (on par with BTC) ##### Key Takeaway 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 *(up 13% y/y). That means Ethereum's security is as robust as ever, with its supply side receiving the *least* compensation since The Merge. That’s interesting. Because Ethereum is demonstrating that it can: - Scale via L2s and grow the network effect (the Robinhood L2 just recently [opened to the public](https://finance.yahoo.com/markets/crypto/articles/robinhood-markets-launches-public-blockchain-135000798.html?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=the-watch-list-ethereum-q2-update)). - 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 in line with Bitcoin’s. We think this can bolster the story around ETH as a “store of value” (low inflation) that also pays a yield (2.68% in Q2) while securing hundreds of billions of value and producing $1.8b of qtrly network GDP in “risk-off” market conditions. # DeFi ##### DEX Volumes Data: [The DeFi Report](https://dune.com/the_defi_report/the-ethereum-ecosystem?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=the-watch-list-ethereum-q2-update) - L1 DEX volumes declined 26% in Q2, but were up 35% y/y. - Combined DEX volumes on L2s declined 22% in Q2, and 2% y/y. - Base volumes were down 7% in Q2 and made up for 81% of all L2 volumes in the quarter (up from 67% in Q1). - Combined, the L2s accounted for 46% of all DEX volumes on Ethereum in Q2, up from 45% in Q1. - In total, Ethereum L1 + the L2s combined for $250b of DEX volume in Q2 vs $171b for Solana. ##### Active Loans in DeFi Data: [The DeFi Report](https://dune.com/the_defi_report/the-ethereum-ecosystem?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=the-watch-list-ethereum-q2-update) - Active Loans on Ethereum L1 were down 26% in Q2, and 8% y/y (Aave was down 39% in Q2). Aave has $9.6b in active loans and a 59% market share on L1. - On L2s, active loans declined 9% during the quarter, but were up 26% y/y. Combined, the L2s make up 14% of all active loans in the Ethereum ecosystem. - Base has 68% of L2 active loans — dominated by Morpho (77% market share on Base), and Aave (19% market share on Base). - Morpho has separated itself in the bear market in terms of the durability of its active loans (down just 2% since October of ‘25). We believe this is due to Morpho offering more of a “structured credit” product that is less cyclical in nature when compared to Aave — which is primarily driven by “risk-on” conditions and the desire to “loop” and rehypothecate collateral to boost yields. # Layer 2 Ecosystem ##### L2 Fees Data: [The DeFi Report](https://dune.com/the_defi_report/the-ethereum-ecosystem?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=the-watch-list-ethereum-q2-update) *L2s include abstract, arbitrum, base, blast, bob, boba, ink, lighter, linea, mantle, optimism, scroll, unichain, worldchain, zkevm, zksync, and zora. * - L2 fees were down 29% in Q2, and 25% y/y. - In total, the L2s combined for $14.8m in fees in Q2, with Base accounting for 74% of the market. - The L2s combined to produce 28% of Ethereum L1 fees (base + priority fees) during the quarter — down from 52% in Q1. - Notably, Lighter, the leading Ethereum-based Perps DEX and L2, generated just $46k in L2 fees in Q2. But the app generated *over $9.1m* in user fees. This highlights how L2s are simply infrastructure for apps — with most of the economic activity generated by the apps coming from the app itself, rather than the infrastructure/settlement layer. ##### L2 Active Users Data: [The DeFi Report](https://dune.com/the_defi_report/the-ethereum-ecosystem?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=the-watch-list-ethereum-q2-update) - Average daily active addresses on L2s (combined) were down 10% in Q2, and 39% y/y. The trend has been in significant decline since last summer. - With that said, combined average daily active addresses on L2s still outpaced L1 by 34% in Q2. - Base accounts for roughly 58% of L2 active addresses, which were down 8% in Q2. ##### L2 Transactions Data: [The DeFi Report](https://dune.com/the_defi_report/the-ethereum-ecosystem?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=the-watch-list-ethereum-q2-update) - The L2s combined for 17.3m tx/day in Q2 (7.7x more than L1, down from 8.8x in Q1). - In total L2 transations were down 12% during the quarter, but up 44% y/y. - Base (down 10% in Q2) accounted for 52% of all L2 transactions during the quarter. # Layer 2 Stablecoins ##### L2 Stablecoin Supply Data: [The DeFi Report](https://dune.com/the_defi_report/the-ethereum-ecosystem?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=the-watch-list-ethereum-q2-update) - The L2s currently have $10.4b stablecoins, down 6% in Q2, but up 26% y/y. Combined, the L2s represent 6% of the stablecoin supply on Ethereum L1. - Base (up 3% in Q2) accounts for 46% of the supply. Arbitrum (down 2% in Q2) has 38%. # ETFs & Treasury Firms ##### ETF Net Flows Data: [The DeFi Report](https://dune.com/the_defi_report/the-ethereum-ecosystem?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=the-watch-list-ethereum-q2-update) - Net ETF flows were -$700m in Q2, a subtle improvement over the $991m of outflows in Q1. - Combined, the ETFs currently hold 4.4% of the total ETH supply (down from 4.7% in Q1). - Total ETH under AUM (in ETH) is currently down 23% from the peak established on October 8th last year. For reference, the Bitcoin ETF's AUM is currently down 11% from its peak last year. ##### ETH Held in Treasury Data: [The DeFi Report](https://dune.com/the_defi_report/the-ethereum-ecosystem?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=the-watch-list-ethereum-q2-update) - ETH held in the treasury hit another all-time high in Q2, increasing 13% during the quarter. 5.9% of the ETH supply is currently “held in treasury,” up from 5.5% last quarter. - Bitmine (BMNR) currently holds over 5.5 million ETH, up 17% during the quarter. This represents 68% of all ETH held in treasury, and 4.5% of the total ETH supply. For reference, MicroStrategy has 4.2% of the BTC supply. # “Fair Value” KPIs Data: The DeFi Report, Glassnode As shown in the table above, ETH is currently in the “deep value” range across the key high-level “cycle awareness” indicators we track. # Closing Thoughts Ethereum the Network remains the largest L1 across stablecoins, RWA’s, active loans, and users. It’s clear that Ethereum the Network is not going anywhere. But what is unclear is how ETH, as an asset, will accrue value going forward. We’re now 5 years into the launches of Optimism and Arbitrum. And there is zero evidence that L2s are accretive to ETH holders. It’s our view that tokenholders are (and will be moving forward) increasingly attuned to this, given projects with superior token value capture. Does the Ethereum Foundation care about this? Or should ETH position itself as an SOV with inflation similar to BTC, but with utility and yield? Will the market pay attention? Or has it already been determined that ETH is “digital silver” when compared to “digital gold?” These are the key questions for us moving forward. Not whether the Ethereum Network will onboard lots of stablecoins, RWAs, and L2s. We think that’s likely to happen, though competition is increasing. We’ll have more next week, with a deep dive into the Solana Ecosystem and our views on the superior risk/reward play moving forward. If you’d like to get an inside look at how we’re building our portfolio in the bear market (allocations, our favorite assets, and how we think about apps vs infrastructure) + receive alerts when we make changes, you can sign up for TDR Pro and get one month free [here](https://thedefireport.io/friends?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=the-watch-list-ethereum-q2-update). If you’re an existing member and would like to lock in for the next year at a 20% discount ($16.67/month), you can do so [here](https://thedefireport.io/pro20?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=the-watch-list-ethereum-q2-update). ##### Related - [Ethereum Ecosystem Dashboard](https://dune.com/the_defi_report/the-ethereum-ecosystem?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=the-watch-list-ethereum-q2-update) - [Solana Ecosystem Dashboard](https://dune.com/the_defi_report/the-solana-ecosystem?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=the-watch-list-ethereum-q2-update) 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.*