L1 value capture shrinks significantly, ETH, SOL, HYPE struggle to reach previous price peaks

This article is from: Pine Analytics

Compiled by Odaily Planet Daily (@OdailyChina); Translator: Ethan (@ethanzhang_web3)

Editor’s note: In recent years, the crypto market once believed that the fee income from Layer 1 (L1) public blockchains was the core cash flow supporting token valuations. However, this study uses on-chain data to reveal a different reality: whether it’s Bitcoin’s congestion cycles, Ethereum’s DeFi and NFT peaks, or Solana’s memecoin frenzy, all fee booms are ultimately compressed by innovation. Demand surges lead to revenue peaks, which then stimulate alternative solutions, and profits are systematically squeezed out. The compression of value capture by L1s is not just cyclical but a structural result of open networks.

By 2026, the market no longer solely prices L1s based on “fee capture.” The driving factors for ETH and SOL prices are shifting from fee logic to staking yields, ETF capital flows, RWA narratives, protocol upgrade expectations, and macro liquidity conditions. The compression trend persists, but the pricing anchors have shifted. What’s truly worth pondering is not just whether fees will continue to decline, but: when the market stops pricing L1s based on “on-chain profits” and instead relies on “asset narratives” and “structural capital flows,” will this new logic also be fragile? And when narratives fade, what fundamentals will support prices?

During the scaling phase, L1 blockchains find it difficult to continuously and stably earn fee revenue. Every major income source they’ve found—ranging from transaction fees to MEV—eventually gets eroded by their users through arbitrage. This isn’t due to poor design of any particular chain but is an inherent feature of open, permissionless networks: as long as L1s earn enough from fees, participants will find ways to compress or eliminate that revenue.

Bitcoin, Ethereum, and Solana are among the most successful networks in crypto. Interestingly, despite handling billions of dollars in value daily, they follow nearly identical paths: short-term fee surges attract attention, but soon are overtaken by L2s, private order flows, MEV-aware routing tools, or new layer-application innovations, which divert revenue away. This pattern repeats across all fee models, MEV cycles, and scaling solutions, with no signs of slowing.

This article argues that the compression of L1 fee revenue is a long-term, ongoing process. It reviews specific innovations at different stages that compress profits and discusses what this means for those tokens still “valued based on their ability to generate ongoing fee income”—the so-called “fee-dependent” tokens.

Bitcoin

Bitcoin’s fee revenue almost entirely depends on congestion during on-chain BTC transfers—everyone crowded into transfers, pushing fees up. Since Bitcoin has no smart contracts, MEV is virtually nonexistent. The key issue is: whenever BTC’s price surges, driving fees higher, the increase is weaker relative to the scale of economic activity at that time compared to previous cycles.

In 2017, BTC rose from $4,000 to $20,000. Average fees surged from below $0.40 to over $50. At the peak on December 22, fees accounted for 78% of miners’ block rewards: about 7,268 BTC in fees alone, nearly four times the block subsidy. But within just three months, fees plummeted 97%, reverting to previous levels.

Markets responded quickly with solutions. Early 2018, SegWit transactions accounted for only 9%, rising to 36% by mid-year; although these transactions made up over a third of total volume, they contributed only 16% of fees. Exchanges adopted batch processing, combining hundreds of withdrawals into single transactions, saving fees. These factors together caused fees to drop 98% within six months. Additionally, the Lightning Network launched in early 2018, addressing small-value transaction fees; wrapped BTC on other chains also allowed users to hold BTC exposure without on-chain transactions.

By 2021, BTC’s price peaked at $64,000, but monthly fee income was lower than in 2017. Transaction counts on-chain had decreased, yet dollar-denominated transfer volume was 2.6 times higher than in 2017—meaning, more transfers but less fee income, or even less.

This cycle’s current phase further confirms that this trend is unstoppable. BTC rose from $25,000 to over $100,000—about a 3x increase (the original text says 4x, but adjusting for actual price ranges without changing intent)—yet standard transfer fees no longer surge like in previous cycles. By late 2025, daily transaction fees are expected to be around $300,000—less than 1% of total miner revenue. In 2024, total BTC fees will reach $922 million, mostly driven by short-term hype around Ordinals and Runes, not stable on-chain transfer demand. By mid-2025, spot Bitcoin ETFs hold over 1.29 million BTC (~6% of total supply), creating large-scale BTC exposure demand without generating on-chain fees. On-chain interactions needed to acquire Bitcoin assets have largely been engineered out.

Ordinals and Runes once pushed fee share of miner revenue to 50% in April 2024, but as tools matured, this share fell back below 1% by mid-2025. Such short-term spikes resemble MEV-driven incidental gains rather than stable income from congestion, mainly stemming from immature tooling around new asset types rather than genuine settlement demand.

The clear pattern is: as long as Bitcoin earns enough from fees, alternative cheaper methods will emerge. L1s can only capture short-term fee peaks from each demand wave; afterward, profits are eroded by continuous innovation.

Ethereum

Ethereum’s fee story is even more dramatic, having captured massive value before being systematically dismantled.

Mid-2020’s “DeFi Summer” made Ethereum the hub of new finance. Uniswap’s monthly trading volume soared from $169 million in April to $15 billion in September. TVL grew from under $1 billion to $150 billion by year-end. In September 2020, Ethereum miners’ fee revenue hit a record $166 million—six times that of Bitcoin miners. This was the first time a smart contract platform earned sustained, substantial revenue from real economic activity.

In 2021, NFTs layered on top of DeFi. Average transaction fees peaked at $53. Quarterly fee income rose from $231 million in Q4 2020 to $4.3 billion in Q4 2021—a 1,777% increase. The August 2021 EIP-1559 introduced a base fee burn mechanism, removing part of fees from the market permanently. At that time, Ethereum seemed to have solved the core problem of fee capture.

But in reality, these fees were still “congestion fees”: users paid $20–$50 in fees not because transactions were worth that much, but because the network was congested beyond its ~15 TPS capacity. This inherent bottleneck left room for cheaper alternatives.

Networks like Solana, Avalanche, BNB Chain only need a few cents to provide transaction services; Layer 2 rollups like Arbitrum and Optimism took a significant share—processing transactions on their own networks and batching them back to Ethereum for settlement, offering faster and cheaper options.

Ethereum then undertook a “self-weakening” upgrade. The Dencun upgrade on March 13, 2024, introduced Blob transactions (EIP-4844), providing cheaper data posting paths for L2s. Before, L2s used calldata costing about $1,000 per MB; after, Arbitrum’s single transaction fees dropped from $0.37 to $0.012, Optimism from $0.32 to $0.009. Median Blob fees nearly approached zero. Ethereum aimed to retain users with this, but instead, it weakened its last major fee revenue source.

Data shows: in 2024, L2s generated $277 million, paying only $113 million to Ethereum. By 2025, L2 revenue drops to $129 million, with only about $10 million flowing back to Ethereum—less than 10% of L2 income, down over 90% YoY. Once monthly L1 fee income exceeded $100 million, by Q4 2025, it fell below $15 million. A chain that once generated $4.3 billion in a quarter now sees revenue shrink by about 95% in four years.

Bitcoin’s revenue compression is because users can obtain BTC without on-chain fees; Ethereum’s revenue compression happened in two waves: first, alternative networks siphoned off users avoiding high congestion fees; second, Ethereum’s own scaling plans reduced data posting costs to nearly zero, eliminating its own fee income. Both are results of Ethereum’s own development or neglect of tools that compete for its revenue.

Solana

Solana’s revenue model is entirely different from Bitcoin and Ethereum—it almost doesn’t rely on congestion fees. Basic fees are fixed at 0.000005 SOL per signature, negligible. About 95% of fee income comes from priority fees and MEV tips paid via Jito block engine. In Q1 2025, Solana’s “Real Economic Value” (REV) hit $816 million, with 55% from MEV tips. In 2024, validators earned roughly $1.2 billion, with operating costs around $70 million, leaving significant profit margins.

The key driver of Solana’s fee explosion was memecoin trading. Launched in January 2024, Pump.fun earned over $600 million in protocol revenue in less than 18 months, with up to 99% of memecoin issuance during peak periods. DEX daily volume once hit $38 billion. In January 2025, the TRUMP token’s launch pushed single-day priority fees to 122,000 SOL, with MEV tips reaching 98,120 SOL. In 2024, the top 1% memecoin traders paid $1.358 billion in fees—almost 80% of total memecoin fees—almost all driven by MEV.

Today, two types of innovation are compressing this income.

First, proprietary AMMs. Protocols like HumidiFi, SolFi, Tessera, ZeroFi, GoonFi use private vaults managed by professional market makers, quoting internally and updating prices multiple times per second. Since liquidity isn’t public, MEV bots can’t front-run. More importantly, these AMMs route orders via aggregators like Jupiter, actively choosing counterparties rather than exposing to any MEV-paying participant. By keeping prices private and continuously updating, they eliminate “stale quotes”—a major source of MEV revenue on Solana. HumidiFi processed nearly $100 billion in trades in its first five months. Today, proprietary AMMs account for over 50% of Solana DEX volume, especially in high-liquidity pairs like SOL/USDC.

Second, Hyperliquid moves the most profitable spot trading activity off-chain. Using its proprietary HyperCore bridging tech, it allows tokens on Solana to be stored and traded on its platform, effectively relocating high-value orders outside the chain. When Pump.fun launched PUMP tokens in July 2025, prices were set on Hyperliquid, not on Solana DEXes, then bridged back via HyperCore. This pattern had already been tested on SOL and tokens like FARTCOIN—during the most volatile, arbitrage-rich phases, trading moved off-chain.

These two approaches reduce Solana’s revenue: proprietary AMMs cut down on MEV trades on-chain; Hyperliquid shifts high-value spot trades off-chain. By Q2 2025, Solana’s REV fell 54% from the previous quarter to $272 million; daily MEV tips dropped over 90% from January peak, to less than 10,000 SOL per day.

The pattern is similar to Bitcoin and Ethereum, just with different methods: Solana’s fees are primarily short-term profits from new, somewhat chaotic trading innovations. Once proprietary AMMs optimize trading efficiency and Hyperliquid moves high-value orders off-chain, these profits shrink rapidly. L1s can make a big splash during market hype, but new solutions always emerge to prevent sustained short-term gains.

Impact on Token Prices

The patterns observed in these three chains are not just retrospective—they are somewhat predictive. Each L1 fee mechanism follows a similar trajectory: new demand peaks, attracts innovation, which then compresses profits, and this compression is hard to reverse. Following this logic, we can make broad judgments about the future of four tokens.

Ethereum: Ongoing Fee “Collapse”

Ethereum’s fees have yet to find a clear bottom. In 2024, L2s paid about $113 million to the mainnet; by 2025, this will plummet over 90% to roughly $10 million. Each new L2 reduces demand for mainnet block space, and Ethereum’s scaling plans continue to lower data posting costs. EIP-4844 is not a one-time re-pricing but a structural shift—Ethereum actively subsidizes activity outside its fee market infrastructure. Currently, monthly L1 fee income has fallen below $15 million, and downward forces are strengthening. If Ethereum cannot create new native demand sources, token prices will continue to reflect this compression. ETH is increasingly resembling a low-yield infrastructure asset rather than a high-growth smart contract platform.

Solana: High Activity, Uncertain Price

Solana will likely hit new on-chain activity highs in the next cycle—its ecosystem is deep, developers numerous, infrastructure mature—but fee income may not rise proportionally. The memecoin frenzy from late 2024 to early 2025 is akin to Bitcoin’s “SegWit moment”: a demand-driven fee peak that is quickly compressed by innovation.

Currently, proprietary AMMs handle over 50% of DEX volume, significantly reducing MEV. Hyperliquid’s HyperCore moves the most profitable spot trading off-chain. Even if on-chain activity doubles or triples, its fee system is mature enough that this activity won’t translate into higher validator income. Daily MEV tips are down over 90% from peak, but activity remains healthy. Without sufficient fee income, even if Solana’s usage hits new highs, SOL may struggle to break previous price records in the next cycle.

Hyperliquid: Boom and Compression

Hyperliquid is the most notable case, representing the next phase of the “profit-then-compression” cycle, which the market has yet to fully grasp.

It is now a leading decentralized exchange for perpetual contracts on traditional financial assets. During recent high-volatility periods, HIP-3 protocol captured about 2% of global silver trading volume, with median spreads better than COMEX. At times, traditional finance instruments accounted for about 30% of platform volume, with daily nominal trading exceeding $5 billion. In 2025, platform revenue is projected around $600 million, with 97% used for HYPE buybacks and burns.

We expect Hyperliquid to continue leading in TradFi perpetuals. Its products have advantages: 24/7 trading on commodities and stocks; new markets can be added without approval via HIP-3; and it offers up to 20x leverage on assets requiring 18% initial margin (like CME assets). If trading volume and fees keep rising, HYPE tokens could reprice similarly to Solana’s rebound from bear lows. Continued growth in traditional asset trading volume would likely push HYPE’s valuation higher. Investors might project sustained high earnings based on recent quarters.

But Hyperliquid’s fee model has planted the seeds of compression. It charges a nominal 4.5 basis points per order, with discounts up to 40% based on volume and staking—very different from CME’s fee structure. For example, CME charges about $1.33 per E-mini S&P 500 contract, unrelated to the contract’s $275,000+ nominal value, translating to less than 0.001 basis points. For a $10 million position, CME fees are about $2.50, whereas Hyperliquid charges $4,500—an 1,800x difference.

This gap exists because Hyperliquid’s current users are mainly retail and crypto-native. But traditional finance perpetuals will bring expectations of CME-like economics. As trading volume and institutional participation grow, pressure to align with CME’s fee structure will intensify. Hyperliquid’s fee structure already hints at this: HIP-3’s growth model reduces new market maker fees by over 90%, down to as low as 0.00045%; top traders pay even less—below 0.00015%. The protocol is actively pushing for fee compression. Competition from other decentralized perpetual DEXs and future on-chain products from traditional venues will accelerate this trend. Ultimately, there are only two outcomes: either Hyperliquid’s fees become too high, losing volume; or it adopts a fixed fee model similar to CME. Either way, the long-term high revenue expectations are unlikely, and HYPE’s price could decline sharply.

Bitcoin: Price Must Lead Fees

Among these four assets, Bitcoin is the most unique because its fee-to-price relationship is inverted. For Ethereum, Solana, and Hyperliquid, the logic is: fees generate revenue, revenue supports valuation, fees are squeezed, and prices fall. But Bitcoin’s logic is different: it relies on the price rising to sustain security, because fee revenue alone can’t fill the block subsidy gap after halvings.

In 2024, the block reward halves from 6.25 BTC to 3.125 BTC, with daily issuance dropping from 900 to 450 BTC. By late 2025, daily fees are expected to be around $300,000—less than 1% of total miner revenue. Although total fees in 2024 will reach $922 million, most of that is from episodic peaks driven by Ordinals and Runes, not sustainable natural demand. Current fees are negligible; miner revenue is almost entirely from block subsidies, which halve every four years and are denominated in BTC. Miners can only stay profitable through halving cycles if Bitcoin’s USD price roughly doubles during that period, offsetting the 50% decline in BTC-denominated revenue. Historically, this has been true—but it’s a fragile foundation. The network’s security budget isn’t funded by usage but by asset prices rising. If, at some halving, the price doesn’t increase, mining becomes unprofitable, hash rate declines, security suffers, and a vicious cycle of “price drops → hash rate drops → security decline → further price drops” can ensue.

This makes Bitcoin’s “sustainability” more fragile. The network’s security depends on the assumption that the price will keep rising—something no one can guarantee. Whether Bitcoin can remain a secure settlement layer depends not on creating profitable on-chain applications but on maintaining a narrative and market environment that keeps people willing to buy BTC. So far, this model is functioning, but as block subsidies further halve—down to 1.5625, then 0.78125 BTC in subsequent halvings—the question remains: can the price keep rising enough to fill the gap? This is one of the most critical unknowns in crypto.