This text is from: Pine Analytics

Translation｜Odaily Planet Daily (@OdailyChina); Translator｜ Ethan (@ethanzhang_web 3)

Editor's note: In the past few years, the crypto market at one point believed that the revenue from transaction fees of L1 public chains was the core cash flow supporting token valuations. However, this research, using on-chain data, reveals a different fact: whether it is the congestion periods of Bitcoin, the DeFi and NFT peaks of Ethereum, or the memecoin frenzy of Solana, the prosperity of all transaction fees will eventually be compressed by innovation. The explosion of demand brings revenue peaks, and these peaks stimulate the emergence of alternatives, which systematically squeeze out profits. The compression of L1 value capture is not a cyclical phenomenon, but a structural result of open networks.

The market in 2026 no longer simply uses "transaction fee capture" to price L1. The price drives of ETH and SOL are transitioning from L1 fee logic to staking yields, ETF capital flows, RWA narratives, protocol upgrade expectations, and macro liquidity environments. The compression trend continues, but the pricing anchors have shifted. What really deserves consideration is not just whether transaction fees will continue to decline, but: When the market no longer prices L1 based on "on-chain profits", but instead uses "asset narratives" and "structural capital flows", is this new logic also fragile; and, when the narrative tide recedes, what kind of fundamental support will the prices return to.

L1 blockchains find it very difficult to sustainably and stably earn transaction fees in the scaling development phase. Every main source of revenue they have found—from transaction fees to MEV—will eventually be gradually dissipated by their users through various arbitrage methods. This is not due to any single chain not performing well, but rather an inherent characteristic of open, permissionless networks: as soon as L1's revenue from transaction fees reaches a certain scale, the parties involved in transactions will devise new methods to compress or even eliminate this income.

Bitcoin, Ethereum, and Solana are among the most successful networks in the crypto space. Interestingly, despite processing tens of billions of dollars in value movement daily, these three have followed almost the same path: transaction fee revenues surged suddenly in the short term, attracting everyone's attention, but shortly after, they were taken over by L2 (layer two networks), private order flows, MEV-aware routing tools, or new applications in the application layer, which snatched business and divided revenues. This situation appears repeatedly in every fee model in the crypto industry, every round of MEV fluctuations, and every scaling solution, with no signs of slowing down.

This article believes that the compression of L1 transaction fees is a long-term and accelerating issue. This article will outline the specific innovative practices that can compress profits during different phases, and explore what this means for those who still account "sustainable earning through transaction fees" into the valuations of L1 tokens.

Bitcoin

Bitcoin’s transaction fees predominantly rely on congestion during BTC transfers to earn revenue—when everyone is rushing to make transfers, the fees naturally increase. Additionally, because Bitcoin lacks smart contracts, there is almost no MEV within the network. The key issue is: each time BTC prices rise and drive fees to spike, the extent of fee increases has been significantly weaker compared to the scale of economic activity at that time.

In 2017, BTC rose from $4,000 to $20,000. The average fee surged from less than $0.40 to over $50. By the peak on December 22, transaction fees accounted for 78% of miners’ block rewards: just the fees amounted to about 7,268 BTC, nearly four times the block subsidy. But within just three months, fees plummeted by 97%, reverting to their original state.

The market reacts very quickly, and countermeasures soon appeared. At the beginning of 2018, SegWit transactions made up only 9%, but by mid-year they rose to 36%; although these transactions accounted for over one-third of total transaction volume, they only contributed 16% of the fees. Exchanges began to adopt batch processing, merging hundreds of withdrawals into one transaction, saving significant fees. These factors combined led to a 98% fee reduction within six months. Additionally, the Lightning Network was officially launched in early 2018 to specifically address the fee issue for small transactions; other chains with Wrapped BTC also allow users to hold BTC exposure without needing to operate strictly on the Bitcoin main chain.

By the price peak in 2021, although Bitcoin prices surged to $64,000, monthly fee revenues were actually lower than in 2017. At that time, the number of on-chain transactions was fewer, but the value of transfers in USD was 2.6 times higher than in 2017—simply put, network transfers increased, but the fees earned did not keep up and were even lower.

This current cycle further illustrates that this trend cannot be stopped. BTC rose from $25,000 to over $100,000, approximately tripling (the original text mentioned quadrupling, adjusted slightly based on actual price ranges without altering the original meaning), but standard transaction fees have not skyrocketed like in previous cycles. By the end of 2025, daily transaction fees are only about $300,000, less than 1% of miners’ total revenue. In 2024, Bitcoin's annual transaction fees amounted to $922 million, but most came from the temporary hype of Ordinals and Runes, not from the stable revenue brought by traditional BTC transfers. By mid-2025, the spot Bitcoin ETF held over 1.29 million BTC, accounting for approximately 6% of total supply, providing large-scale BTC exposure demand without generating any on-chain transaction fees. The on-chain interactions required to acquire Bitcoin assets have largely been engineered out.

Ordinals and Runes pushed the proportion of fees to miners’ income to 50% back in April 2024, but as related tools became more mature, by mid-2025, this proportion dropped back below 1%. This type of short-term spike seems more akin to incidental gains brought by MEV, rather than stable income generated by congestion, and more so originates from an immature tool system surrounding new asset types rather than real demand for BTC settlement.

This pattern is quite evident: as long as Bitcoin earns noticeable and substantial revenue from transaction fees, faster and cheaper alternatives will emerge in the ecosystem. L1 can only capture a short-term peak in transaction fees from any demand, which will then be gradually consumed away by continued innovation.

Ethereum

Ethereum’s fee story is even more dramatic. Because this chain has truly captured enormous value, only to watch it be systematically dismantled.

In mid-2020, the “DeFi Summer” made Ethereum the center of the new financial system. Uniswap's monthly trading volume soared from $169 million in April to $15 billion in September. TVL increased from less than $1 billion to $15 billion by year-end. In September 2020, Ethereum miners’ fee income reached a record of $166 million, six times that of Bitcoin miners. This was also the first time a smart contract platform had earned sustainable and substantial income from real economic activities.

In 2021, NFTs surged on top of DeFi. Average transaction fees reached a peak of $53. Quarterly fee revenue rose from $231 million in Q4 2020 to $4.3 billion in Q4 2021, an increase of 1,777%. The EIP-1559 implemented in August 2021 introduced a base fee burn mechanism, permanently removing a portion of fees from the market. At that time, it seemed that Ethereum had truly solved the core issue of L1 not being able to earn money.

However, in reality, these fees were essentially “congestion fees”: users were paying $20 to $50 not because the transactions themselves were worth that much, but because everyone was crowding onto the chain, exceeding Ethereum’s processing capacity of about 15 transactions per second (15 TPS). This inherent shortcoming also left enough space for cheaper alternatives.

Other L1s like Solana, Avalanche, and BNB Chain can provide transaction services for just a few cents; Ethereum’s L2 Rollups, such as Arbitrum and Optimism, have also snatched a considerable amount of business—they process transactions on their networks and then return the compressed batches to settle on Ethereum’s mainnet, proving to be faster and cheaper.

Subsequently, Ethereum undertook a "self-diminishing" act. The Dencun upgrade on March 13, 2024, introduced Blob transactions (EIP-4844), providing cheaper data publishing paths for L2s. Prior to this, L2s used calldata costing about $1,000 per megabyte. After the upgrade, Arbitrum's fee per transaction fell from $0.37 to $0.012; Optimism from $0.32 to $0.009. The median fee of Blobs dropped to nearly zero. Ethereum intended to retain users this way, but unexpectedly weakened its last significant source of fee revenue.

The data provides a more intuitive view. In 2024, L2s generated $277 million in revenue, but only paid $113 million back to Ethereum. By 2025, L2 income dropped to $129 million, with only about $10 million flowing back to Ethereum, which is less than 10% of L2 revenue, a year-on-year decline of over 90%. Once averaging over $100 million a month, L1 fee revenues dropped below $15 million in Q4 2025. This chain, which generated $4.3 billion in a single quarter, saw its revenue scale shrink by approximately 95% in just four years.

The reduction in Bitcoin’s income is due to users being able to obtain BTC without relying on the chain; while Ethereum’s income reduction occurred in two waves: the first wave saw other alternative networks siphoning away users unwilling to pay high congestion fees; the second wave came from Ethereum’s own scaling plans, pushing the costs of data transmission for L2s to nearly zero, making it impossible for Ethereum to earn from settlements anymore. Regardless of the reason, both were caused by tools that L1 either built or allowed to arise that stole its income.

Solana

Solana’s profit logic is entirely different from that of Bitcoin and Ethereum—it hardly relies on congestion to earn fees. The base fee is fixed at 0.000005 SOL per signature, which is practically negligible. About 95% of fee income comes from priority fees and MEV tips paid through the Jito block engine. In Q1 2025, Solana’s "real economic value" (REV) reached $816 million, of which 55% came from MEV tips. In 2024, validators are expected to earn around $1.2 billion, with operating costs only about $70 million, allowing for substantial profit margins.

The key to Solana’s fee explosion lies in memecoin trading. Pump.fun, launched in January 2024, generated over $600 million in protocol income in less than 18 months, contributing as much as 99% of memecoin issuance at peak. Daily trading volumes on DEX reached $38 billion at one point. In January 2025, the TRUMP token launch caused one-day priority fees to soar to 122,000 SOL, with MEV tips reaching 98,120 SOL. In 2024, the top 1% of memecoin traders contributed $1.358 billion in fees, accounting for nearly 80% of total memecoin fees. Almost all were driven by MEV.

Currently, two types of innovations are compressing this income.

The first type is proprietary AMMs. Protocols like HumidiFi, SolFi, Tessera, ZeroFi, and GoonFi adopt private vaults managed by professional market makers, quoting internally and updating prices multiple times per second. Since liquidity is not publicly disclosed, MEV bots cannot perform sandwich trading. More crucially, proprietary AMMs actively choose trading counterparts through aggregators like Jupiter instead of passively exposing themselves to any participants willing to pay MEV tips as public pools do. By maintaining pricing secrecy and continuous updates, they eliminate the "stale quotes" issue—this is precisely where Solana’s substantial MEV revenue originates. HumidiFi processed nearly $100 billion in transaction volume within the first five months post-launch. Currently, proprietary AMMs account for over 50% of Solana’s DEX trading volume, with even higher percentages in high liquidity trading pairs such as SOL/USDC.

The second type is Hyperliquid, which has directly migrated the most profitable spot trading activities out of Solana. Utilizing its own developed HyperCore technology, it created a native bridging tool, allowing tokens on Solana to be stored on Hyperliquid, withdrawn, and traded on its spot order book. When Pump.fun launched the PUMP token in July 2025, everyone was pricing it on Hyperliquid instead of Solana’s DEX, utilizing HyperCore for cross-chain bridging. Previously, Hyperliquid had already tested this model on tokens like SOL and FARTCOIN—when prices first emerged, the period with the greatest spreads and most volatility, which were easiest for MEV profits, has slowly moved off Solana.

These two methods are compressing Solana’s revenue from two directions: proprietary AMMs reduce MEV trading remaining on Solana, while Hyperliquid removes the most lucrative trading to off-chain. By Q2 2025, Solana’s REV dropped 54% from the previous quarter, leaving only $272 million; daily MEV tips fell over 90% from the January peak, averaging less than 10,000 SOL a day.

The pattern here is similar to the first two chains, just with a different way of earning: Solana’s fees essentially came from short-term profits earned through MEV when new trading methods emerged in a relatively chaotic phase. As proprietary AMMs improved trading efficiency and Hyperliquid absorbed high-value orders, this profit quickly shrank. L1 may earn a significant amount during market frenzies, but the market will always quickly devise new methods to prevent this short-term revenue from continuing indefinitely.

Impact on Token Prices

The patterns presented by the three chains above are not merely retrospective descriptions; to some extent, they are also forward-looking. Each L1 fee mechanism follows the same trajectory: new demand brings revenue peaks, peaks attract innovation, innovation compresses profits, and once this compression occurs, it is difficult to reverse. Following this logic, we can make a rough judgment about the future of four tokens.

Ethereum: Continuous Fee "Collapse"

Ethereum's fees have yet to find a clear bottom. In 2024, L2 paid Ethereum’s mainnet $113 million; by 2025, it plummeted to about $10 million, a drop of more than 90%. With each new L2, the demand for Ethereum’s mainnet block space decreases, and Ethereum’s own scaling plans continue to reduce the costs of data transmission. EIP-4844 is not a one-time repricing but the starting point of a structural shift—Ethereum actively subsidizing routing activities to infrastructure tools outside its fee market. Currently, monthly L1 fee revenues have dropped below $15 million, while the forces driving this decline continue to strengthen. If Ethereum cannot create new sources of native L1 demand, the token price will continue to reflect this compression trend. ETH is increasingly resembling a low-yield infrastructure asset rather than the previously high-growth smart contract platform.

Solana: Record Activity, Uncertain Price

Solana is almost certain to achieve record levels of on-chain activity in the next cycle—it has a sufficiently deep ecosystem, enough developers, and mature infrastructure; however, its fee revenue may not increase accordingly. The memecoin frenzy from late 2024 to early 2025 is equivalent to Bitcoin's "SegWit moment": a spike in fees driven by new demand, quickly compressed by innovation.

Currently, proprietary AMMs process over 50% of DEX trading volume, significantly reducing MEV. Hyperliquid's HyperCore technology is moving the most lucrative pricing segments off-chain. Even if on-chain activity is 2 to 3 times more than in January 2025, its fee system has matured to the point where it is challenging to convert this activity into corresponding validator income. As daily MEV tips have decreased over 90% from the peak, on-chain activity remains healthy. Without sufficient fee revenues to support valuations, even if Solana's usage hits record highs, it may struggle to break past historical highs in the next cycle.

Hyperliquid: Prosperity and Compression Phases

Hyperliquid is the case to watch because it represents the next stage of this “earning-compression” cycle, and the market has not yet realized how this cycle's latter phase will develop.

Hyperliquid is now the leading decentralized exchange for trading perpetual contracts on traditional financial assets. During the recent silver volatility peak, the market deployed by HIP-3 captured about 2% of the global silver trading volume, with median spreads for retail-sized trades even better than COMEX. In certain periods, traditional financial instruments accounted for about 30% of the platform's trading volume, with daily nominal trading volumes exceeding $5 billion. In 2025, platform revenue reached about $600 million, of which 97% was used for HYPE buybacks and burns.

We expect Hyperliquid to continue dominating the trading of perpetual contracts for TradFi assets. Its products offer real advantages: commodities and stocks can be traded 7x24; operations can occur even when traditional markets are closed; through the HIP-3 proposal, new trading markets can be added without approval; it can offer up to 20x leverage on assets requiring an 18% initial margin at CME. In the next bull market, if trading volumes and fees rise consistently, the HYPE token might experience a repricing similar to Solana’s rebound from the bear market lows. If the trading volume of traditional financial assets continues to expand, HYPE will likely follow a similar path. Investors are likely to make projections about its future earnings based on high revenue in a particular quarter.

But Hyperliquid’s fee model has planted the seeds for compression. The platform charges a nominal fee of 4.5 basis points to the taker and provides discounts of up to 40% based on trading volume and staking. This is fundamentally different from traditional financial derivative pricing logic. At CME, the transaction cost for a single E-mini S&P 500 contract is about $1.33 per side, not related to the nominal value of contracts over $275,000, equating to less than 0.001 basis points. For a nominal position of $10 million: CME's fees would be about $2.5, while Hyperliquid’s would be $4,500, a difference of about 1,800 times.

This price discrepancy exists because current Hyperliquid users primarily consist of retail and crypto-native groups. However, TradFi perpetual products will bring TradFi expectations. As trading volumes expand and institutional participants enter, the pressure to align with CME-style economic models will significantly increase. Hyperliquid’s own fee structure has signaled its direction: the HIP-3 growth model will cut fees for new markets by over 90%, with a minimum as low as 0.0045%; top traders could even achieve rates below 0.0015%. The protocol is actively pushing for fee compression. Competitive perpetual DEXs and future traditional exchanges providing on-chain products will further accelerate this process. There are ultimately two outcomes: either Hyperliquid loses trading volume because of high fees; or it changes its rate structure to a fixed fee model like CME. In either case, the long-term high revenues currently predicted by investors are likely to be unattainable, and the HYPE token price may quickly adjust downward.

Bitcoin: Price Must Rise Before Fees

Among the four assets, Bitcoin is the most unique because its fees and token price have an inverse logical relationship. For Ethereum, Solana, and Hyperliquid, the logic is: fees generate income, income supports valuations, fees are compressed, and token prices will also drop; but Bitcoin operates differently—the logic is reversed. Miners must rely on continuously rising prices to survive after each block reward halving—because fee revenue has been proven insufficient to cover the gap from reduced block subsidies.

The 2024 halving will reduce the block reward from 6.25 BTC to 3.125 BTC, cutting the daily issuance from 900 BTC to 450 BTC. By the end of 2025, daily average transaction fees are about $300,000, accounting for less than 1% of miners’ total revenues. Although Bitcoin’s annual transaction fees in 2024 reached $922 million, most were derived from ephemeral peaks of Ordinals and Runes, rather than sustainable natural fee demand. Currently, the contribution of fees is almost negligible, and miners’ income heavily relies on block subsidies, which halve every four years and are priced in BTC. The only way for miners to remain profitable during halving cycles is for Bitcoin's USD price to roughly double in a similar timeframe, thus offsetting the 50% reduction in income calculated in BTC terms. Historically, this condition has been met. However, this foundation is extremely fragile. The security budget of the chain is not funded by usage but rather by continuously rising asset prices. Once, during a halving event, the price does not rise, mining will become unprofitable, hash power will decrease, network security will be affected, and it may even fall into a vicious cycle of "price drop → hash rate drop → security decline → renewed price drop."

This also makes Bitcoin’s "sustainability" appear weaker than it seems. The ability for the price to support network security with almost no fees is a mechanism that is hard for other chains to replicate, as Bitcoin is primarily a monetary asset, not a smart contract platform.

People buy BTC to hold it, not for its block space. This gives Bitcoin an advantage that the other three chains do not have: the demand for currency drives the price up, allowing network security to be maintained even with low transaction fees.

However, this also means that Bitcoin's long-term security relies entirely on one assumption—that the price continues to rise, which is uncertain. Whether this chain can remain a secure settlement layer does not depend on whether it can produce applications that generate transaction fees, but rather on whether it can continuously maintain the narrative and market environment that encourages people to buy BTC. So far, this model is still operating normally, but as the block subsidy decreases from 3.125 BTC to 1.5625 BTC, 0.78125 BTC, the future three to four halving events, whether it can rely on price increases to fill the gap is one of the most critical unknowns in the crypto space.

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