Ethereum blobs entered price discovery for the first time since August’s Dencun upgrade

The Ethereum blob market had a brief period where blobs became paid, forcing L2 chains to compete for space. The blob market aims for a fine balance where it burns ETH and generates fees for the L1 chain while being accessible to L2 platforms. 

The Ethereum blob market became saturated, meaning L2 chains had to pay competitive fees to be included in blobs. The latest activity led to the biggest expansion of blob prices and saturation since the Ethereum Dencun upgrade. 

The latest upgrade led to months where blob users posted their data for free, never reaching the target of paid blobs. For months, most blobs were also empty, while some L2s only posted at intermittent schedules. 

Even during the latest blob spike, protocols quickly adjusted their blob posting, returning to a no-fee market. In total, the blob price spike burned 5.71 ETH in gas fees, not making a serious dent on the supply. 

However, the expectation for Ethereum is to have a competitive L1 blob market. During peak times before the Dencun upgrade, blobs were among the top ETH burners among smart contracts. The recent spike in blobs happened during a period of accelerated ETH burns when inflation slid back to 0.37%. 

Rent increases for Ethereum L2 chains

The competitive blob market raises a business issue for L2 chains. The platforms generate fees, which they try to retain or pay out to node operators. At the same time, they try to use L1 for extra security, while minimizing payments. 

Rents to L1 increased for several rollup and optimistic rollup chains, depending on their current activity. The biggest increase was for Scroll, which recently launched its airdrop incentive period. The Scroll airdrop may be entirely responsible for the recent spike in blob space usage instead of any organic event. Scroll also had the biggest increase in blob posting during the period of its airdrop on October 22. 

Increased activity means potentially higher income for the L2, but it may also mean it will need to pay for using Ethereum. 

For Base, the rent paid to Ethereum increased by 620%, while Scroll saw a 759% jump in the past 24 hours. Taiko saw an increase of just 25%, while Arbitrum had to pay 54% more for its L1 usage. The differences in rent depend on the activity in each L2, as well as the schedule for securing their data on Ethereum blocks. Some chains choose a more lenient schedule, only posting every few blocks.

If the blob market reaches much higher prices, some of the most successful L2s may seek other options for their finality state. Data availability services may offer a better price compared to blobs, which can become prohibitively expensive very fast. 

Ethereum is in uncharted waters when it comes to the new type of blob price discovery. The L2s choosing Ethereum instead of a DA layer may decrease, depending on each chain’s real demand and capacity. For some, a free blob market with unpredictable fee spikes may make the most efficient L2s give up and find other data-layer solutions.

Rate increase was an anomaly

The current blob spike was a one-off event. It does not give enough data for a longer period of price discovery. Without incentivized activity, L2s can stay under the target for blob posting for months or years, with extremely low fees paid to Ethereum. 

After the blob event, Ethereum’s simple transaction fees hovered around $0.38, or 7 GWei per transaction. Complex transactions can rise above $13, as in the case of NFT mints, while a DEX swap is around $5. 

All those actions are much cheaper on L2 chains, but the question remains whether L2s can afford to be cheap if they have to pay for blobs.

One possible scenario is that blob fees would be passed onto the end user.

Ethereum supporters have called for making blobs more scarce, but that could push away some of the best L2s. There are also proposals to keep blobs accessible and cheap, thus retaining more long-term gains from L2 ecosystems. 

The recent blob competition episode had negligible effect on the ETH market price. ETH traded at $2,579.90 after the overall market stopped its expansion.