The dynamic fee model uses a square root function to balance revenue and fairness in the Ethereum ecosystem.
In the context of Ethereum facing challenges regarding transaction fee revenue, two community members, Kevin Owocki and Devansh Mehta, have proposed a new dynamic fee structure for the application layer, aimed at balancing revenue generation for developers and ensuring fairness in the ecosystem.
The proposal on April 27 introduces a formula using a square root function to reduce the fee rate exponentially as the funding for a project increases. "For small grants, the fee will follow the square root function (sqrt(1000 x N)), providing relatively higher returns," Owocki and Mehta explain.
Illustration of the proposed fee structure decreasing at higher project funding levels. Source: Ethereum Research
According to this mechanism, a project with a funding grant of $170,000 will incur an operating fee of about 7%. However, the fee will drop to just 1% when the funding exceeds $10 million, facilitating the development of smaller projects without the burden of excessive costs, while also encouraging growth and scalability.
This initiative arises in the context of the Ethereum ecosystem facing increasing competitive pressure from alternative networks, particularly Solana. According to 2024 data, Solana attracted 7,625 new developers, surpassing Ethereum's 6,456. Although Ethereum still maintains a leading position in terms of total developers, this gap is gradually narrowing.
More concerning, according to data from on-chain analytics firm Santiment, transaction fees on Ethereum dropped to a five-year low in April 2025. The primary cause identified was a decline in activity on Ethereum's base layer, reflecting low demand for smart contract and decentralized finance (DeFi) activities.
This situation has led many financial institutions to begin reducing their holdings of Ether or selling off investments, while investor sentiment towards the world's first smart contract platform continues to deteriorate without clear signs of recovery.
Owocki and Mehta's proposed new fee structure is seen as part of a series of initiatives aimed at reforming Ethereum's economic model, with the goal of maintaining the economic viability of the network in the face of increasing competition from other rapidly developing blockchain platforms.
