Key Points
- Ethereum’s market dominance has dropped to a 2021 low of 13.1%, while altcoin dominance has risen to 28.2%.
- Despite advancements and upgrades, Ethereum’s role and value within the crypto ecosystem are being questioned.
A recent report titled “The ETH Value Debate” has scrutinized Ethereum’s changing role in the crypto ecosystem and analyzed the major trends influencing its value. The report highlights Ethereum’s position as a vital part of the blockchain revolution, but its current place in the crypto ecosystem is under question.
Despite significant advancements, such as the Dencun upgrade and the introduction of Spot Ethereum ETFs, Ethereum’s dominance in the market has drastically fallen to 13.1% – its lowest since April 2021. In contrast, altcoin dominance has surged to 28.2%, while Bitcoin has surpassed the $100,000 milestone.
The Dencun Upgrade and Its Impact
The Dencun upgrade, a part of Ethereum’s roadmap, has reformed its fee dynamics. This upgrade has significantly reduced Layer 2 (L2) transaction fees, benefiting L2 users but leaving Layer 1 (L1) fee collections at their lowest levels in years. As a result, Ethereum’s ETH burn rate has fallen, reversing the deflationary trends that emerged after its transition to proof-of-stake (PoS) in 2022.
Market sentiment towards Ethereum has not been favorable. The introduction of Spot ETH ETFs in July 2024 initially received a lukewarm response but later picked up, surpassing $1.7 billion in net flows after the U.S. election. However, Ethereum’s trading volumes and search interest have remained stagnant compared to the rising activity of alt-Layer 1s like Solana, which has experienced a 131.7% year-to-date market cap growth.
Challenges Posed by L2 Growth and App-Chains
The adoption of Layer 2 continues to expand, with over 4 million ETH now bridged to these platforms. This integration underscores Ethereum’s evolving role as a foundational element in decentralized finance (DeFi). However, the rise of app-chains, including Uniswap’s move to Unichain, indicates a shift in value distribution away from Ethereum’s core ecosystem.
Ethereum’s prioritization dilemma is becoming more apparent. Some argue for enhancing value capture through L2 scaling and focusing on ETH’s role as non-sovereign money within this framework. Others advocate for preserving Ethereum’s L1 strength by maximizing fee-based demand and maintaining a robust decentralized application (dApp) economy.
The shift towards inflationary dynamics has also impacted Ethereum’s market perception. With ETH’s 30-day annualized inflation turning positive in 2024, the once-prominent “ultrasound money” narrative has lost traction among its advocates.
Competitors Gaining Ground
The rise of alt-L1s and rollups has introduced new challenges. Chains like Solana, Sui, and The Open Network (TON) have outpaced Ethereum in user activity and growth metrics, capturing a larger share of trading and transaction volumes. Meanwhile, rollup-centric value generation through mechanisms like sequencer services and cross-chain transfers remains underdeveloped.
Future protocol upgrades, including the Pectra upgrade scheduled for early 2025, aim to address these shortcomings. By enhancing L2 scalability and user experiences, Ethereum hopes to stay competitive. However, any strategic ambiguity in balancing L2 scaling with L1 value preservation could hinder its long-term value accrual.
As economic value shifts towards L2s, Ethereum must navigate challenges such as fragmentation, interoperability, and centralized sequencer risks. L2s may increasingly rely on cost-effective data availability providers like Celestia, further decentralizing fee collection.
Questions About Ethereum’s Future
At the heart of Ethereum’s value debate lies a pivotal question: Will transaction fees and miner extractable value (MEV) drive greater value capture, or will ETH’s utility as a gas token, medium of exchange, and collateral asset prevail? While Ethereum’s issuance rate remains below 1%, maintaining its scarcity, declining fee collections have raised concerns about sustaining its burn mechanism’s efficacy.
Ethereum’s role in DeFi remains crucial. In 2024 alone, decentralized exchanges spent $512.8 million on fees, while ERC-20 tokens and ETH transfers contributed $159.4 million and $148.9 million, respectively. However, with dApps like dYdX and Hyperliquid moving to app-chains, Ethereum’s fee-based demand profile is undergoing significant transformation.
Amid these shifts, the demand for ETH as non-sovereign money within the L2 economy stands as a bright spot. The rollup-centric roadmap emphasizes this utility, reinforcing ETH’s position as a reserve asset. As Ethereum charts its path forward, committing to a clear direction—whether through L2 scaling or L1 fee preservation—will be critical for its future relevance.
