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Author: Steven Ehrlich Source: unchainedcrypto Translation: Shan Oppa, Bitchain Vision
Driven by the meme coin craze, Solana is creating a trust crisis in Ethereum.In the face of competition, Ethereum, a blockchain with a market value of $323 billion, did not fight back, but it does have a very potential choice in front of it.
Ethereum and its communities are facing unprecedented challenges.It is being seized by more friendly rival Solana, which is benefiting from the millions of meme coins.In addition, the rise of the L2 (Layer 2) network also puts Ethereum in “internal competition”, which directly divert Ethereum’s users, transaction fees and market attention.On Tuesday, Uniswap, the world’s largest decentralized exchange, launched its own L2-Unichain on the Optimism network.
Ethereum’s token price performance is also far behind Solana and Bitcoin with a market capitalization of $1.9 trillion.Over the past 12 months, ETH has risen by only 5.9%, while Bitcoin has soared by 100.58%, and Solana has also risen by 85%.
More notably, ETH prices (currently around $2,600) have been lagging behind Bitcoin and Solana over the past six months, indicating that investors are classifying the latter two into the same asset class, while Ethereum is being marginalized.”The market demand for smart contract platforms is not obvious among traditional investors,” said Zach Pandl, head of research at Grayscale Investments.
Ethereum needs to reshape its own narrative and regain the attention of investors and the community, and the key to all this is to find a more accurate product market positioning.
Ethereum sandwiched between Bitcoin and Solana
Ethereum has long been the “supporting role” of Bitcoin, and the market defaults to being the second-ranked blockchain.
But Bitcoin’s “digital gold” narrative has stabilized its market position, and despite its limited functions, low throughput and high transaction fees, it has maintained steady growth.However, Ethereum has encountered a similar throughput bottleneck in its development – it can only process dozens of transactions per second.
To expand network capabilities, the Ethereum Foundation adopted the L2 scaling strategy and launched hundreds of L2 blockchains to improve overall throughput.This move is indeed effective, increasing the transaction processing capacity of the Ethereum network to more than 200 transactions per second, but it also brings side effects: Ethereum outsources core functions to a series of L2 blockchains, such as Optimism, Arbitrum, Base, Mantle, Zksync, etc.This change weakens the connection between Ethereum and its users.
“If you invest in Ethereum but don’t actually use it directly, you might be thinking, ‘Why not buy Arbitrum’s tokens?”
This trend accelerated in March 2024, when Ethereum introduced a temporary data storage solution called “blobs” through an upgrade, making transactions on L2 almost free.Gauntlet founder Tarun ChitraThe Chopping Block“You’ll never see a company giving up 99% of its revenue to its own affiliates,” the commented on the podcast.
This is a real loss of money.For example, Coinbase’s L2 Base has generated nearly $100 million in revenue for the company since its launch in the summer of 2023, and that value ultimately belongs to Coinbase’s shareholders rather than ETH holders.
Even more ironic, Ethereum’s dependence on L2 actually makes it more centralized.Almost all L2s rely on a single sorter to organize transactions and submit them to the mainnet, a mechanism similar to having the entire Bitcoin network controlled by only one miner.Although L2 plans to achieve decentralization in the future, the current situation undoubtedly exacerbates the risk of centralization of Ethereum.
What can best illustrate this issue is the circulation supply of Ethereum.In September 2022, Ethereum moved from a Proof of Work (PoW) mechanism to a Proof of Stake (PoS), and introduced a mechanism to destroy a portion of the network transaction fee, thereby reducing the supply of ETH in circulation.In theory, during periods of high transaction volume, the cost of destruction should exceed the newly added ETH supply, bringing Ethereum into deflation mode.However, after the upgrade in March 2024, Ethereum returned to inflation due to the decline in main network transaction volume, and the current total supply of ETH has exceeded 120.5 million before the upgrade.
This is bad news for ETH holders.Another problem is that the Ethereum ecosystem is too fragmented, resulting in a confusing user experience.In contrast, Solana’s growth rate is amazing and its ecosystem is simpler and more friendly.As a self-sufficiency L1 blockchain, all features on Solana run on the mainnet (L1), and users only need to use a wallet without paying attention to which L2 the assets are distributed.In addition, Solana’s transaction fee is only a few cents, making it a natural home for the meme coin craze and continues to attract new users.
Developers are also turning their attention to Solana.According to Electric Capital’s 2024 Crypto Developer Report, Solana’s developer number grew by 83% in 2024, while Ethereum’s developer number fell by 22%.
Going to a broader market
Ethereum can do more to restore confidence among investors and communities in it.Some experts believe that the Ethereum community is too focused on the obscure details of technology development and ignores basic marketing.In contrast, the Solana Foundation not only launched a smartphone, but also opened a pop-up store at Hudson Yards on the west side of Manhattan to promote the ecosystem in a way closer to users.
GSR research vice president Guzman said that in the coming years, the expansion discussion of the Ethereum mainnet will continue, which may include the adoption of technologies such as ZK Proofs.One proposal under discussion is to increase the gas cap for Ethereum blocks to support more transaction processing.Ethereum founder Vitalik Buterin is already pushing these efforts.However, in Guzman’s view, any major expansion plan will take at least several years to land.In addition, Tron founder Justin Sun also made a more radical proposal. Although the details are limited, its core ideas include taxing L2 and reducing validator rewards to enhance the deflation of Ethereum.These discussions will undoubtedly continue.
At the same time, more and more L2 projects are being launched.In addition to Unichain, tokenized Treasury bond fund issuer Ondo Finance announced that it will launch its own L2, while gaming and entertainment giant Sony has also launched its own L2.”Ultimately, all applications may launch their own L2 on top of Ethereum to support their own business,” said Christine Kim, vice president of research at Galaxy Digital. She believes that the block space and ecosystem of the Ethereum mainnet are currently affected bySevere restrictions, so the rise of L2 is an inevitable trend.
Kim further pointed out that Ethereum can adapt to this trend and abandon the goal of becoming the main interaction layer of users.However, for this strategy to work, the overall usage of Ethereum needs to grow exponentially, and whether investors will accept this direction remains uncertain.
Despite investors’ anxiety about the price of ETH, Ethereum has still outperformed almost all major L2 tokens in the past year, according to the data.Optimism and Arbitrum’s tokens have dropped 69% and 75% in the past 12 months, respectively, as the unlocking mechanism of the L2 token allows early investors such as venture capital to sell their positions, despite rapid growth in usage.
Pandl, head of research at Grayscale, believes that Ethereum should give full play to its core advantages – stability, security and decentralization, leaving the low-value trading market to L2 and Solana to compete.He pointed out: “Ethereum remains the leading public chain in terms of total lock-up value (TVL) and economic security, which makes it a natural choice for institutional finance.”
Pandl specifically mentioned that BlackRock, with a global asset management scale of up to $11.5 trillion, chose to launch its $1 billion tokenized Treasury bond platform BUIDL on Ethereum.In fact, according to RWA.xyz, there are more tokenized real-world assets (RWA) on Ethereum than all other blockchains combined.
In addition, Ethereum’s TVL share in the entire blockchain industry is still stable.
It is obvious that high-end financial services on decentralized chains are still the advantage of Ethereum, and this trend may continue to expand.Putting aside the stablecoin market with a scale of US$200 billion, the total value of real-world assets on the chain is only US$17.1 billion, while the total scale of the global fixed income and stock capital markets in 2024 reached US$255.7 trillion – growth spacehuge.
Perhaps, rather than trying to become an “all-round blockchain”, Ethereum should focus on developing this market area.In contrast, Solana or L2 projects are still too emerging or centralized, and it is difficult to win the trust of mainstream financial markets.
Ethereum was once the birthplace of governance tokens, NFTs and meme coins, and real-world assets (RWA) may be the next step in the evolution of the crypto world, and it is also fully in line with Ethereum’s advantages.For ETH investors, this is perhaps their best hope.
