Key Notes
- Ethereum’s market share drops to 13.1% amid competition from altcoins like Solana, which grew 131.7% in 2024.
- The Dencun upgrade reduced Layer 2 fees but led to Ethereum’s lowest Layer 1 fee revenue in years.
- Future upgrades, like Pectra, target scalability, but Ethereum faces rising app-chain and alt-L1 competition.
Binance Research recently published a report titled “The ETH Value Debate”, analyzing Ethereum’s shifting role in the crypto ecosystem and exploring major trends influencing its value. According to the report, Ethereum has been a cornerstone of the blockchain revolution, but its place in the crypto ecosystem is now under scrutiny.
Despite major advancements, including the Dencun upgrade and Spot Ethereum ETFs, Ethereum’s dominance in the market has plummeted 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, part of Ethereum’s rollup-centric roadmap, has reshaped its fee dynamics. This upgrade slashed Layer 2 (L2) transaction fees, benefiting L2 users, but left Layer 1 (L1) fee collections at their lowest levels in years. Consequently, Ethereum’s ETH burn rate has declined, reversing the deflationary trends that emerged after its transition to proof-of-stake (PoS) in 2022.
Market sentiment hasn’t been kind. The introduction of Spot ETH ETFs in July 2024 initially saw muted interest but later picked up, surpassing $1.7 billion in net flows after the U.S. election. Yet, 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.
L2 Growth and App-Chains Challenge Ethereum
Layer 2 adoption continues to grow, 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, presents a shift in value distribution away from Ethereum’s core ecosystem.
Ethereum’s prioritization dilemma is increasingly evident. 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.
Solana, Sui, TON Gain 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. Yet, it’s clear that any strategic ambiguity in balancing L2 scaling with L1 value preservation could hinder its long-term value accrual.
As economic value shifts toward 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.
Ethereum’s Fee-Driven Future in Question
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.
Disclaimer: Coinspeaker is committed to providing unbiased and transparent reporting. This article aims to deliver accurate and timely information but should not be taken as financial or investment advice. Since market conditions can change rapidly, we encourage you to verify information on your own and consult with a professional before making any decisions based on this content.
With over 3 years of crypto writing experience, Bena strives to make crypto, blockchain, Web3, and fintech accessible to all. Beyond cryptocurrencies, Bena also enjoys reading books in her spare time.
