Ethereum’s Path Forward: Bullish and Bearish Scenarios Explained

Key Takeaways

• Ethereum has underperformed since the Dencun upgrade in March.
• The Layer-2 fee reduction has made the ETH supply inflationary.
• What are some possible remedies for Ethereum in the future?

Discussions about Ethereum have been at the forefront of the current market cycle, mostly relating to its underperformance and the possibility of other Layer-1s, like Solana, grabbing its market share.

The price action reflects this since Ethereum is 46% away from its all-time high. Bitcoin and Solana are  3% and 30% away, respectively.

Let’s analyze some of these Ethereum issues, the discussions surrounding them, and potential remedies for the future.

Ethereum Issues

After the Merge, which made Ethereum proof-of-stake, and Dencun, which greatly reduced transaction fees, Ethereum sentiment was near highs. Most believed that $10,000 was attainable this cycle.

However, ETH has underperformed in the current cycle and lost significant value against Bitcoin (BTC) and other Layer-1s like Solana. The SOL/ETH ratio recently reached a new all-time high.

Then, the launch of ETH ETFs in July was expected to trigger a rally. On the contrary, ETH declined nearly 25% since then, and ETFs have cumulative total net outflows  of nearly $500 million.

One of the main reasons for this Ethereum underperformance is that the Dencun upgrade had unintended consequences. It greatly reduced fees for Layer-2s but did the same for Ethereum earnings, making its supply inflationary. 

While  Ethereum still dominates TVL, it is missing out on major new narratives such as AI, RWA, and meme coins. New projects like FET, TAO, or Mantra have built their Layer-1s to create a more suitable ecosystem.

So, in a way, Ethereum is enabling the growth  of its Layer-2s and making numerous innovations, but none of these benefits the token itself.

Some believe  that Ethereum also faces a marketing problem. Despite its innovations, marketing could help Ethereum deal with FUD and explain its focus on Layer-2s and rollups.

Ethereum’s complicated roadmap  also makes it difficult for market entrants to know what is coming and if issues will be solved.

Users also have issues  with the Layer-2 experience. It is not seamless, and using multiple chains is difficult.

Ethereum’s Bull Case

Ethereum community member Ryan Berckmans believes  that Ethereum is still destined to be the global backbone of the new financial system by utilizing Layer-2s.

Even though Solana has outpaced Ethereum this cycle, especially in the meme coin race, Solana seems to be pivoting in the same Layer-2 direction by launching the Solana virtual machine. 

He believes that Ethereum is better suited for this purpose. Solana has high bandwidth requirements and less decentralization due to the allocation during its ICO. Additionally, Ethereum is more reliable since it has not had any network outages.

So, as it pertains to creating a network of Layer-2s, Ethereum is still more suited to do so, though it remains to be seen if Ethereum can gain value from them.

Vivek Ventures also has a bull case for Ethereum  in the long term. He notes that major institutions are already adopting Ethereum, as seen by BlackRock’s BUIDL fund, Visa’s and Guggenheim asset tokenization, and WisdomTree deploying market funds on Ethereum.

Finally, Crypto Researcher Bread  says that the entire Layer-2 dilution angle is overblown since even at the top of the fees paid before, Dencun’s total revenue was less than $40 million. This is a tiny portion of Ethereum’s market cap.

He suggests that Ethereum either needs to continue scaling its Layer-1 or massively increase the amount of Layer-2s so they affect Ethereum’s revenue.

Ethereum’s founder Vitalik Buterin has also posted  six different future ideas for Ethereum, including lowering staking requirements and block finalization. In one of them, the Surge, he sets a goal of 100,000 transactions per second on Ethereum and its Layer 2-s.

Because of its blob mechanism,  this would burn roughly 6.5% of the supply per year, making Ethereum an extremely deflationary asset.

Ethereum’s Future is Uncertain

Erthereum’s underperformance this cycle has put its future in doubt. While Ethereum is likely much more suited for being the backbone of a diverse network of Layer 2-s, it is unclear if this will bring any value for ETH.

Buterin’s proposals can affirm that the current iteration of the blockchain needs tinkering for the long term.

About the Author

Valdrin Tahiri

Valdrin discovered cryptocurrencies while getting his MSc in Financial Markets from the Barcelona School of Economics in 2017. He has been an avid investor and trader since. Valdrin has written for several cryptocurrency media companies such as BeInCrypto and CoinGape.

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