As the leader in the public chain, Ethereum's recent performance has sparked controversy.
Looking back over the past year, Ethereum’s development seems to have hit a bottleneck.
In addition to the continued development of the staking mechanism, the progress of the Layer 2 expansion plan is not as expected. The price of ETH is sluggish, and the gas fee has dropped to a record low.
Since the beginning of this year, Ethereum's growth has lagged far behind mainstream projects such as Solana and BNB, and users' dissatisfaction has continued to accumulate. At the same time, the issue of transparency in the Ethereum Foundation's spending has become a new focus, sparking widespread discussion in the community.
These issues have further exacerbated the market's doubts about Ethereum's overall performance. As the exchange rate of ETH relative to BTC fell below 0.042 again, the market's confidence in the long-term value of Ethereum is also shaken.
So, why is the price of Ethereum so sluggish? What caused the phenomenon of ETH "following the decline but not the rise"? Is Ethereum still worth looking forward to in the future?
We can analyze the reasons for the sluggish performance of Ethereum prices from two perspectives: superficial reasons and root causes.
1. Surface reasons
The apparent reason for Ethereum’s poor performance is that Ethereum founder Vitalik and the Ethereum Foundation sold a large amount of Ethereum, triggering panic in the market.
On August 9 and August 30, Vitalik transferred 3,000 and 800 Ethereum to a multi-signature address respectively.
The transfers occurred during a market decline, raising concerns that he might be selling Ethereum.
In response, Vitalik firmly denied that he was selling Ethereum for personal gain. He said that since 2018, he has never sold any Ethereum for personal financial needs, and all Ethereum transfers have been to support charity or some projects in the Ethereum ecosystem.
Then on August 23, the Ethereum Foundation transferred 35,000 Ethereum to the Kraken exchange. The market began to speculate why the Ethereum Foundation made such a large-scale transfer and discussed whether this would have a negative impact on the price of ETH.
Some community members began to question that the Ethereum Foundation has not disclosed detailed expenditure data in the past two years, and the latest verifiable report is in 2021.
The $100 million budget described by the executive director is clearly a large expenditure, and the community is questioning where exactly the funds are going.
Ignas further questioned on the X platform that the Ethereum Foundation allocated up to $30 million in the fourth quarter of 2023, while the allocation in the third quarter was only $8.9 million. The huge difference in the allocation amount raised more doubts.
So where exactly are the funds of the Ethereum Foundation used?
As community controversy intensified, the Ethereum Foundation also responded.
Ethereum Global member Hudson Jameson said that Ethereum is currently preparing the latest expenditure report, which will count expenditures in 2022 and 2023 and will be released before the Devcon SEA conference in November.
Hudson also described the approximate use of expenditures in the form of a chart. The largest expenditure in 2022 is Layer 1 research and development, accounting for 30.4%, including funding for external project teams and internal expenditures, of which internal expenditures account for 38% and external expenditures account for 62%.
In 2023, the largest expenditure shifted to grants to new institutions, accounting for 36.5%.
However, the doubts about the Ethereum Foundation are only superficial; the core issue lies in Ethereum’s disappointing price performance in recent years.
There has been no new story for Ethereum since last year.
Looking back at the development of Ethereum, from the Defi that made a sensation in the market in 2020, to the NFT and chain game hype in 2021, to the MEME craze, almost every breakthrough in the industry is inseparable from the key infrastructure Ethereum.
The data also proves this. According to DefiLlama data, Ethereum's TVL reached 4.7 billion US dollars, accounting for 56.37% of all public chains, making it a well-deserved public chain leader.
The price of Ethereum has also risen from a few hundred dollars to around $2,500 today, ranking second in the cryptocurrency market, second only to Bitcoin.
However, is there any new story for Ethereum now?
Since Ethereum switched from the POW proof-of-work mechanism to the POS proof-of-stake mechanism, technological upgrade has become the main narrative, and Layer2 has become an ecosystem that is the focus of hype.
After that, the internal narrative effect weakened and ETF became the new external narrative.
But in reality, neither internal nor external narratives have really driven up the price of Ethereum.
In sharp contrast, Bitcoin's position as a store of value continues to consolidate. From the exchange rate of the two, the exchange rate of Ethereum to Bitcoin has dropped from 0.07 a year ago to 0.042 now.
Even without comparing it with Bitcoin, in terms of price trends, Ethereum's growth has begun to frequently lag behind mainstream projects such as Solana and BNB.
The weakening of the coin price reflects the reduced activity of the Ethereum ecosystem, while the decline in gas fees more directly shows the weakening of the ecosystem.
According to Etherscan data, Ethereum's average Gas recently dropped to 0.758Gwei, reaching its historical bottom.
Although the introduction of Blob in the Cancun upgrade has an impact, the most direct reflection of such low Gas fees is the lack of popular applications on Ethereum.
Data from The Block also shows that the number of new Ethereum wallet addresses is currently at its lowest level this year.
The reality is indeed like this. DeFi Summer is difficult to reproduce for the time being, NFT and chain games have fallen to the bottom, and even the MEME narrative has been taken over by Solana.
With the rise of ecosystems such as TON and Base, there are more and more voices in the market that are pessimistic about Ethereum, and some even believe that Solana has the potential to surpass Ethereum.
In addition, Ethereum's rankings in terms of the number of token holders, monthly active users, and number of transactions are not satisfactory, ranking third, seventh, and eleventh respectively. Such data does not seem to match Ethereum's title as the leading public chain.
2. Root Cause
The above are all superficial reasons for Ethereum’s sluggish performance. The root cause of its sluggish performance actually stems from deeper supply and demand issues.
First, let’s look at Ethereum’s inherent needs
Ethereum's technological advancement has triggered strong market demand. For example, the ICO boom in 2017 and the DeFi boom from 2020 to 2021 have greatly boosted market demand for Ethereum.
So why isn’t there a similar spike in demand in the market now?
Logically speaking, the current Layer 2 expansion plan and Restaking should be the main hotspots in the market.
However, projects in the Layer 2 ecosystem are highly similar to those on the Ethereum main chain and cannot trigger the same trading boom as before.
In addition, the essence of PointFi and Restaking is to lock up ETH and reduce its liquidity, rather than allowing more assets to be priced in Ethereum.
Even some large-scale Restaking projects (such as EigenLayer, Rez, and Ethfi) have their pricing power in the hands of exchanges, and they are mainly denominated in USDT.
Unlike previous YFI, CRV, and COMP, which are denominated in Ethereum on the chain, as long as there are no large numbers of new assets denominated in Ethereum, there is no reason for users to hold a large amount of Ethereum.
Another influencing factor is the ETH burning mechanism brought about by the EIP-1559 upgrade. The main function of Ethereum is to serve as a settlement layer, and the clearing and settlement of large DeFi projects all occur on the Ethereum main chain.
However, the functions of Layer 2 and the main chain are now highly overlapping, resulting in many transaction demands being diverted to Layer 2, while the amount of Ethereum burned by these transactions has been greatly reduced, which has weakened the demand for Ethereum.
In addition to the inherent demand problem, there are also some problems on the supply side of Ethereum
Since Ethereum switched from Proof of Work (PoW) to Proof of Stake (PoS), the price floor of Ethereum is no longer supported by miners as before.
In the PoW era, miners obtain Ethereum through mining. The cost of mining includes mining machines, electricity bills, etc., which are all paid in fiat currency.
If the market price of Ethereum is lower than the cost of mining, miners will not sell ETH because they will lose money.
But in the PoS era, miners are replaced by validators, and validators only need to stake Ethereum to the verification node to obtain income.
The cost to validators is primarily infrastructure fees, while the cost to stakers is opportunity cost.
Since the cost of validators is low and stakers have no fiat cost, they can sell Ethereum at any time, unlike miners who maintain a price floor for Ethereum. This makes the price of Ethereum more vulnerable to supply pressure.
Finally, there is the impact of external demand.
In the last market cycle, the Grayscale Trust drove demand for Ethereum because it could only be bought but not sold.
But this time the Ethereum spot ETF is different, it can be bought and sold freely. Since the launch of the ETF, there has been a large outflow of funds, especially through the Grayscale Trust, which is in sharp contrast to the net inflow of the Bitcoin ETF.
This means that both old and new Ethereum investors are cashing out through ETFs.
3. Is there still hope for Ethereum? Can it still be held for a long time?
I think Ethereum's fundamentals remain solid.
The Ethereum Foundation's strategy is to focus on infrastructure and long-term development.
They believe that only through education and technical research can the Ethereum ecosystem become more stable and attract more developers and users.
While this strategy may not bring short-term market excitement, it helps the long-term development of Ethereum.
However, Ethereum is currently facing some problems, especially the internal competition caused by the popularity of Layer 2 solutions and the lack of new market hotspots.
To address these issues, the Ethereum Foundation launched the "Next Billion" funding program, which is specifically aimed at innovative projects at the application layer.
The program, which has been in its fourth phase, aims to fund projects that could potentially get 1 billion people involved in blockchain.
Some people may think that Ethereum is not down-to-earth enough, but others believe that Ethereum is sticking to its original intention.
At least judging from the expenditure details of the Ethereum Foundation, they did not use the funds for luxury consumption or hire the media to write soft articles like some other public chains.
In an age when blockchain is equated with casinos, there are still a small number of people who insist on using technology to make the world a better place.
Therefore, I personally am willing to hold a portion of Ethereum for a long time.
Summarize
Overall, Ethereum’s recent weak performance stems from deep-seated problems on both the demand and supply sides.
New technologies such as Layer 2 and Restaking have failed to bring the expected demand growth, and under the PoS mechanism, validators have also failed to support the price floor of ETH like miners in the PoW era.
At the same time, changes in external demand, such as the launch of the Ethereum spot ETF, also led to capital outflows.
Despite this, the Ethereum Foundation is still actively looking for solutions. Through the "Next Billion" plan, they are trying to promote the long-term development of Ethereum.
Although Ethereum is currently facing many challenges, its core values and technical foundation are still worthy of attention.
Finally, what do you think about the future of Ethereum? Will you continue to hold Ethereum?
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