Ethereum (ETH), the second largest cryptocurrency by market capitalization, is experiencing a severe downturn, marking its worst quarter in history.

This occurs in the context of a general market slump, although for Ethereum, the outlook appears concerning as the largest altcoin by market capitalization metrics continues to underperform.

Analysts Examine Ethereum's Price Performance

Ethereum has lost over 44% of its value in the first quarter (Q1). Data also shows record outflows over the past three months. CryptoQuant CEO Ki Young Ju believes this is due to an unprecedented wave of selling.

Ethereum Faces Record Dump. Source: CryptoQuant CEO on X

With the massive sell-off, Ethereum's market dominance has declined significantly. Data on CoinMarketCap shows it stands at 8.5% at the time of writing, marking its lowest level since 2020.

This development has sparked widespread discussions on X (Twitter) as analysts try to explain the reasons behind Ethereum's decline.

"What happened to Ethereum?" Tron founder and Huobi Global advisor, Justin Sun asked.

The Impact of Layer 2 on Ethereum's Decline

According to analyst Camila Russo, the primary reason for Ethereum's decline is the rise of Layer-2 (L2) networks. While these scaling solutions improve scalability and reduce congestion on Ethereum's Primary Network, the benefits are not fully reflected in ETH's price performance.

"There's a path to overcome Ethereum L2 fragmentation and poor user experience. But I still haven't seen how all this L2 activity is reflected on the Ethereum Primary Network. Layer 2 is currently getting Ethereum's security for free, just paying for block space, which they'll pay even less for with larger blocks," Russo explained.

This perspective suggests that while Ethereum remains the center of many blockchain applications, its value capture mechanism is problematic. This has led to the continuous decline in ETH price despite ongoing development and adoption efforts.

Ethereum's Technical Foundation

In addition to structural issues with L2 scaling, some Ethereum developers have expressed concerns about the blockchain's technical foundation, raising questions about its long-term viability.

A developer, Uncle Rockstar Developer, described Ethereum as "an absolutely burning dumpster fire." He believes the network has strayed far from its initial promise of a decentralized world computer.

"To hide the fundamental failures, meaningless complexity is constantly added... this occasionally surfaces in hacks like the one that caused Bybit to lose 400,000 ETH (~$1.5 billion)," he stated.

The developer also criticized Ethereum's governance, arguing that it has become a centralized startup primarily benefiting its co-founder, Vitalik Buterin.

Lack of a Compelling Narrative

Blockstream advisor, Tuur Demeester, said the lack of a compelling narrative is another key factor contributing to Ethereum's decline.

"It's run out of story," Demeester joked.

He referenced a tweet from 2017 in which he warned that cryptocurrencies relying on novelty rather than utility would struggle. This view is based on the assumption that the market creates new narratives faster than Ethereum can sustain.

Regulatory Uncertainty and Institutional Hesitation

Regulatory concerns are also threatening Ethereum's future. Unlike Bitcoin, which is widely recognized as a commodity, Ethereum's staking and yield-generating features make it more susceptible to being classified as a security.

Francisco Quartin de Macedo, a fund manager, noted that ETH's monetary policy has become increasingly unclear since The Merge. This upgrade has led to a reduction in network activity, causing inflationary pressure instead of the deflationary trend previously expected.

Macedo also emphasized that Ethereum lacks the strong institutional support that the approval of Bitcoin ETFs (exchange-traded funds) has provided for BTC. Similarly, Bitcoin's position as digital gold further reinforces this hypothesis.

"TBH [to be honest] it still feels like an institutional choice, just not sure what that means for pricing," Macedo commented.

He pointed out that Ethereum's fragmented Layer 2 ecosystem and regulatory uncertainty have made some investors hesitant to bet on the long-term growth of ETH.

Ethereum's recent difficulties are the result of a combination of factors, including the unintended consequences of L2 scaling solutions. While Ethereum remains a significant player in the blockchain space, its price action suggests that investors and developers are increasingly concerned about its future.

However, some analysts note that although the price of Ethereum is underperforming, the staking of ETH is increasing. This may mean long-term confidence from some investors. However, without clear catalysts or structural changes, ETH may continue to underperform compared to other major cryptocurrencies. Ethereum (ETH) Price Performance. Source: BeInCrypto Data from BeInCrypto shows that ETH is trading at $1,890 at the time of writing, up slightly 1.34% in the last 24 hours.