Ethereum's "Midlife Crisis": Daily Revenue Drops 99% in Six Months, Once Rising and Falling Three Times

Author: Arain, ChainCatcher

Editor: Marco, ChainCatcher

Is the price of Ethereum important?

Yes. Even Justin Drake, a member of the Ethereum Foundation, believes in the latest AMA that "the appreciation of ETH is crucial for the success of Ethereum."

However, in this cycle, Ethereum's price performance has been disappointing. According to Coingecko data, in the past year, Bitcoin has risen over 116% against the dollar, Ethereum has risen 44% against the dollar, and Solana has surged over 548% against the dollar. In a blue-chip portfolio, Ethereum's price performance is clearly lagging.

The absence of star projects, the sluggish price, and the dazzling performance of Ethereum killer "Solana" have put Ethereum in a public relations dilemma over the past year, with doubts surfacing from time to time. The criticism against Ethereum reached a boiling point when Bankless presented the content of its dialogue with Multicoin.

In the program, Bankless mentioned a set of concerning data: the annual growth rate of SOL/ETH reached 300% in the past year, while the ETH/BTC ratio has dropped by 50% over the past two years, halving its market capitalization relative to Bitcoin.

This data further amplifies Ethereum's lagging performance in this cycle. In the talk show, Multicoin partner Kyle Samani described Ethereum's current situation as a "midlife crisis."

Interestingly, although the hosts of Bankless claimed that inviting Kyle to talk about Ethereum was the best choice at this time, Multicoin has been bearish on Ethereum from the start and has invested in "Ethereum killers." Once famous for betting on "EOS," which refused to acknowledge its mistakes, Multicoin's current investment in Solana may have a chance to compete with Ethereum.

Now the question arises: does Ethereum's price stagnation really indicate that there is some problem with Ethereum? Is Ethereum indeed experiencing a "midlife crisis," as Kyle said?

Stagnation: What Happened?

Describing "Ethereum not rising" is inaccurate, especially when comparing Ethereum to itself. According to Coingecko data, between March 12 and October 2023, Ethereum's price was on an upward trend, although it did not perform as well as Bitcoin, which reached the previous cycle's high and set a new record. Ethereum peaked at $4070.6 during this period, while its historical high was $4878.26.

During this time, the market was flooded with information about Bitcoin spot ETFs and Ethereum spot ETFs, and the SEC ultimately approved the Bitcoin spot ETF and Ethereum spot ETF on January 11, 2024, and May 24, 2024, respectively.

Possibly influenced by the news of the approval of spot ETFs, the prices of Bitcoin and Ethereum began to surge in October 2023, indicating a potential early digestion of positive news.

For Ethereum, there is one notable difference: the "Dancun upgrade" occurred during this period. This upgrade is a significant event for Ethereum, being a further upgrade to the main chain following the Shanghai upgrade. The goal of the upgrade is to improve performance and reduce network fees, with the most direct impact being a significant reduction in the Gas fees required for digital asset transactions on Ethereum's Layer 2 networks, expected to drop by over 90% (results have met expectations).

The Dancun upgrade was completed on March 13, 2024, and the timing of this event coincides with the price increase of Ethereum, meaning that after the Dancun upgrade, Ethereum has exhibited this "stagnation" phenomenon, and there are still no signs of reversal.

After the upgrade event, Ethereum spot ETFs and Ethereum spot ETPs were successively approved by the SEC for listing and trading—this can also be seen as a positive factor on the trading front. Bitcoin continued to rise and set new historical highs after the approval of the Bitcoin spot ETF, but this script has not played out for Ethereum.

According to data from Sosovalue.xyz, since the approval, the cumulative net inflow into U.S. Bitcoin spot ETFs has been about $16.9 billion, while the cumulative net inflow into U.S. Ethereum spot ETFs has been -$560 million. The listing of Ethereum ETFs did not lead to an influx of funds; instead, it exacerbated the outflow of funds, putting pressure on Ethereum's price.

Dune data shows that currently, 64.7% of the assets under management (AUM) of U.S. Ethereum spot ETFs belong to Grayscale. As its corresponding buy-side research, Grayscale Research stated in a study this May that U.S. Ethereum spot ETFs would help increase the demand and price of ETH, but based on the relatively high valuation at the time of approval, they believe that the price upside for U.S. Ethereum spot ETFs after approval is limited.

The price trend of Ethereum has not reflected the price support role of U.S. Ethereum spot ETF buyers. Grayscale Research pointed out in its August research report that two reasons contributed to the significant decline in Ethereum's price afterward:

On one hand, the long positions in perpetual futures were increased by traders after the approval of the U.S. spot Ethereum ETP, but the longs were liquidated during the downturn, accelerating the price drop;

On the other hand, there may be actual and expected sell-offs by a few large holders, such as market makers Jump Crypto, venture capital firm Paradigm, and Golem Network. Grayscale Research estimates that these three entities held about $1.5 billion worth of Ethereum at the time, all of which could potentially be sold.

Based on the lack of significant rebound in Ethereum in August, Grayscale Research believes this reflects, to some extent, the long positions in CME-listed futures and perpetual futures, as well as excessive speculative positions.

"More fundamentally, the Ethereum network is undergoing a significant transformation… Ethereum plans to achieve greater scalability by moving more transactions to Layer 2 networks, which will periodically settle to the Layer 1 mainnet. This strategy is working; this year, Ethereum's Layer 2 has flourished, with major companies like Sony announcing projects built on Ethereum. However, this has also led to a decrease in fee revenue for the mainnet, further potentially impacting the value of ETH." Grayscale Research wrote in a report released on September 3, noting that "Ethereum's scaling strategy is effectively working, and the current market's pessimism towards Ethereum is unfounded, but a shift in market consensus may take some time."

In other words, the lack of reversal now is due to the market's failure to reach a consensus shift regarding Ethereum after the upgrade, with one important point being the "reduction in mainnet fee revenue," which is the actual result caused by the Dancun upgrade EIP-4844, whose expected outcome is to scale Layer 2 while reducing fees. The aforementioned Bankless dialogue with Multicoin pointed the finger at this aspect of Ethereum's current dilemma.

So, has Layer 2 really pushed Ethereum to the brink of danger?

Controversial Layer 2

The talk show by Multicoin that criticized Ethereum mainly targeted Layer 2, with Kyle Samani stating that "Layer 2 does not belong to Ethereum because they do not contribute to the value capture of Ethereum." Specifically, Ethereum Layer 1 has outsourced all MEV and execution to Layer 2, as if Ethereum has handed over its cash cow to others.

This viewpoint essentially denies the key efforts Ethereum has made for its upgrades.

Layer 2 is actually a solution, not the ultimate solution. Looking back at Ethereum's performance during several historical bull markets, network congestion has often been criticized, leading to users frequently feeling that fees are very "expensive" during bull markets, and sometimes unable to use the network normally, prompting calls for the arrival of "ETH2.0."

ETH2.0 is the long-term plan for Ethereum's upgrade, and Layer 2 is a part of it, born to solve Ethereum's scalability issues—much like building an overpass on a road to alleviate congestion on the original road.

The Shanghai upgrade, completed on April 13, 2023, opened the door to Layer 2, mainly including changes to the EVM object format, the unbonding function for beacon chain development, and fee reductions for Layer 2, with Ethereum's POW mechanism fully transitioning to POS.

After the Shanghai upgrade, a large amount of staked ETH was redeemed, and new participants entered the market.

According to Dune data, since the Shanghai upgrade, the cumulative net inflow of staked Ethereum has been about 13.96 million ETH, reflecting market participants' interest in Ethereum staking. However, the upgrade event had a lukewarm response in the secondary market; on the day the Shanghai upgrade was completed, Ethereum's price was about $1920 per coin, while the price of Ethereum before the Dancun upgrade (when the Holesky testnet went live) was $1652 per coin, which may have been limited by the market environment at that time, as Bitcoin's price performance was similar.

The Dancun upgrade, completed on March 13, 2024, is crucial for Layer 2, with the most significant point being lower GAS fees: for the same amount of money, after this upgrade, one can enjoy faster speeds, better performance, and pay less in GAS fees. This is related to the core EIP-4844 of the Dancun upgrade, but it is also a point that Kyle Samani vehemently criticizes.

Protolambda, a researcher from the Optimism team and a former Ethereum Foundation researcher, pointed out that Layer 1 is the data layer, while Layer 2 is responsible for executing computations. Layer 1 provides security for Rollups (Layer 2 is one type of Rollup solution) and acts as the data layer. By introducing a new transaction type that carries "blob data," the base layer can store Layer 2 data with less pressure, without compromising the security of data availability.

"Blob data" is a new type of transaction introduced by EIP-4844, responsible for paying transaction fees. This large data packet temporarily exists at the consensus layer, thus reducing the fees for the Ethereum network and Rollups.

From the data, it seems possible to more intuitively feel Kyle Samani's viewpoint:

Token Terminal data shows that on March 5, the revenue of the Ethereum L1 network reached (so far) the highest daily revenue of the year, at about $35 million; on September 2, it set the lowest daily revenue of the year so far, at about $200,000. A six-month decline of 99.4%.

The Base chain built on the Ethereum Layer 2 network launched by Coinbase generated about $2.5 million in revenue in August but only paid about $11,000 to Ethereum.

At first glance, Layer 2 seems to have taken a slice of the cake from Layer 1. Although from the current level of Gas fees, Ethereum has indeed achieved its goal of reducing network Gas fees, moving the "execution state" away from Layer 1 to Layer 2 is, at least in Kyle Samani's view, a problem. Ryan from Bankless further questioned that when Layer 2 develops to a certain stage, it will form a competitive relationship with Ethereum Layer 1, leading to a breakdown of cooperation.

Independent researcher @Web3Mario wrote that Layer 1 and Layer 2 are not in the execution outsourcing relationship that Kyle Samani describes, but rather a subordinate relationship, as Layer 2 does not undertake the consensus task of transactions; it relies on L1 to provide finality through technical means such as "optimistic solutions" or "ZK solutions."

Layer 2 acts as an agent for value capture in various fields for Ethereum, while Ethereum ensures its security, thus Layer 1 "taxes" Layer 2. This viewpoint seems to align more closely with the original design intention of Ethereum Foundation researchers.

From the current data perspective, the Layer 2 track is highly competitive. After the Dancun upgrade, it has not brought revenue contributions to Layer 1; instead, it has taken away additional income from Layer 1. However, according to l2beat data, there are currently 71 projects in Layer 2, and the total TVL locked has rapidly soared to about 14.48 million ETH since March 2024.

On September 5, the Ethereum Foundation research team held its 12th AMA on Reddit, addressing several questions of market concern.

Among them, Foundation researcher Dankrad Feist stated that Ethereum is building the most neutral financial platform, with Layer 1 being the intersection of multiple subfields, and a large number of valuable activities will generate fees (assuming L1's expansion is sufficient). Otherwise, there are other options, such as using ETH as the primary medium of exchange or using ETH as collateral, which will also be the main logic for ETH's subsequent rise.

"Many people believe that a rollup-centric roadmap will weaken Ethereum's fee revenue and MEV, and ultimately rollups may become parasites. I don't think this is correct. The highest value transactions will still occur on Ethereum L1, while rollups will expand the entire ecosystem by providing users with a large amount of transaction space. This relationship is symbiotic: Ethereum provides rollups with cheap data availability, and rollups make Ethereum L1 a natural hub for high-value transactions," Dankrad Feist responded.

Ethereum Foundation researcher Anders Elowsson believes that when Ethereum promotes sustainable economic activities, ETH will appreciate.

It is worth mentioning that expanding Layer 1 is also within Ethereum's plans and has made new progress. At least from the latest statements of official personnel, it does not appear that, as Kyle Samani claimed in the dialogue program, all bets are placed on a rollup-centric roadmap, such as abandoning the expansion of Layer 1.

Dankrad Feist stated that expanding Layer 1 execution is a goal, running parallel to building rollups, and Layer 1 itself will expand to 10-1000 times its current capacity, while rollups will provide the remaining portion to reach global scale. Ethereum Foundation researcher Justin Drake stated that the long-term sustainable plan of the Ethereum Foundation is to use SNARKs to scale the EVM execution of the mainnet. In recent months, significant progress has been made in SNARKifying Layer 1 EVM, which will lighten the burden on users and consensus participants, allowing validators to verify low-cost SNARKs without having to re-execute EVM transactions.

A Review of Ethereum's Historical Crises

Regardless of whether the current crisis faced by Ethereum is real or not, the most important thing is the team's ability to solve problems.

Looking back at several crises faced by Ethereum:

1. The "smart contract vulnerability crisis" in 2016, with the famous incident being "The DAO smart contract vulnerability," which led to a hacker attack, resulting in the loss of millions of dollars worth of Ether.

Solution: The Ethereum community decided to implement a hard fork (Ethereum Classic) to reverse the transactions and restore the funds. This led to the Ethereum network splitting into two versions: Ethereum (Ethereum) and Ethereum Classic (Ethereum Classic).

2. Since 2017, the Ethereum network has faced congestion crises. With the rise of DApps (decentralized applications), the Ethereum network has experienced severe congestion, causing transaction fees to soar.

Solution: The community began exploring solutions, leading to the embryonic form of ETH2.0, introducing sharding technology and Layer 2 scaling solutions, such as Rollups and State Channels, to address congestion issues.

3. From 2018 to the present, the high energy consumption caused by Ethereum's POW mechanism has raised concerns among environmental organizations and users. Strictly speaking, this does not count as a major crisis, but the solutions it prompted have had significant impacts on the Ethereum network, thus it is listed.

Solution: Ethereum sought to transition from proof of work (PoW) to proof of stake (PoS) to reduce energy consumption.

The crises faced by Ethereum have provided opportunities for some new public chains known as "Ethereum killers," such as BNB Chain, Cardano, Avalanche, Polkadot, EOS, and Solana. Except for Solana, which is currently ongoing, the others have at least at some point competed with Ethereum in momentum.

After Layer 2, the only remaining contender on the "Ethereum killer" path is Solana, with Multicoin being one of its largest investors and supporters.

In this sense, Ethereum is successful.