Two Years of Ethereum Transition to PoS: An Analysis of the Deep Reasons Behind ETH's Lackluster Price

Author: Carol, PANews

The transition of Ethereum to a PoS mechanism has long been considered beneficial for achieving monetary deflation and meeting the demands of larger-scale applications, which is favorable for the upward price of ETH. However, on the second anniversary of this transition, Ethereum faces numerous doubts. On the surface, these doubts mainly arise from ETH's poor performance in the recent market cycle, especially compared to BTC and SOL during the same period, with price increases falling short of expectations.

But at a deeper level, these doubts reflect two main challenges in Ethereum's development: first, the competition and cooperation between Layer1 and Layer2, where the core issue is how to position the role of Layer2 and its relationship with Ethereum; second, the contradiction between staking and liquidity, where the core issue is how to define the attributes of ETH.

To further illustrate the current state of Ethereum's development and the challenges behind the doubts, PAData, a data column under PANews, conducted a comprehensive analysis of Ethereum's fee changes, Blob fees, changes in Layer2 demand, and variations in Ethereum's staking and locked amounts. The findings reveal: first, Ethereum has reduced fee prices, but Layer2 has diverted on-chain activity demand and interacts with Ethereum at lower prices, posing challenges to ETH's value feedback and accumulation. Second, if ETH is positioned as a settlement currency, meaning there is an expectation for Ethereum to have long-term sustainable high demand to achieve long-term stable appreciation of ETH, the market's willingness to pay for such long-term expectations may waver in the face of fierce competition.

The main findings of this article include:

• In the past two years, the increase of ETH against USD is approximately 44.28%, but the decrease against BTC is about 48.70%, and against SOL is about 63.55%.
• In the past two years, Ethereum's monthly transaction fee revenue (considering only Tip fees) has shown a significant upward trend, with an average monthly fee income of about $32.8156 million. However, starting in August this year, monthly fee income began to decline.
• After the introduction of Blob, the daily average TPS of Arbitrum One, Base, and OP Mainnet increased by 122.00%, 694.69%, and 54.94%, respectively. The daily average TPS of Arbitrum One and Base exceeded Ethereum's by 60.24% and 158.85%.
• The top 20 submitters of Blob payment fees collectively submitted 263.93 Blobs, paying a total of $5.9914 million, with an average fee of about $2.27 per Blob. Among them, Base, which saw the fastest TPS growth, only paid a total of $109,300.
• The total amount staked in Ethereum has grown by about 150.18% over the past two years, but the marginal growth of the total staked amount has slowed. The average daily growth rate for the first nine months of this year is 0.06%, down more than 0.1 percentage points from last year's average growth rate of 0.17%.
• The locked amount of DeFi on Ethereum has increased by 50.12% this year, but Solana has grown by 242.20%. Based on this year's average monthly growth rate, it is estimated that in another 12 months, Solana's locked amount will surpass that of Ethereum.

01. ETH, BTC, and SOL Exchange Rates Decline Together, Ethereum's Fee Revenue Turns from Increase to Decrease

The direct reason for the doubts surrounding Ethereum is ETH's poor performance, but in terms of its own trend, ETH has maintained a significant upward trend since the transition. According to CoinGecko data, in the past two years, ETH's increase is approximately 44.28%, during which it once broke through $4,000, reaching a peak of $4,071, and the current price above $2,300 is still at a near two-year high.

However, when comparing ETH to BTC and SOL during the same period, ETH's performance is less satisfactory. From the trends of these two ratios, BTC has consistently outperformed ETH in the two years since Ethereum's official transition, while SOL's performance compared to ETH has gone through a process of initially underperforming and then improving.

According to statistics, in the past two years, compared to BTC, the amount of BTC that 1 ETH could be exchanged for dropped from 0.0807 to 0.0414, a decrease of about 48.70%, and overall, the ETH/BTC exchange rate shows a clear downward trend.

When compared to SOL, before September 2023, 1 ETH could generally be exchanged for over 50 SOL, showing an overall upward trend, with a maximum exchange rate of 125.1895 SOL. However, after September 2023, the exchange rate rapidly declined, dragging down the overall exchange rate over the past two years. Currently, 1 ETH can only be exchanged for 17.4939 SOL, a decrease of about 63.55%.

Some doubts suggest that the direct reason for ETH's poor performance is the decrease in fee revenue. Although this is one of the main purposes of a series of upgrades after the transition, it hinders the value accumulation of ETH. However, according to the data trends from CryptoQuant, in the past two years, Ethereum's monthly transaction fee revenue (considering only Tip fees) has shown a significant upward trend.

As of September this year, over the past 25 months, Ethereum's average monthly fee revenue has been $31.8445 million. If we exclude September this year, the average monthly fee revenue over the past 24 months would increase to $32.8156 million. Moreover, from November 2023 to July 2024, the monthly fee revenue was above $33 million, significantly higher than most of the previous time, and once broke through $60 million.

However, in August this year, Ethereum's monthly fee revenue dropped to $27.96 million. If we estimate based on the average fee revenue for the first 10 days of September, the monthly fee revenue for September may further decline to $25.6847 million. This indirectly confirms the market's concerns about ETH's future value accumulation.

02. The Three Major Layer2s Experience Significant TPS Growth After Introducing Blob, Top 20 Blob Submitters Only Paid a Total of $5.9914 Million

The continuous decrease in Ethereum's fees should actually be an expected outcome, but why have recent doubts centered around this point? A possible reason is that the balance between on-chain activity demand and fee prices has not been established.

The ideal expectation is that Ethereum, through Layer2 and other upgrades, reduces fee prices, which would directly boost or be beneficial for long-term on-chain activity demand, allowing both to reach a balance, and ETH can still accumulate value from it. However, the current issue is that the total demand for on-chain activity is insufficient, coupled with Layer2 taking on more direct on-chain activities and interacting with Ethereum at lower prices. In this situation, the continuous reduction of fees poses challenges to ETH's value feedback and accumulation. In simpler terms, Ethereum's fee optimization plan designed for high-demand periods faces untimely difficulties in low-demand periods.

According to data from Dune (@hildobby), after the introduction of Blob transactions, the TPS of the three Layer2s with the highest locked amounts has significantly increased, with two of them exceeding Ethereum's TPS. A series of optimizations in Ethereum's fees have objectively promoted the development of Layer2, especially the growth of Base.

From the beginning of this year to March 14, the daily average TPS of Arbitrum One, Base, and OP Mainnet was 9.68, 4.33, and 4.15, respectively. From March 14 to now, their daily average TPS has increased to 21.49, 34.41, and 6.43, with increases of 122.00%, 694.69%, and 54.94%, respectively.

Moreover, during the period from the beginning of this year to March 14, the daily average TPS of Arbitrum One, Base, and OP Mainnet was lower than Ethereum's daily average TPS, averaging 26.86%, 67.19%, and 68.76% lower, respectively. However, after the introduction of Blob, the daily average TPS of Arbitrum One and Base has exceeded Ethereum's by 60.24% and 158.85%, respectively. Although OP Mainnet's daily average TPS is still lower than Ethereum's, the gap is also narrowing.

The growth in Layer2 demand benefits from the introduction of Blob transaction types, but the fees paid by Layer2 for Blob are very low. In other words, the improvement in Ethereum's transaction fees has not yet translated into ETH's value accumulation.

According to Dune (@hildobby), as of now, the top 20 submitters of Blob payment fees have collectively paid $5.9914 million, accounting for over 99% of the total fees. Among them, Base, which has seen the fastest TPS growth, has only paid a total of $109,300, Arbitrum has paid a total of $643,500, and OP Mainnet has paid a total of $49,400. Even the highest-paying Taiko has only paid $2.4079 million.

These submitters have collectively submitted 263.93 Blobs, meaning the average fee per Blob is about $2.27. However, this fee data is based on the current situation of insufficient total on-chain demand. If the demand for on-chain activities in Ethereum increases significantly in the future, leading to network congestion, the price of Blob will also rise, and Layer2 will naturally have to pay more fees to Ethereum. At that time, whether Blob can compensate for the portion of fee revenue that Ethereum has ceded will need further observation.

The growth in Layer2 demand is partially reflected in the changes in locked amounts. According to statistics from DefiLlama, after the introduction of Blob, Ethereum's locked amount dropped by 22.13%, with only Blast and Optimism experiencing a greater decline. Base, which saw the fastest TPS growth, experienced a locked amount increase of 105.33%, while Linea, which paid the second-highest Blob fees, saw a locked amount increase of 414.02%. Additionally, although Arbitrum's locked amount also dropped by 19.13%, the decline was less than that of Ethereum.

03. Ethereum's Staking Growth Rate Declines, TVL Grows but Growth Rate Lower than Solana

Another challenge for Ethereum after the transition is how to achieve a steady state between the total staked amount and the locked amount to ensure that on-chain activities remain secure at a certain level. The mutual changes between ETH's price and staking rates will be key to achieving this balance. Essentially, this will determine whether ETH has sufficient liquidity and demand, which is an important requirement for ETH to become a settlement currency. Another requirement is that ETH must maintain its value over time, meaning that significant volatility or sharp short-term increases in ETH should be undesirable.

If we accept the positioning of ETH as a settlement currency, it implies an expectation for Ethereum to have long-term sustainable high demand to achieve long-term stable appreciation of ETH. The question is whether the market is willing to pay for such long-term expectations. When this long-term expectation is insufficient, the emergence of doubts is also natural.

From the demand-side situation reflected in the data, currently, Ethereum's total staked amount is 34.3842 million ETH, an increase of about 150.18% compared to two years ago, which is significant. However, in terms of the growth rate of the staked amount, the average daily growth rate is showing a declining trend, meaning that the marginal growth of the total staked amount is slow. The average daily growth rate for September has dropped to 0.02%, while the average daily growth rate for the first nine months of this year is 0.06%, down more than 0.1 percentage points from last year's average growth rate of 0.17%.

Currently, the three entities with the highest cumulative staked amounts are Lido, Coinbase, and ether.fi, with Lido alone having a staked amount exceeding 9.75 million ETH. This year, the main contributors to the rapid growth of the staked amount are Renzo, ether.fi, and Everstake, with growth rates exceeding 7457%, 3128%, and 2044%, respectively.

While the total staked amount remains high and grows slowly, the locked amount of DeFi on Ethereum reached a short-term peak of $67.901 billion in June this year, currently standing at $44.468 billion, having grown by 50.12% this year and 50.53% over the past two years. This indicates that Ethereum's demand at the application level has somewhat recovered this year.

However, compared to Solana, Ethereum's demand growth appears to be lacking momentum. Solana's current locked amount is approximately $4.781 billion, roughly 1/10th the scale of Ethereum. However, this year, Solana's locked amount has grown by 242.20%, and over the past two years, it has increased by 267.89%, showing rapid development.

To conduct a simple static analysis, if Solana continues to grow at this year's average monthly growth rate (this year's growth / 254 days * 30 days), it is estimated that in another 9 months, its locked amount will exceed $46 billion. If Ethereum also maintains its average monthly growth rate, it is estimated that in another 12 months, Solana's locked amount will surpass that of Ethereum. Competition may be one reason why the market has begun to question whether Ethereum's long-term expectations can be realized.