The wealth effect has seriously diminished. Can Ethereum survive its "midlife crisis"?

Author: 1912212.eth, Foresight News

Recently, Vitalik has once again been pushed to the center of the community's criticism. This is not the first time Ethereum has faced such a crisis; since 2018, Ethereum has been questioned multiple times. The most direct trigger for this event is Trump's decision to issue his meme coin TRUMP on the Solana chain. The exaggerated surge of this meme coin has allowed many who seized the opportunity to achieve fame and retire.

The exaggerated wealth effect has led many regretful investors to sigh, and Solana and meme coins have once again become the focus of public opinion. The FOMO sentiment even caused SOL to become in short supply, leading Binance to suspend withdrawals. While TRUMP surged, the price of SOL skyrocketed to $295, setting a new historical high. The market is restless, with Bitcoin and SOL both advancing rapidly, while Ethereum, ranked second by market cap, remains stagnant. What has happened to ETH? Why has it fallen to such a level that everyone scorns it?

New and Old Money No Longer Favor Ethereum

Once upon a time, Ethereum's grand vision as a global computing layer attracted countless tech elites and financial giants, but now it seems to have lost its luster. Bitcoin's status as digital gold is as solid as a rock, with the approval of spot ETFs, MicroStrategy's aggressive purchases, and increasing acceptance by government institutions. Even though its market cap has grown larger, if we calculate its increase from the bottom of $15,000, it has already gained over 6 times returns. BTC remains the favorite of old money like family wealth.

In contrast, Ethereum, while competing with Bitcoin, has remained around $3,000 since March last year, and its performance during the much-anticipated altcoin season has been disappointing.

As of January 16, the total net inflow of Ethereum spot ETFs reached $2.66 billion, but this net inflow seems to have little effect on supporting or raising the coin price. Coin prices are a reflection of consensus in financial markets, and long-term stagnation has eroded a lot of faith and market confidence.

In contrast, Solana, with its low gas fees and the meme wealth wave, has attracted many new users eager to chase after the "dog coins." According to the latest data from Circle's official website, the issuance of USDC on Ethereum's mainnet has reached $31.53 billion, while the new public chain Solana has surged to $7.72 billion.

L2 Fragmenting Liquidity, Voices of Doubt Arise

As early as the last cycle, the debate over L2 versus L1 had already begun, and this cycle has seen the "Four Kings" of L2 successively take the stage, leading to endless discussions about which is superior. However, it seems that the voices favoring L1 have gained widespread recognition in the market.

As an L2 chain focused on scalability, the bridging of funds across chains faces significant issues regarding safety and timeliness, and the user experience has also been greatly compromised. While each chain has its technical strengths, users do not perceive significant differences.

Some project teams have even repeatedly wavered between different L2 chains, further fragmenting liquidity and user experience. Additionally, each L2 has launched its own token system, which has not genuinely benefited Ethereum, thus weakening ETH's attractiveness. For example, most of the network fees from Base last year turned into profits for Coinbase, with very little funding going to Ethereum's mainnet, most of which was retained by Coinbase for its own use. If calculated annually, Coinbase's earnings from Base are close to $100 million.

Kain, founder of Synthetix and Infinex, stated that if he were to operate the EF (Ethereum Foundation), he would definitely pressure L2s to use their sequencer revenue to buy back and burn ETH.

Since their launch, the performance of various L2 tokens has been mediocre. Although their total TVL has exceeded $54 billion, there has been no significant growth since March last year.

Now, L2 technology is also encountering bottlenecks. The continuous growth of L2 chains and the limited Blob storage among multiple L2s have led to soaring fees and increased user costs. Even with the Pectra upgrade increasing the number of Blobs to six, the problem can only be temporarily alleviated, not fundamentally resolved. Solutions include short-term Pectra upgrades, mid-term PeerDAS implementation, and long-term DA expansion.

In this regard, Michael Egorov, founder of Curve, suggested abandoning the L2-centric roadmap and focusing entirely on expanding L1. Furthermore, he bluntly stated that L2 is not a moat but merely a band-aid.

Ethereum's mainnet TPS can now reach about 90 transactions per second, but this is far from enough. As a financial settlement layer, Ethereum urgently needs to scale to meet the massive high-frequency data processing demands. However, the challenges are immense; Ethereum must ensure safety and decentralization while making complex technical adjustments and improvements to the protocol layer, such as sharding and proof of stake. Additionally, community consensus issues are worth noting; the mainnet upgrade and scaling plan must receive broad support and recognition from the community. If it rashly shifts from L2 to L1, the positions of various L2s will become quite awkward, easily leading to community fragmentation and disputes.

In the short term, whether Ethereum will pursue L2 or mainnet upgrades for scaling remains undecided.

DeFi and NFT Dual Turbo Power Dwindling

In the last bull market cycle, the crypto industry experienced an unprecedented frenzy driven by the dual engines of DeFi and NFT, combined with macroeconomic liquidity. As the base currency for DeFi, Ethereum saw a significant positive impact on ETH's demand and visibility after DeFi's explosive growth, continuously boosting its coin price through a flywheel effect.

It is worth mentioning that NFTs also played a significant role in Ethereum's success during the last bull market. During the NFT craze, many platforms and brand NFTs were priced in ETH, meaning that purchasing NFTs required first buying ETH. The popularity of NFTs greatly enhanced ETH's influence in expanding its user base, contributing significantly to the crypto bull market and Ethereum's glory.

Because of this, during the last bull market cycle, if calculated from the bottom, ETH's returns exceeded 50 times.

Fast forward to the current cycle, new DeFi protocols in lending and derivatives have not attracted significant capital inflows, with many opting to create their own chains, and value capture has not flowed to Ethereum. Some DeFi protocol tokens have repeated the wheel-making process, peaking upon launch, which has further dragged down the already precarious market sentiment. Since 2023, the highlights of DeFi have only appeared during the peak phase of Q4 last year, quickly submerged again in the waves of memes and AI. Data shows that the current total TVL of DeFi is still less than the peak of $180 billion set in the last cycle.

The explosion of NFTs in the last cycle often stemmed from the market's consumption after making significant profits from trading coins. However, now, the market's capital flow is limited to three main lines: Bitcoin, on-chain memes, and AI coins. The former has seen ordinary retail investors stop buying due to price factors, while the latter two heavily test PvP skills and research capabilities, and the once easy money-making cycle no longer exists.

The market's overall rise is no longer the case, especially after the difficulty of making money has increased, leading to fewer opportunities for profit. Some altcoin holders have not waited for an altcoin bull market but instead have encountered a "paradigm shift" in their wallets. Those who run fast earn more and lose less, while those who run slowly are severely trapped.

The market's attitude towards DeFi and NFTs remains lukewarm, and Ethereum's once-powerful turbocharging effect has stalled, leading to predictable consequences for ETH's price.

Ethereum's Wealth Effect No Longer, Solana Takes the Baton

This week's market cycle is different from the past, with the waves of AI and meme coins dominating the wealth tide. In previous cycles, ETH benefited from early ICOs and the subsequent emergence of DeFi protocols, creating a strong wealth effect.

Ten years ago, Vitalik gave a code-filled presentation in Silicon Valley, where the entire PPT was composed of code. After the presentation, the investors below were all excited, saying this was the future. Subsequently, Ethereum completed a $20 million fundraising through ICO, setting a record at that time, with the price of one ETH around $0.3.

Now, Ethereum's current price is above $3,000, meaning that if one had participated in the public offering and held on until now, the return would exceed 10,000 times. ICOs made the 2017 cycle filled with many hundredfold or even thousandfold returns, with fundraising primarily conducted in ETH. After some quiet periods, the emergence of many DeFi protocols like AAVE, COMP, SNX, and UNI during the 2021 cycle allowed market investors to reap substantial rewards.

Do not underestimate the wealth effect; whether it is project teams, exchanges, or new listing platforms, all are brainstorming ways to leverage this effect. While the market may not allow most people to make money, it at least enabled some to earn significant profits, which is crucial because the wealth effect can be imitated and spread wildly, attracting countless newcomers.

In this cycle, the most significant wealth effect is no longer the so-called VC coins but rather AI concept coins and MEME coins. For example, in the MEME category, aside from the old favorites DOGE/SHIB/PEPE, there has not been much of a meme wave on Ethereum's mainnet. Even L2 has only seen a brief spotlight with BRETT and DEGEN on the Base chain. AIXBT and VIRTUAL have also become some of the few highlights on Base.

Meme and AI projects on Solana have sprung up like mushrooms after rain, competing to emerge. Taking the recent TRUMP as an example, since its issuance, Circle has cumulatively minted 2.5 billion USDC on the Solana chain within four days. Some high-level players in the Chinese community have even achieved remarkable profits of tens of millions of dollars within four hours, attracting envy from the Twitter community.

Additionally, the past rise of memes like BONK/BOME/WIF/PENGU has injected significant vitality into the Solana ecosystem, with many "meme supercycle" theorists rallying to attract more users into the Solana ecosystem.

In terms of the AI wave, Solana has also outperformed Ethereum, with hot coins like AI16Z/FARTCOIN/GOAT leading the AI trend.

Solana firmly holds the market initiative in AI concept coins and meme coins. Dune data shows that its launch platform Pump.fun has accumulated over $400 million in revenue to date.

As the liquidity infrastructure for memes, Raydium has an annualized income of $363 million, with annualized fees exceeding $3 billion. Over the past three months, fees have increased by over 370%, and revenue has grown by over 260%. The market cap to fee ratio is 1.1 times, and the market cap to revenue ratio is 9.6 times.

Many meme and AI concept coins have chosen Solana over Ethereum and its L2s, largely due to the high gas fees and slow transactions on the mainnet, as well as the vicious cycle caused by fragmented liquidity in L2s. Ultimately, Solana has begun to expand its wealth effect through a continuous flywheel effect.

Currently, according to Solscam data, the number of active wallets remains high at 6 million, nearly six times the level in May 2024.

The daily number of new accounts (counting single accounts with multiple tokens) also remains at a historic high of 20 million.

Behind the explosive growth of Solana's data, perhaps a small spark has turned into a prairie fire.

Ethereum Foundation Selling Coins, Team Overstaffed

With L2s not favored by market investors, the dual engines of DeFi and NFT stalling, and the wealth effect waning, various contradictions have led to ETH's price stagnating and oscillating. The community has begun to direct its grievances towards Vitalik, who has been pulled down from his pedestal. Numerous accusations and criticisms have arisen, and the Ethereum Foundation under Vitalik has become a target of scorn.

In the last cycle, the Ethereum Foundation was known for its top-selling indicators, and in this cycle, the EF's frequent coin-selling actions have often been discovered and reported by on-chain monitoring, leading to an outcry from the community. When the coin price rises, the community may choose to overlook such selling behavior, but once ETH's price stagnates, these actions become "sensitive sell pressure." Vitalik explained that this was to maintain employee salaries and community ecosystem donations, but the community is not buying it.

Aave's founder also expressed his views at this time. After reading the Ethereum Foundation's annual budget report, Stani Kulechov stated that the EF faces expenditure and financial issues and should immediately reduce its burn rate from $130 million to $30 million, streamline staff, and form a new leadership team, among other specific suggestions.

If the coin-selling behavior is just one of the reasons for retail investors' venting, another part of the dissatisfaction with the EF focuses on its lack of direction and leadership.

As an early investor in SOL, Kyle Samani, co-founder of Multicoin Capital, expressed today that he was initially excited about entering the crypto space because of Ethereum. However, after Devcon 3 in November 2017, he lost confidence in Ethereum. "I really can't understand why the Ethereum Foundation is so directionless. No one inside the Ethereum Foundation has enough awareness to push a specific scalability plan."

Furthermore, Kyle added, "In the past seven years, I feel that the Ethereum Foundation hasn't changed much. It still lacks a sense of urgency, and the leadership is disconnected from the needs of core users, still lacking a clear direction."

Well-known Twitter KOL Eric Conner even recently announced his exit from the Ethereum community on social media, stating that the problem is that the current foundation does not report to stakeholders and is gradually sinking into a quagmire while resisting change. The foundation currently exhibits an "anti-victory and competitive mentality," leading many community members to question whether to continue staying.

Under the pressure of widespread skepticism, Vitalik had to step forward to respond, stating that significant changes to its leadership structure are underway and have been ongoing for about a year. Some of these reforms have already been implemented and made public, while others are still in progress. He also strongly supports engaging with funds, institutions, and countries, and is open to discussing ETH from an asset perspective.

In response to the overwhelming criticism, Vitalik stated, "If you continue to apply pressure, you are actually creating an environment that is extremely harmful to top talent. Recently, some of Ethereum's best developers have privately messaged me, expressing their dissatisfaction with the social media environment, which is created by people like you. You are making my job more difficult. At the same time, this makes it even less likely that I will have any interest in acting according to your wishes."

Conclusion

Ethereum is facing a serious mid-life crisis, and what actions Vitalik will take to address this crisis remains to be seen. Fortunately, Ethereum co-founder and Consensys founder Joseph Lubin has stepped forward to voice his support: One of the most admirable qualities of Vitalik is his decision-making process. When problems arise, he listens to various opinions, gathers information, weighs the pros and cons, and makes decisions after considering most of the necessary data. He has heard everyone's opinions, and things are moving forward.

Additionally, Joseph Lubin stated, "Based on what I see, many high-value plans will be publicly announced soon, which will dazzle you. It is best to stay calm now and not lose your mind before the wave begins."

After years of ups and downs, whether Ethereum can still turn the tide remains to be seen.