The wealth effect has severely 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 incident was Trump's decision to issue his meme coin TRUMP on the Solana chain. The exaggerated price surge of this meme coin allowed many who seized the opportunity to achieve fame and retire.

The exaggerated wealth effect has caused many regretful investors to lament their missed opportunities, making Solana and meme coins the focus of public opinion once again. The FOMO sentiment even led to a shortage of SOL, causing Binance to suspend withdrawals. While TRUMP surged, the price of SOL skyrocketed to $295, setting a new historical high. The market is restless, with both Bitcoin and SOL advancing rapidly, while Ethereum, ranked second by market cap, remains stagnant. What has happened to ETH? Why has it fallen to such a despised state?

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 achieved over 6 times the return. BTC remains the favorite of old money and family wealth.

In contrast, Ethereum, although competing with Bitcoin, has remained around $3,000 since March of last year, disappointing many during the much-anticipated altcoin season.

As of January 16, the total net inflow of Ethereum spot ETFs reached $2.66 billion, but this inflow seems to have little effect on supporting or raising the coin price. The coin price is a manifestation of consensus in the financial market, and long-term stagnation has eroded a significant amount of faith, depleting market confidence.

In contrast, Solana, with its low gas fees and the meme-fueled 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 Splits 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 Heavenly Kings" of L2 make their appearances, leading to endless discussions about which is superior. However, it seems that the voices favoring L1 have gained widespread acceptance in the market.

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

Some project teams have even oscillated between various L2 chains, further splitting liquidity and user experience. Additionally, each L2 has launched its own token system, which has not truly benefited Ethereum, further weakening ETH's appeal. 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, the founder of Synthetix and Infinex, stated that if he were to run the Ethereum Foundation, he would definitely pressure L2 to use their sequencer revenues to burn ETH.

Since their launch, the tokens of various L2s have performed mediocrely. Although their total TVL has exceeded $54 billion, there has been no particularly significant growth since March of 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 solved. Solutions include short-term Pectra upgrades, mid-term PeerDAS implementations, and long-term DA expansions.

In this regard, Michael Egorov, the 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 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 security and decentralization while making complex technical adjustments and improvements to the protocol layer, such as sharding and proof of stake. Additionally, community consensus is also a concern; the mainnet upgrade and expansion plan needs 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 splits and disputes.

In the short term, whether Ethereum's expansion will take the L2 or mainnet upgrade route remains undecided.

DeFi and NFT Dual Turbo Power Exhaustion

In the last cycle, the crypto industry experienced an unprecedented bull market 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 experienced 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 much capital frenzy, 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, dragging 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 flow of funds in the market 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 require high PvP skills and research capabilities, making the once easy money-making cycle a thing of the past.

The market no longer experiences widespread increases, especially as the difficulty of making money has risen, leading to fewer opportunities. Some altcoin holders have not seen the anticipated altcoin bull market but instead faced 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 tepid, and Ethereum's turbocharged wealth effect has stalled, leading to predictable consequences for ETH's price.

Ethereum's Wealth Effect Fades, Solana Takes the Baton

This week's market cycle is different from the past, with the AI and meme coin waves dominating the wealth tide. In previous cycles, ETH benefited from early ICOs and the continuous 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 agitated, saying this was the future. Subsequently, Ethereum completed a $20 million fundraising through ICO, setting a new record at the time, while the price of one ETH was around $0.30.

Now, Ethereum's current price is above $3,000, meaning that those who participated in the public offering and held on until now would see returns exceeding 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, many DeFi protocols like AAVE, COMP, SNX, and UNI emerged during the 2021 cycle, allowing 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 create wealth effects. 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 like 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.

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

Moreover, the past meme coins like BONK/BOME/WIF/PENGU have injected significant vitality into the Solana ecosystem, with many "meme supercycle" theorists rallying support and attracting more users to 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 issuance 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 high mainnet gas fees, slow transactions, and 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 at a high of 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 historical high of 20 million.

The explosive growth of Solana's data may signal that 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 frustrations towards Vitalik, who has been pulled down from his pedestal. Numerous accusations and criticisms have emerged, 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 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 selling 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 is facing 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 reason for retail investors' frustration, another part of the dissatisfaction with the EF focuses on its lack of direction and leadership.

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

Additionally, Kyle added, "In the past seven years, I feel that the Ethereum Foundation has not changed much. It still lacks a sense of urgency, is disconnected from the needs of core users, and still lacks a clear direction."

Well-known Twitter KOL Eric Conner even announced his exit from the Ethereum community on social media, stating that the problem lies in the foundation's failure to report to stakeholders, gradually sinking into a quagmire and resisting change. The foundation currently exhibits an "anti-victory and competitive mindset," 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 are underway in its leadership structure, which has 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 it remains to be seen what actions Vitalik will take to address this crisis. 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 this giant ship called Ethereum still has a chance to turn the tide remains to be seen.