Ethereum’s “midlife crisis”: daily revenue drops 99% in half a year

Written by Arain, 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 to the success of Ethereum."

But in this cycle, the price performance of Ethereum has not been satisfactory. According to Coingecko data, in the past year, Bitcoin has risen by more than 116% against the US dollar, Ethereum has risen by 44% against the US dollar, and Solona has risen by more than 548% against the US dollar. In a blue-chip investment portfolio, Ethereum's price performance is obviously lagging behind.

The absence of star projects, the sluggish price, and the dazzling performance of Ethereum killer "Solona" have put Ethereum in a dilemma in public opinion in the past year, and doubts have emerged from time to time. The criticism against Ethereum reached a fever pitch when the content of the Bankless dialogue with Multicoin was presented.

In the show, Bankless mentioned a set of worrying data: the annual growth rate of SOL/ETH has reached 300% in the past year, but the ratio of ETH/BTC has fallen by 50% in the past two years, and the market value has been halved relative to Bitcoin.

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

Interestingly, although the host of Bankless claimed that Kyle was the best person to invite to talk about Ethereum at this time, Multicoin has been firmly bearish on Ethereum from the beginning and invested in "Ethereum killers." Once popular for betting on the famous "EOS", and refusing to admit mistakes, the Solana invested in now may have a chance to compete with Ethereum.

Now the question is, does the stagflation of Ethereum prices really mean that there is something wrong with Ethereum? Is Ethereum really experiencing a "mid-life crisis" as Kyle said?

What happened to the sideways trend?

The description of "Ethereum not rising" is inaccurate, especially when Ethereum is compared with itself. According to Coingecko data, between October 2023 and March 12, the price of Ethereum was on an upward trend, although not as good as Bitcoin's performance-it reached the high point of the previous cycle again and set a new high. Ethereum reached a high of $4070.6 per coin during this period, while the historical high was $4878.26 per dollar.

During this period, the market intensively released information about Bitcoin spot ETF and Ethereum spot ETF. The SEC finally lived up to expectations and approved Bitcoin spot ETF and Ethereum spot ETF on January 11, 2024 and May 24, 2024, respectively.

Perhaps influenced by the news of the approval of spot ETFs, the prices of Bitcoin and Ethereum have already begun to riot in October 2023, and there is a possibility of digesting the good news in advance.

For Ethereum, there is another difference, that is, the "Dancun (Cancun) upgrade" occurred during this period. This upgrade is a major upgrade event for Ethereum. It is another upgrade of the main chain after the Shanghai upgrade. The goal of the upgrade is to further improve performance and reduce network fees. The most intuitive manifestation is that the Gas fee required for digital asset transactions on the Ethereum Layer2 network will be significantly reduced, and the expected reduction is more than 90% (the result is in line with expectations).

The Cancun upgrade was completed on March 13, 2024, and the start and end events basically coincided with the time interval of Ethereum's price increase. That is to say, after the Cancun upgrade, Ethereum formed this "no increase" phenomenon, and there is still no sign of reversal.

After the upgrade event, Ethereum spot ETF and Ethereum spot ETP were approved by the SEC for listing and began trading one after another-this can also be said to be a positive at the trading level. Bitcoin continued to rise and hit a record high after the Bitcoin spot ETF was approved, but this script did not play out on Ethereum.

According to Sosovalue.xyz data, since its approval, the US Bitcoin spot ETF has accumulated a net inflow of approximately US$16.9 billion, while the US Ethereum spot ETF has accumulated a net inflow of -US$560 million. The listing of the Ethereum ETF did not promote the inflow of funds, but instead aggravated the loss of funds, putting pressure on the price of Ethereum.

Dune data shows that currently 64.7% of the US Ethereum spot ETF asset management scale (AUM) belongs to Grayscale. As its corresponding buy-side research, Grayscale Research stated in a study in May this year that the US Ethereum spot ETF will help increase the demand and price of ETH, but based on the corresponding high valuation at the time of approval, they believe that the US Ethereum spot ETF has little room for price increases after approval.

The Ethereum price trend does not reflect the price support role of US Ethereum spot ETF buyers. Grayscale Research pointed out in its August research report that there are two reasons for the subsequent sharp drop in Ethereum prices:

• On the one hand, it is the long positions in perpetual futures. The approval of US spot Ethereum ETP has enabled traders to increase their long positions. However, the long positions were liquidated during the decline, accelerating the price decline;

• On the other hand, it may be the actual and expected selling by a few large holders, such as market maker Jump Crypto, venture capitalist Paradigm and Golem Network. Grayscale Research estimates that these three entities had about $1.5 billion in Ethereum at the time, which could all be sold.

Based on the fact that Ethereum did not rebound significantly in August, Grayscale Research believes that this reflects, to a certain extent, the long positions of CME-listed futures and perpetual futures, and the excess of speculative positions.

"More fundamentally, the Ethereum network is undergoing a major transformation... Ethereum plans to achieve greater expansion by transferring more transactions to the L2 network, which will be regularly settled to the Layer 1 mainnet. This strategy is working. Ethereum L2 has flourished this year, and major companies such as Sony have announced projects to build in Ethereum. However, this has also led to lower fee income for the mainnet, which has further potential impact on the value of ETH." Grayscale Research wrote in a research report released on September 3, pointing out that "Ethereum's expansion strategy is working effectively, and the current market pessimism about Ethereum is unfounded, but the shift in market consensus may take some time."

In other words, there is no reversal now because the market has not reached a consensus on the Ethereum upgrade. One of the important points is that "mainnet fee income has decreased", which is the actual result of the Cancun upgrade EIP-4844. The expected result is to expand L2 and reduce fees. The aforementioned Bankless dialogue program with Multicoin is to point the finger at Ethereum's current predicament.

So, has L2 really pushed Ethereum to the brink of danger?

Controversial L2

Multicoin's talk show bombarding Ethereum is mainly aimed at Layer 2. Kyle Samani proposed that "Layer2 does not belong to Ethereum because they do not contribute to Ethereum's value capture." Specifically, Ethereum Layer 1 outsourced all MEV and execution to Layer 2, just like Ethereum handed over its cash cow to others.

This view basically denies the key efforts made by Ethereum for upgrading.

Layer2 is actually a solution, not the ultimate solution. Looking back at Ethereum's performance in several historical bull markets, network congestion is often criticized. The consequence is that users often feel that the fees are very "expensive" in the bull market, and sometimes they cannot use it normally. The market often calls for the arrival of "ETH2.0".

ETH2.0 is a long-term plan for Ethereum to upgrade, and Layer2 is one of its parts. It was born to solve the problem of Ethereum expansion - this is like building an elevated road on a highway to alleviate the congestion problem on the original highway.

The Shanghai upgrade completed on April 13, 2023 kicked off the prelude to Layer 2. The content of the Shanghai upgrade mainly includes changes in the EVM object format, the development of the beacon chain to release the staking function, and the Layer 2 fee reduction. The mechanism of Ethereum POW is completely converted to POS.

After the Shanghai upgrade, a large number of staked ETH were redeemed, and new participants also entered the market.

According to Dune data, since the Shanghai upgrade, the cumulative net inflow of Ethereum staking is about 13.96 million ETH, which reflects the interest of market participants in Ethereum staking. However, the upgrade event received a lukewarm response in the secondary market. The price of Ethereum was about $1,920 per coin on the day the Shanghai upgrade was completed, and the price of Ethereum was $1,652 per coin before the Cancun upgrade (Holesky test network launch). This may be limited by the market environment at the time, because Bitcoin's price performance was similar during the same period.

The Cancun upgrade, which was completed on March 13, 2024, is the top priority of Layer 2. The most significant point is that the GAS fee is lower: for the same money, after this upgrade, you can enjoy faster speeds, better performance, and pay less GAS fees. This is related to the core EIP-4844 of the Cancun upgrade, but this is also a point that Kyle Samani fiercely criticized.

Protolambda, a researcher on the Optimism team and a former researcher at the Ethereum Foundation, once wrote that Layer1 is the data layer, L2 is responsible for performing calculations, and Layer1 provides security for Rollup (Layer2 is one of the solutions for Rollup) and acts as a data layer. By introducing a new design of transaction types that carry "blob data", the base layer can store Layer2 data more easily without affecting the security of data availability.

"blob data" is a new type of transaction introduced by EIP-4844, which is responsible for paying transaction fees. This large data packet temporarily exists in the consensus layer, thereby reducing the fees of the Ethereum network and Rollup.

From the data, it seems that Kyle Samani's point of view can be felt more intuitively:

Token Terminal data shows that on March 5, the revenue of the Ethereum L1 network reached the highest revenue of the year (so far), about 35 million US dollars; September 2 hit the lowest revenue of the year so far, about 200,000 US dollars. A decrease of 99.4% in half a year.

The Base chain launched by Coinbase, which is built on the Ethereum Layer2 network, generated about 2.5 million US dollars in revenue in August, but only paid about 11,000 US dollars to Ethereum.

At first glance, Layer2 has taken a piece of the pie from Layer1. Although from the current level of gas fees, Ethereum has indeed achieved its goal and reduced the network's gas fees. But letting the "execution state" leave Layer1 and move to Layer2 is a problem, at least in Kyle Samani's view. Ryan of Bankless further questioned that when Layer2 develops to a certain stage, it will form a competitive relationship with Ethereum Layer1 and lead to a breakdown of cooperation.

Independent researcher @Web3Mario wrote that Layer1 and Layer2 are not an execution outsourcing relationship as Kyle Samani claims, but a subordinate relationship, because Layer2 does not bear the consensus task of the transaction, and it relies on L1 to give finality through technical means such as "optimistic solutions" or "ZK solutions".

Layer2 acts as a value capture agent for Ethereum in various fields, and Ethereum guarantees its security, so Layer1 "taxes" Layer2. This view seems to be closer to the original design intention of the researchers of the Ethereum Foundation.

From the current data level, the Layer2 track is very involuted. After the Cancun upgrade, it has not yet contributed to Layer1's revenue, but has instead divided Layer1's revenue. However, according to data from l2beat., there are currently as many as 71 Layer2 projects, and the total locked TVL has soared rapidly after March 2024, with a value of about 14.48 million in ETH.

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

Among them, Foundation researcher Dankrad Feist said that Ethereum is building a most neutral financial platform, Layer1 is the intersection of multiple sub-fields, and a large number of valuable activities will be generated through fees (assuming that L1 is expanded enough). Otherwise, there are other options, such as ETH as the main 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 income and MEV, and that rollups may eventually become parasites. I don't think this is correct. The highest value transactions will still occur on Ethereum L1, and rollups will expand the entire ecosystem by providing users with a large amount of transaction space. This relationship is symbiotic: Ethereum provides cheap data availability for rollups, and rollups make Ethereum L1 a natural hub for high-value transactions." Dankrad Feist replied.

Anders Elowsson, a researcher at the Ethereum Foundation, believes that ETH will increase in value when Ethereum promotes sustainable economic activities.

It is worth mentioning that the expansion of Layer1 is also within the scope of Ethereum's plan, and there is new progress at present. At least from the latest information revealed by the official staff, it is not as Kyle Samani claimed in the dialogue program that all bets are placed on the Rollup-centric roadmap, such as abandoning the expansion kit Layer1.

Dankrad Feist said that expanding Layer1 execution is the goal. In parallel with building rollups, Layer1 itself will expand to 10-1000 times the current capacity, and Rollups will provide the rest to reach world scale. Justin Drake, a researcher at the Ethereum Foundation, said that the Ethereum Foundation's long-term sustainable plan is to use SNARK to expand the EVM execution of the main network. In the past few months, the SNARKization of Layer1 EVM has made great progress, which will make the burden on users and consensus participants very light. Validators can verify low-cost SNARKs without having to re-execute EVM transactions.

A review of Ethereum's historical crises

Whether the crisis Ethereum is facing this time is real or fake, the Ethereum team's ability to solve problems is the most important.

Looking back at several crises encountered by Ethereum:

1. The "smart contract vulnerability crisis" in 2016, the famous event is "The DAO smart contract vulnerability", which led to hacker attacks and the loss of millions of dollars worth of ether.

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

2. Since 2017, the Ethereum network has encountered a congestion crisis. With the rise of DApp (decentralized applications), the Ethereum network is severely congested and transaction fees have soared.

Solution: The community began to explore solutions, which led to the prototype of ETH2.0, and introduced sharding technology and Layer 2 expansion solutions, such as Rollups and State Channels, to solve the congestion problem.

3. Since 2018, the high energy consumption caused by the Ethereum POW mechanism has aroused concerns from environmental organizations and users. This is not strictly a major crisis, but the impact of the solution it has promoted on the Ethereum network is important, so it is listed.

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

The crisis of Ethereum has given some new public chains known as "Ethereum killers" historical development opportunities, including BNB Chain, Cardano, Avalanche, Polkadot, EOS, Solana, etc. Except for Solana, which is currently in progress, the others have more or less competed with Ethereum in terms of momentum.

After Layer 2, the only one still calling for the title of "Ethereum killer" is Solana, and one of its largest investors and supporters is Multicoin.

In this sense, Ethereum is successful.