Author: Clow Plain Language Blockchain
In 2025, Ethereum experienced a classic "divergence between fundamentals and price."
In August, the price of ETH broke through its previous all-time high from 2021, reaching above $4,900 and setting a new historical record. Market sentiment hit "extreme greed," and discussions about "Ethereum surpassing Bitcoin" once again became rampant.
However, this favorable situation did not last long. By the end of the year, the ETH price had fallen back to around $2,900, a nearly 40% drop from its peak. Looking at the data from the past 365 days, the decline reached 13.92%, with a volatility rate as high as 141%.
Paradoxically, this year, Ethereum actually delivered an impressive technical performance: it successfully implemented two milestone upgrades, Pectra and Fusaka, completely redefining the network's scalability. The Layer 2 ecosystem experienced explosive growth, with Base's annual revenue surpassing that of many other public blockchains. Giants like BlackRock established Ethereum's position as the preferred settlement layer for real-world assets (RWA) through BUIDL funds, which have amassed over $2 billion in assets under management.
Technology is advancing, the ecosystem is thriving, but the price is falling.
What is actually happening behind this "divergence between fundamentals and prices"?
The Demise of the Deflation Myth
To understand this deviation, we must start by discussing the Dencun upgrade.
The Dencon upgrade on March 13, 2024, became the immediate catalyst for the collapse of Ethereum's deflationary narrative.
The core of this upgrade is the introduction of EIP-4844, which provides a dedicated data availability layer for L2 through blob transactions. Technically, this upgrade has been a resounding success—transaction costs on L2 have dropped by over 90%, significantly improving user experiences on networks like Arbitrum and Optimism. However, it has also triggered significant turbulence in token economics.
Under the EIP-1559 mechanism, the amount of ETH burned (the deflationary force) directly depends on the congestion level of the block space. Dencun significantly increased the supply of data availability, but the demand side has not kept pace—although L2 transaction volumes are growing, blob space remains in oversupply, causing blob fees to remain near zero for extended periods.
Data speaks the loudest. Before the upgrade, Ethereum burned as much as several thousand ETH per day during peak times. After the Dencun upgrade, due to the sharp drop in blob fees, the overall burning amount plummeted. More importantly, the issuance of ETH (approximately 1,800 ETH per day per block) began to exceed the burning amount, causing Ethereum to shift back from deflation to inflation.
According to ultrasound.money data, Ethereum's annual inflation rate in 2024 turned positive from a negative value before the upgrade, meaning the total ETH supply is no longer decreasing but instead experiencing a net daily increase. This completely overturns the foundational narrative of "ultra sound money."
The Dencun upgrade effectively "killed" Ethereum's deflationary narrative for now. ETH has reverted from being a scarce asset that becomes "rarer the more it is used" into a mildly inflationary asset. This sudden shift in monetary policy has disappointed many investors who based their ETH investments on the "ultrasonic money" theory, prompting them to exit. A long-term holder wrote on social media: "I bought ETH because of its deflationary nature. Now that logic is gone, why should I still hold it?"
Technological upgrades are typically positive developments, but in the short term, they have become price killers. This is the biggest paradox facing Ethereum today: the more successful Layer 2 solutions become, the weaker the value capture on the mainnet; the better the user experience, the more ETH holders are hurt.
The Double-Edged Sword of L2: Vampire or Moat?
In 2025, the debate over the relationship between Layer 2 and Layer 1 reached its peak.
From a financial reporting perspective, the state of Ethereum L1 is indeed concerning. The Base chain developed by Coinbase generated over $75 million in revenue in 2025, accounting for nearly 60% of the entire L2 sector's profit share. In contrast, despite high transaction activity in August, Ethereum L1's protocol revenue was only $39.2 million, which is even less than a single quarter's revenue for Base.
If Ethereum were viewed as a company, its revenue has dropped significantly while its market capitalization remains high, making it appear "expensive" from the perspective of traditional value investors.
"L2 is a parasite draining the blood out of Ethereum." This is a mainstream view in the market.
But a deeper analysis will reveal that the situation is far more complex.
All economic activities on L2 are ultimately priced in ETH. On Arbitrum or Base, users pay gas fees in ETH, and in DeFi protocols, the primary collateral is ETH. The more vibrant L2 becomes, the stronger ETH's liquidity is as a "currency."
This currency premium cannot be measured solely by L1 gas revenue.
Ethereum is transitioning from "serving end users directly" to "serving Layer 2 (L2) networks." The blob fees that L2s pay to Layer 1 (L1) essentially represent the cost of purchasing Ethereum's security and data availability. Although blob fees are currently low, as the number of L2s increases, this business-to-business (B2B) revenue model may prove more sustainable than relying solely on individual users in a business-to-consumer (B2C) model.
An analogy is: Ethereum is no longer a retailer but is instead in the wholesale business. Although the profit per individual transaction is lower, the potential for scale may be much greater.
The issue is that the market has not yet understood this shift in the business model.
Competitive Landscape: Facing Pressure from Multiple Fronts
It would be incomplete to discuss Ethereum's challenges without mentioning its competitors.
According to Electric Capital's 2025 annual report, Ethereum remains the undisputed leader in developer activity, with 31,869 active developers throughout the year. Its number of full-time developers is unmatched by any other ecosystem.
However, Ethereum is losing its edge in the competition for new developers. Solana has 17,708 active developers, representing an 83% year-over-year increase, and is particularly strong in attracting new developers.
More importantly, there is track differentiation.
In the PayFi (Payment Finance) sector, Solana has established its leadership with high TPS and low fees. The issuance volume of PayPal USD (PYUSD) on Solana has surged, and institutions like Visa have also begun testing large-scale commercial payments on the Solana network.
In the DePIN (Decentralized Physical Infrastructure) sector, Ethereum has faced significant setbacks. Due to fragmentation between L1 and L2 and volatile gas fees, the star project Render Network migrated to Solana in November 2023. Leading DePIN projects such as Helium and Hivemapper have also chosen Solana.
But Ethereum has not completely collapsed either.
In the RWA (Real-World Assets) and institutional finance sectors, Ethereum maintains an absolute dominant position. BlackRock's BUIDL fund, with a size of $2 billion, primarily operates on Ethereum. This demonstrates that traditional financial institutions have greater trust in Ethereum's security when handling large-scale asset settlements.
In the stablecoin market, Ethereum holds a 54% share, amounting to approximately $1.7 trillion, and remains the primary carrier of "internet dollars."
Ethereum has the most experienced architects and researchers, making it suitable for building complex DeFi and financial infrastructure. Its competitors, on the other hand, have attracted a large number of application-layer developers transitioning from Web2, making them more suitable for building consumer-facing apps.
These are two distinct ecological niches, which also determine the direction of future competition.
The Ambiguous Stance of Wall Street
"It does not seem to have received strong endorsement from mainstream Wall Street financial institutions."
This feeling is not an illusion.The BlockData shows that as of year-end, Ethereum ETFs saw net inflows of approximately 9.8 billion U.S. dollars, while Bitcoin ETFs reached as high as 21.8 billion U.S. dollars.
Why are institutions so "indifferent" to Ethereum?
The core reason is that due to regulatory restrictions, the spot ETFs listed in 2025 will exclude the pledge function.
Wall Street values cash flow the most. Ethereum's native staking yield of 3-4% was originally its core competitive advantage against U.S. Treasury bonds. However, for clients of BlackRock or Fidelity, holding a "zero-coupon" risky asset (ETH in an ETF) is far less attractive than directly holding U.S. Treasury bonds or high-dividend stocks.
This directly led to a "ceiling effect" on institutional fund inflows.
A deeper issue is the ambiguity in positioning. In the 2021 cycle, institutions viewed ETH as the "tech stock index" of the crypto market—that is, a high-beta asset. When the market performs well, ETH should outperform BTC.
However, this logic no longer holds in 2025. If institutions seek stability, they will choose BTC; if they pursue high-risk, high-return opportunities, they will shift to other high-performance blockchains or AI-related tokens. ETH's "alpha" returns are no longer clear.
However, the institutions have not completely given up on Ethereum.
BlackRock's BUIDL fund has allocated its entire $2 billion in Ethereum, sending a clear signal: when it comes to settling assets in the hundreds of millions of dollars, traditional financial institutions only trust Ethereum's security and legal certainty.
The institution's attitude toward Ethereum is more like "strategic recognition, but tactical wait-and-see."
Five Possible Ways to Make a Comeback
Faced with the current slump, what can Ethereum rely on to make a comeback in the future?
First, the breakthrough in staking ETFs.
The 2025 ETF is just a "half-finished product," and institutions holding ETH cannot earn staking rewards. Once an ETF with staking functionality is approved, ETH will instantly become a dollar-denominated asset offering an annualized yield of 3-4%.
For global pension funds and sovereign wealth funds, this type of asset, which combines technology-driven growth (price appreciation) and fixed income (staking returns), will become a standard component of their asset allocation portfolios.
Second, the outbreak of RWA (Real-World Assets).
Ethereum is becoming Wall Street's new backend. BlackRock's BUIDL fund has reached $2 billion, and although it has now expanded to multiple chains, Ethereum remains one of the primary chains.
By 2026, as more government bonds, real estate, and private equity funds are tokenized on the blockchain, Ethereum will support assets worth tens of billions of dollars. While these assets may not necessarily generate high gas fees, they will lock up massive amounts of ETH as liquidity and collateral, significantly reducing the amount of ETH circulating in the market.
Third, the reversal of supply and demand in the Blob market.
The deflationary effect caused by Fusaka is merely a temporary supply-demand mismatch. Currently, Blob space utilization is only 20%-30%. As breakout applications (such as Web3 games and SocialFi) emerge on L2, Blob space will become fully utilized.
Once the Blob market becomes saturated, its fees will rise exponentially.Liquid Capital AnalysisAs L2 transaction volume grows, blob fees could contribute 30%-50% of the total ETH burn by 2026. At that point, ETH will return to a deflationary trajectory, making it an "ultrasonic money" again.
Fourth, a breakthrough in L2 interoperability.
Currently, the fragmentation of the L2 ecosystem (divided liquidity, poor user experience) is the main obstacle to mass adoption. Optimism's Superchain and Polygon's AggLayer are building unified liquidity layers.
More importantly, there is the shared sequencer technology based on L1. It will allow all L2s to share the same decentralized sequencer pool. This not only solves the problem of cross-chain atomic swaps but also enables L1 to recapture value (sequencers need to stake ETH).
When users can switch between Base, Arbitrum, and Optimism as seamlessly as switching mini-programs within WeChat, the network effect of the Ethereum ecosystem will experience exponential growth.
Fifth, the 2026 Technology Roadmap.
The evolution of Ethereum has not stopped. Glamsterdam (Q1 2026) will focus on optimizing the execution layer, significantly improving the efficiency and security of smart contract development, reducing gas costs, and paving the way for complex institutional-grade DeFi applications.
Hegota (Q4 2026) and Verkle Trees are key to the final battle. Verkle Trees will enable stateless client operation, meaning users can validate the Ethereum network on their phones or even in web browsers, without needing to download terabytes of data.
This will make Ethereum far ahead of all its competitors in terms of decentralization.
Summary
Ethereum's "poor performance" in 2025 is not because it has failed, but because it is undergoing a painful transformation from a "retail speculation platform" into a "global financial infrastructure."
It sacrifices short-term L1 revenue for infinite scalability at L2.
It sacrifices short-term token price momentum in exchange for a compliant and secure moat as an institutional-grade asset (RWA).
This is a fundamental shift in business model: from B2C to B2B, and from earning transaction fees to building a global settlement layer.
For investors, Ethereum today resembles Microsoft during the mid-2010s transition to cloud services—although its stock price is temporarily weak and it faces challenges from emerging competitors, the deep network effects and moats it has built are gathering strength for the next phase.
The question is not whether Ethereum can rise, but rather when the market will recognize the value of this transition.