Author | Clow Blockchain

In 2025, Ethereum experienced a typical "divergence between fundamentals and price."

In August, the price of ETH broke through the previous high of 2021, reaching over $4,900, setting a new all-time high. Market sentiment reached "extreme greed," and discussions about "Ethereum surpassing Bitcoin" resurfaced.

However, the good times did not last long. By the end of the year, the price of ETH fell back to around $2,900, a nearly 40% drop from its peak. Looking at the data over the past 365 days, the decline reached 13.92%, with volatility as high as 141%.

Ironically, Ethereum delivered an impressive technical performance that year: it successfully implemented two milestone upgrades, Pectra and Fusaka, completely restructuring the network's scalability; the Layer 2 ecosystem experienced explosive growth, with Base chain's annual revenue surpassing many public chains; giants like BlackRock established Ethereum as the preferred settlement layer for real-world assets (RWA) through the BUIDL fund, with the fund size exceeding $2 billion.

Technology was advancing, the ecosystem was thriving, but prices were falling.

What exactly happened behind this "divergence between fundamentals and price"?

The Collapse of the Deflation Myth

To understand this divergence, we must start with the Dencun upgrade.

The Dencun upgrade on March 13, 2024, was the direct trigger for the collapse of Ethereum's deflation narrative.

The core of this upgrade was the introduction of EIP-4844, which provided a dedicated data availability layer for L2 through Blob transactions. Technically, this upgrade was nearly perfect—transaction costs for L2 plummeted by over 90%, and the user experience on networks like Arbitrum and Optimism significantly improved. However, it caused severe turbulence in token economics.

Under the EIP-1559 mechanism, the amount of ETH burned (deflationary pressure) directly depended on the congestion level of block space. Dencun significantly increased the supply of data availability, but the demand side did not keep pace—although L2 transaction volumes were increasing, the Blob space became oversupplied, leading to Blob fees lingering near zero for an extended period.

Data speaks volumes. Before the upgrade, Ethereum burned thousands of ETH daily during peak periods; after the Dencun upgrade, due to the plummeting Blob fees, the overall burn rate dropped sharply. More critically, the issuance of ETH (approximately 1,800 ETH per block per day) began to exceed the burn rate, causing Ethereum to shift from deflation back to inflation.

According to data from ultrasound.money, Ethereum's annual inflation rate in 2024 turned from negative before the upgrade to positive, meaning the total supply of ETH no longer decreased but instead grew net daily. This completely overturned the narrative foundation of "Ultra Sound Money."

Dencun effectively "killed" Ethereum's deflation story temporarily. ETH reverted from a "scarce asset that becomes less with use" to a moderately inflationary asset. This sudden shift in monetary policy left many investors who bought ETH based on the "Ultra Sound Money" theory disappointed and choosing to exit. A long-term holder wrote on social media: "I bought ETH because of deflation; now that this logic is gone, why should I still hold?"

Technical upgrades were supposed to be beneficial, but in the short term, they became price killers. This is the biggest paradox for Ethereum right now: the more successful L2 becomes, the weaker the value capture of the mainnet; the better the user experience, the more ETH holders suffer.

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 statement perspective, the situation for Ethereum L1 is indeed concerning. The Base chain developed by Coinbase generated over $75 million in revenue in 2025, capturing nearly 60% of the entire L2 sector's profit share. In contrast, although Ethereum L1 was active in August, its protocol revenue was only $39.2 million, even less than a quarter of Base's.

If we view Ethereum as a company, its revenue has significantly declined while its market value remains high, which appears "expensive" in the eyes of traditional value investors.

"L2 is a parasite, draining Ethereum's blood." This is a mainstream view in the market.

However, a deeper analysis reveals that the situation is far from simple.

All economic activities in L2 are ultimately priced in ETH. On Arbitrum or Base, users pay Gas in ETH, and in DeFi protocols, the core collateral is ETH. The more prosperous L2 becomes, the stronger the liquidity of ETH as a "currency."

This currency premium cannot be measured solely by L1's Gas revenue.

Ethereum is transitioning from "directly serving users" to "serving L2 networks." The Blob fees paid by L2 to L1 essentially purchase Ethereum's security and data availability. Although Blob fees are currently low, with the surge in the number of L2s, this B2B revenue model may prove more sustainable than a purely retail-focused B2C model.

An analogy is that Ethereum is no longer a retailer but is engaging in wholesale business. Although the profit per transaction is lower, the scale effect may be greater.

The problem is that the market has yet to understand this shift in business model.

Competitive Landscape: Multi-Faceted Pressure

It is impossible to fully discuss Ethereum's predicament without mentioning competitors.

According to Electric Capital's 2025 annual report, Ethereum remains the undisputed leader in developers, with 31,869 active developers throughout the year, and its number of full-time developers is unmatched by other ecosystems.
However, in the battle for new developers, Ethereum is losing its edge. Solana's active developers reached 17,708, an 83% year-on-year increase, and it performed impressively among new entrants.

More importantly, there is a differentiation in the tracks.

In the PayFi (payment finance) sector, Solana has established a leadership position with high TPS and low fees. The issuance of PayPal USD (PYUSD) on Solana has surged, and institutions like Visa have begun testing large-scale commercial payments on Solana.

In the DePIN (decentralized physical infrastructure) track, Ethereum has faced significant setbacks. Due to fragmentation between L1 and L2 and fluctuations in Gas fees, the star project Render Network migrated to Solana in November 2023. Leading DePIN projects like Helium and Hivemapper have also chosen Solana.

However, Ethereum has not suffered a complete defeat.

In the RWA (real-world assets) and institutional finance sectors, Ethereum maintains absolute dominance. BlackRock's BUIDL fund, with a size of $2 billion, primarily operates on Ethereum. This proves that traditional financial institutions trust Ethereum's security when handling large-scale asset settlements.

In the stablecoin market, Ethereum holds a 54% share, approximately $170 billion, and remains the primary vehicle for "internet dollars."

Ethereum has the most experienced architects and researchers, making it suitable for building complex DeFi and financial infrastructure; meanwhile, competitors have attracted a large number of application layer developers transitioning from Web2, making them suitable for building consumer-facing apps.

These are two different ecological positions, which will also determine the future direction of competition.

Wall Street's "Ambiguous" Attitude

"It seems that there hasn't been strong recognition from mainstream financial institutions on Wall Street."

This feeling is not an illusion. Data from The Block shows that by the end of the year, net inflows into Ethereum ETFs were about $9.8 billion, while Bitcoin ETFs reached as high as $21.8 billion.

Why are institutions so "cold" towards Ethereum?

The core reason is: due to regulatory restrictions, the spot ETFs launched in 2025 excluded staking features.

Wall Street values cash flow the most. Ethereum's native staking yield of 3-4% was originally its core competitive advantage against U.S. Treasuries. However, for clients of BlackRock or Fidelity, holding a "zero-yield" risk asset (ETH in the ETF) is far less attractive than directly holding U.S. Treasuries or high-dividend stocks.

This directly leads to a "ceiling effect" on institutional capital inflows.

A deeper issue is the ambiguous positioning. During the 2021 cycle, institutions viewed ETH as the "tech stock index" of the crypto market, a high-beta asset—when the market is good, ETH should rise more than BTC.

However, in 2025, this logic no longer holds. If seeking stability, institutions choose BTC; if pursuing high risk and high returns, they turn to other high-performance public chains or AI-related tokens. The "alpha" returns of ETH are no longer clear.

However, institutions have not completely abandoned Ethereum.

BlackRock's BUIDL fund has all $2 billion invested in Ethereum, sending a clear signal: when handling asset settlements in the hundreds of millions, traditional financial institutions only trust Ethereum's security and legal certainty.

The attitude of institutions towards Ethereum is more like "strategic recognition but tactical wait-and-see."

Five Possibilities for a Comeback

In the face of the current downturn, what can Ethereum rely on for a comeback?

First, the breakthrough of staking ETFs.

The ETFs of 2025 are merely "semi-finished products," and institutions holding ETH cannot earn staking rewards. Once ETFs with staking features are approved, ETH will instantly transform into a dollar-denominated asset with an annual yield of 3-4%.

For global pension funds and sovereign wealth funds, this asset, which combines technological growth potential (price appreciation) and fixed income (staking returns), will become a standard in asset allocation.

Second, the explosion of RWA.

Ethereum is becoming the new backend for Wall Street. BlackRock's BUIDL fund has reached $2 billion, and although it has now expanded to multiple chains, Ethereum remains one of the main chains.

By 2026, as more government bonds, real estate, and private equity funds go on-chain, Ethereum will carry trillions of dollars in assets. Although these assets may not generate high Gas fees, they will lock up massive amounts of ETH as liquidity and collateral, significantly reducing the market's circulating supply.

Third, the reversal of supply and demand in the Blob market.

The deflation failure caused by Fusaka is only a temporary supply-demand mismatch. Currently, the utilization rate of Blob space is only 20%-30%. As blockbuster applications (such as Web3 games and SocialFi) emerge on L2, Blob space will be filled.

Once the Blob market saturates, its fees will rise exponentially. Liquid Capital analyzes that as L2 transaction volumes grow, by 2026, Blob fees could contribute 30%-50% of the total ETH burn. At that point, ETH will return to the deflationary trajectory of "Ultra Sound Money."

Fourth, breakthroughs in L2 interoperability.

The current fragmentation of the L2 ecosystem (liquidity fragmentation, poor user experience) is the main barrier to large-scale adoption. Optimism's Superchain and Polygon's AggLayer are building a unified liquidity layer.

More importantly, there is shared sequencer technology based on L1. It will allow all L2s to share the same decentralized sequencer pool, solving the problem of cross-chain atomic swaps and enabling L1 to recapture value (sequencers need to stake ETH).

When users switch between Base, Arbitrum, and Optimism as smoothly as switching mini-programs in WeChat, the network effects of the Ethereum ecosystem will explode exponentially.

Fifth, the 2026 technology roadmap.

Ethereum's evolution has not stopped. Glamsterdam (first half of 2026) will focus on optimizing the execution layer, significantly improving the development efficiency and security of smart contracts, and reducing Gas costs, paving the way for complex institutional-level DeFi applications.

Hegota (second half of 2026) and Verkle Trees will be key to the final battle. Verkle Trees will allow for the operation of stateless clients, meaning users can verify the Ethereum network on their phones or even browsers without downloading terabytes of data.

This will place Ethereum far ahead of all competitors in terms of decentralization.

Summary

Ethereum's performance in 2025 was "poor," not because it failed, but because it is undergoing a painful transformation from a "retail speculation platform" to a "global financial infrastructure."

It sacrificed short-term L1 revenue for unlimited scalability in L2.

It sacrificed short-term price surges for the compliance and security moat of institutional-level assets (RWA).

This is a fundamental shift in the business model: from B2C to B2B, from earning transaction fees to becoming a global settlement layer.

For investors, Ethereum now resembles Microsoft during its transition to cloud services in the mid-2010s—although its stock price is temporarily sluggish and facing challenges from emerging competitors, the deep network effects and moats it is building are accumulating strength for the next phase.

The question is not whether Ethereum can rise, but when the market will understand the value of this transformation.

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