Solving the problem of liquidity fragmentation and improving token economics are key to driving ETH's rise again.
Author: The DeFi Investor
Translated by: Deep Tide TechFlow
ETH's performance in this market cycle has been quite lackluster.
Back in 2022, when BTC was at the lowest point of the bear market, many predicted that ETH would easily break through $10,000 in this cycle.
However, many people now begin to doubt whether ETH can reach a new all-time high this year.
Given the current low market sentiment, this doubt is understandable, as even ETC has outperformed ETH.
Of course, I remain a loyal supporter of the Ethereum ecosystem, but in my view, ETH's poor performance reflects the need for some profound changes within the Ethereum ecosystem.
Next, I will attempt to answer a key question:
Why has ETH performed poorly in this cycle?
Although the reasons are difficult to pinpoint completely, I believe the following points are major factors.
Excessive ETH Beta Tokens
Almost all Ethereum L2 projects have issued their own tokens, which has led many Ethereum supporters to invest in these L2 tokens rather than ETH itself.
This has significantly reduced the amount of capital flowing into ETH.
For example, if you are optimistic about Solana (which has no L2 projects), you only need to buy SOL; but if you are optimistic about ETH, you may face dozens of token options related to ETH, such as tokens from L2 projects.
Liquidity Fragmentation
Currently, there are over 100 L2 projects in the Ethereum ecosystem.
For skilled DeFi users, moving from one L2 to another is not difficult, but for ordinary investors, this process can be very complex and frustrating.
Although Ethereum L2 offers fast transactions and low costs, if the user experience across L2s cannot be improved, this scalability will struggle to drive the widespread adoption of Ethereum.
Other L1s Catching Up Technologically
In the last market cycle, Ethereum was undoubtedly the leading L1 blockchain across various metrics.
Although Ethereum still has the strongest DeFi ecosystem, other L1s (like Solana) have repeatedly surpassed Ethereum in metrics such as revenue and decentralized exchange (DEX) trading volume.
This is partly due to their technological advancements. While Ethereum has made some significant progress in recent years, some L1 competitors have developed their technology at a faster pace and are now able to offer a better user experience (UX).
How to Bring ETH Back to Its Peak?
Here are some directions worth trying:
Encourage Ethereum's L2 projects to incorporate ETH into their ecosystems, by implementing a mechanism to burn a portion of transaction fees, thereby reducing token supply and enhancing ETH's scarcity and value.
Strengthen ETH's core position in the Ethereum economy (Vitalik has suggested that more support should be given to decentralized applications (dApps) that use ETH as the primary collateral asset).
Allocate more resources to address L2 fragmentation issues, unifying liquidity should become a top priority for Ethereum's development.
Accelerate Ethereum's technological upgrades (Although Ethereum reduces over $100 million in token supply annually through its burn mechanism, its pace of technological upgrades is noticeably lagging behind other L1 blockchains).
Establish a sustainable revenue model for the Ethereum Foundation. By generating stable income from transaction fees or staking rewards, the Ethereum Foundation can reduce its reliance on selling ETH, thereby avoiding negative impacts on market prices.
Promote the scaling of Ethereum L1. While Ethereum's long-term goal is to achieve scaling through L2, there is still significant potential for performance improvements in L1. By optimizing L1's scalability, the overall user experience and competitiveness of Ethereum can be further enhanced.
These measures could be an important step towards elevating Ethereum to new heights.
However, over the past few years, the Ethereum Foundation and its community seem to have fallen into a certain degree of complacency, an attitude that could weaken the project's competitiveness in the long run.
Ethereum remains the leading L1 blockchain, but without adopting more proactive strategies, other L1 projects with ambitious and innovative teams may gain the upper hand in this competition.
It is time for the Ethereum community to reignite the "winner's mindset" to ensure its leadership in the blockchain space.
The good news is that we are already seeing some positive changes, especially from projects within the Ethereum ecosystem that are attempting to improve market confidence in ETH:
MegaETH: Developing a high-performance Ethereum L2 aimed at supporting over 100,000 transactions per second (TPS) to compete with highly scalable L1 blockchains.
Eclipse: Committed to building the first Ethereum L2 supported by the Solana Virtual Machine, aiming to combine Solana's high-speed performance with Ethereum's high security.
Pectra Upgrade: The upcoming major upgrade for Ethereum, Pectra, will significantly enhance user experience (UX) by introducing native account abstraction features, making blockchain interactions simpler and more efficient.
Promotion by Eric Trump: Eric Trump recently publicly endorsed ETH, leading to speculation about whether the U.S. might establish a national Ethereum reserve.
The first three technological advancements will undoubtedly further boost the adoption rate of Ethereum L2. But the more important question is:
Can these advancements truly drive ETH's price up? This remains to be seen.
In my view, the following two points are key to driving ETH's rise again:
Solve the liquidity fragmentation problem (which requires optimizing the user experience across L2s).
Improve ETH's token economics (Vitalik recently suggested in a blog that by encouraging L2 projects to burn a portion of transaction fees, the supply of ETH could be reduced, thereby enhancing its value).
Personally, I currently do not hold a large amount of ETH, as I prefer to invest in rapidly growing DeFi project tokens.
However, an increase in ETH's price would be good news for all altcoin holders.
Historically, ETH's rise has often been a significant trigger for altseason.
The future development of the ETH ecosystem not only concerns Ethereum itself but will also have a profound impact on the entire crypto market.
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