Author | Clow Plain Talk Blockchain
In 2025, Ethereum experienced a classic case of "fundamentals diverging from price".
In August, the price of ETH broke through its previous all-time high from 2021, reaching above $4,900, setting a new record. Market sentiment hit "extreme greed," and discussions about "Ethereum surpassing Bitcoin" were rampant once again.
However, the good times didn't last. By the end, the ETH price had fallen back to around $2,900, a drop of nearly 40% from its peak. Looking at the data over the past 365 days, the decline was 13.92%, with a volatility as high as 141%.
The paradox is that Ethereum actually delivered a stellar technical performance this year: it successfully implemented two milestone upgrades, Pectra and Fusaka, completely revamping the network's scaling capabilities; the Layer 2 ecosystem experienced explosive growth, with Base chain's annual revenue surpassing that of many public chains; giants like BlackRock established Ethereum's position as the preferred settlement layer for real-world assets (RWA) through the BUIDL fund, which grew to over $2 billion in size.
Technology was advancing, the ecosystem was thriving, but the price was falling.
What exactly happened behind this "divergence between fundamentals and price"?
The Demise of the Deflation Narrative
To understand this divergence, one must start with the Dencun upgrade.
The Dencun upgrade on March 13, 2024, was the direct trigger that led to the collapse of Ethereum's deflation narrative.
The core of this upgrade was the introduction of EIP-4844, providing L2s with a dedicated data availability layer through Blob transactions. Technologically, this upgrade was nearly perfect – L2 transaction costs plummeted by over 90%, significantly improving the user experience on networks like Arbitrum and Optimism. But in terms of tokenomics, it caused severe turbulence.
Under the EIP-1559 mechanism, the amount of ETH burned (the deflationary force) is directly tied to the congestion level of block space. Dencun significantly increased the supply of data availability, but demand did not keep pace – although L2 transaction volume grew, Blob space was oversupplied, causing Blob fees to linger near zero.
The data speaks volumes. Before the upgrade, Ethereum could burn thousands of ETH per day during peak periods; after the Dencun upgrade, due to plummeting Blob fees, the overall burn rate dropped sharply. More critically, ETH issuance (about 1800 ETH/day per block) began to exceed the burn rate, and Ethereum shifted from deflation back to inflation.
According to ultrasound.money data, Ethereum's annual inflation rate turned from negative pre-upgrade to positive in 2024, meaning the total supply of ETH was no longer decreasing but increasing net each day. This completely颠覆了 the narrative foundation of "Ultra Sound Money".
Dencun effectively, temporarily, "killed" Ethereum's deflation story. ETH transformed from a scarce asset that "becomes rarer with use" back into a mildly inflationary asset. This sudden shift in monetary policy disappointed many who had invested in ETH based on the "ultrasound money" theory and led them to exit. A long-term holder wrote on social media: "I bought ETH because of deflation. Now that logic is gone, why should I still hold it?"
A technological upgrade, meant to be a positive, became a short-term price killer. This is Ethereum's biggest paradox right now: the more successful L2s are, the weaker the value capture for the mainnet; the better the user experience, the more ETH holders suffer.
L2's Double-Edged Sword: 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 state of Ethereum L1 is indeed concerning. The Base chain, developed by Coinbase, generated over $75 million in revenue in 2025, capturing nearly 60% of the profit share in the entire L2 sector. In contrast, although Ethereum L1 was active in August, its protocol revenue was only $39.2 million, less than Base's quarterly figure.
If Ethereum were a company, its revenue would have dropped significantly while its market cap remained high, making it seem "expensive" in the eyes of traditional value investors.
"L2s are parasites, sucking Ethereum dry." This is a mainstream view in the market.
But a deeper analysis reveals the situation is far more complex.
All economic activity on L2s is ultimately denominated in ETH. Users pay Gas on Arbitrum or Base in ETH, and the core collateral in DeFi protocols is ETH. The more prosperous L2s are, the stronger the liquidity of ETH as "money".
This monetary premium cannot be measured by L1 Gas revenue alone.
Ethereum is transitioning from "serving users directly" to "serving L2 networks". The Blob fees L2s pay to L1 are essentially payments for Ethereum's security and data availability. Although Blob fees are currently low, as the number of L2s explodes, this B2B revenue model could be more sustainable than a B2C model reliant solely on retail users.
An analogy is: Ethereum is no longer a retailer but is in the wholesale business. Although the profit per transaction is lower, the economies of scale could be greater.
The problem is that the market has not yet understood this shift in business model.
Competitive Landscape: Pressure from Multiple Sides
One cannot fully discuss Ethereum's困境 without talking about its rivals.
According to Electric Capital's 2025 annual report, Ethereum remains the undisputed king of developers, with 31,869 active developers throughout the year, and its number of full-time developers is unmatched by any other ecosystem.
But in the battle for new developers, Ethereum is losing its advantage. Solana's active developers reached 17,708, an 83% year-on-year increase, and it performed strongly among newcomers.
More importantly is the赛道 differentiation.
In the PayFi (Payment Finance) field, Solana has established a leadership position with its high TPS and low fees. The issuance of PayPal USD (PYUSD) on Solana surged, and institutions like Visa also began testing large-scale commercial payments on Solana.
In the DePIN (Decentralized Physical Infrastructure)赛道, Ethereum suffered a major setback. Due to fragmentation between L1 and L2 and Gas fee volatility, the star project Render Network migrated to Solana in November 2023. Leading DePIN projects like Helium and Hivemapper also chose Solana.
But Ethereum is not in全面溃败.
In the RWA (Real World Assets) and institutional finance领域, Ethereum maintains absolute dominance. BlackRock's BUIDL fund, with its $2 billion size, runs mostly on Ethereum. This proves that when it comes to settling large-scale assets, traditional financial institutions trust Ethereum's security more.
In the stablecoin market, Ethereum holds a 54% share, about $170 billion,仍然是 the main carrier of "Internet dollars".
Ethereum has the most experienced architects and researchers, suitable for building complex DeFi and financial infrastructure; while competitors attract a large number of application-layer developers transitioning from Web2, suitable for building consumer-facing Apps.
These are two different ecological positioning, which also determine the future direction of competition.
Wall Street's "Ambivalent" Attitude
"It seems it hasn't received strong recognition from mainstream Wall Street financial institutions."
This feeling is not错觉.The Block data shows that as of year-end, Ethereum ETF net inflows were about $9.8 billion, while Bitcoin ETF inflows reached a high of $21.8 billion.
Why are institutions so "cool" towards Ethereum?
The core reason is: Due to regulatory restrictions, the spot ETFs上市 in 2025 stripped out staking functionality.
Wall Street values cash flow above all. Ethereum's native 3-4% staking yield was its core competitiveness against US Treasuries. However, for clients of BlackRock or Fidelity, holding a "zero-yield" risky asset (ETH in an ETF) is far less attractive than holding US Treasuries or high-dividend stocks directly.
This directly led to a "ceiling" effect on institutional fund inflows.
A deeper issue is模糊 positioning. In 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.
But in 2025, this logic no longer holds. If seeking stability, institutions choose BTC; if pursuing high risk and high return, they turn to other high-performance public chains or AI-related tokens. ETH's "alpha"收益 is no longer clear.
However, institutions have not completely abandoned Ethereum either.
BlackRock's $2 billion BUIDL fund is entirely on Ethereum, sending a clear signal: When handling asset settlements worth hundreds of millions of dollars, traditional financial institutions only trust Ethereum's security and legal certainty.
The institutional attitude towards Ethereum is more like "strategic recognition, but tactical观望".
Five Potential Paths to a Comeback
Facing the current slump, what could Ethereum rely on for a future comeback?
First, the breakthrough of staking ETFs.
The 2025 ETFs were only "semi-finished products"; institutions holding ETH could not earn staking rewards. Once ETFs with staking functionality are approved, ETH would instantly become a dollar-denominated asset with a 3-4% annual yield.
For global pension funds and sovereign wealth funds, this type of asset,兼具科技成长性 (price appreciation) and fixed income (staking returns), would become a standard配置 in their asset allocation tables.
Second, the explosion of RWA.
Ethereum is becoming Wall Street's new backend. BlackRock's BUIDL fund reached $2 billion in size, and although it has since expanded to multi-chain, Ethereum remains a primary chain.
In 2026, as more government bonds, real estate, and private equity funds go on-chain, Ethereum will carry trillions of dollars in assets. These assets may not generate high Gas fees, but they will lock up massive amounts of ETH for liquidity and collateral, significantly reducing the circulating supply.
Third, a reversal in the Blob market supply and demand.
The deflation failure caused by Fusaka is only a temporary supply-demand mismatch. Currently, Blob space utilization is only 20%-30%. As killer apps emerge on L2s (like Web3 games, SocialFi), Blob space will be filled.
Once the Blob market saturates, its fees will rise exponentially. Liquid Capital analysis suggests that with the growth of L2 transaction volume, by 2026, Blob fees could contribute 30%-50% of ETH's total burn. At that point, ETH will return to the deflationary track of "ultrasound money".
Fourth, breakthroughs in L2 interoperability.
The current fragmentation of the L2 ecosystem (split liquidity, poor user experience) is a major obstacle to mass adoption. Optimism's Superchain and Polygon's AggLayer are building unified liquidity layers.
More importantly is the technology of L1-based shared sequencers. It will allow all L2s to share the same decentralized sequencer pool, not only solving the problem of cross-chain atomic swaps but also allowing L1 to recapture value (sequencers need to stake ETH).
When users can switch between Base, Arbitrum, and Optimism as smoothly as switching mini-programs within WeChat, the network effects of the Ethereum ecosystem will explode exponentially.
Fifth, the 2026 technical roadmap.
Ethereum's evolution has not stopped. Glamsterdam (H1 2026) will focus on optimizing the execution layer, significantly improving smart contract development efficiency and security, reducing Gas costs, and paving the way for complex institutional-grade DeFi applications.
Hegota (H2 2026) and Verkle Trees are key to the final battle. Verkle Trees will enable stateless client operation, meaning users can verify the Ethereum network on their phones or even browsers without downloading terabytes of data.
This will give Ethereum a遥遥领先 lead in decentralization over all competitors.
Summary
Ethereum's performance in 2025 looked "ugly" not because it failed, but because it is undergoing a painful metamorphosis from a "retail speculation platform" to "global financial infrastructure".
It sacrificed short-term L1 revenue in exchange for L2's infinite scalability.
It sacrificed short-term token price explosiveness in exchange for the compliance and security moat of institutional-grade assets (RWA).
This is a fundamental shift in business model: from B2C to B2B, from earning transaction fees to being the global settlement layer.
For investors, the current Ethereum is like Microsoft in the mid-2010s transitioning to cloud services – although the stock price was temporarily depressed and it faced challenges from emerging rivals, the deep network effects and moat it was building were 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.
