Is Ethereum still a good chain?
For many years, no new chains could challenge Ethereum's dominance as the second-largest asset in crypto. But is it still a strong chain now, with users migrating to L2s and ETH becoming inflationary?
In 2020, Ethereum shifted to an L2-centric roadmap. Now, after Dencun, rollups account for 87% of all daily transactions.
However, this scaling solution has faced criticism because Ethereum's gas fees are at their lowest in years, making the ETH economy inflationary. Furthermore, Ethereum’s recent underperformance against BTC and SOL has validated the critics' views.
Is Ethereum still a competitive and viable chain? Let’s find out.
The state of Ethereum
Ethereum's deflationary narrative appears to be in jeopardy.
In Q2 2024, Ethereum experienced its highest quarterly inflation rate since transitioning to Proof of Stake consensus with The Merge in September 2022.
This surge in inflation is attributed to a significant drop in the burn rate, driven by unusually low gas prices. Currently, the network charges just 1 gwei for a typical transaction, according to Ultra Sound Money.
The Token Termial data reveals the following about Ethereum:
1st in revenue, though Tron and Tether are rapidly catching up.
1st in total value locked (TVL) with $50 billion.
3rd in the number of token holders, with BNB Chain and Tron already surpassing Ethereum.
7th largest protocol by monthly active users (MAUs) with 6.5 million.
11th in transaction count.
12th in transactions per second (TPS).
12th largest by daily active users (DAUs) with 371,000, trailing behind Bitcoin L1’s 410,000.
The Rollup Strategy Drawbacks
As mentioned, decreased user activity, an inflationary economy, and underperformance have been raising criticism around Ethereum. Anything else?
Some analysts discuss the impact of Ethereum's rollup-centric strategy on the value of ETH and highlight potential risks and uncertainties. The rollup strategy assumes that L2s will continue using Ethereum’s block space, driving more users and fees back to Ethereum in the long run.
However, Ethereum cannot ensure that L2s will remain aligned with its base layer. There's a risk that L2s might develop their ecosystems and spin off into independent chains, no longer paying fees to Ethereum.
If this happens, Ethereum could see reduced value from transaction activity and face long-term risks to its revenue as L2s stop contributing fees.
On the other hand…
Although ETH has recently underperformed and faced challenges like reduced fee capture and user migration to L2s, Ethereum remains a strong platform with a robust community.
The widespread use of ETH in DeFi on L2s suggests a positive outlook for the asset, as L2s could become vital economic hubs with ETH at their core.
On Arbitrum, ETH-related assets make up over 50% of the total value, with nearly $590M in value.
On Base, ETH and its derivatives represent over 80% of supplied assets, totaling nearly $140M.
On Optimism, ETH-based assets account for nearly 50% of the total value, with about $110M in value.
Furthermore, Ethereum is the oldest and most successful smart contract platform, with a robust and resilient community that has weathered various challenges, including major upgrades like "The Merge."
The strength of Ethereum’s community is a key differentiator, as it is not something that can be built quickly and is vital for the platform’s long-term success.
L2s gain significant value from their alignment with Ethereum and are unlikely to leave.
Lastly, there's renewed enthusiasm in the Ethereum community with plans for base layer scaling and even more efficient L2s like MegaETH.
