How can Ethereum save itself? Finding opportunities amid the rise of Solana and the crisis of trust

Author: Steven Ehrlich Source: unchainedcrypto Translation: Shan Ouba, Golden Finance

Driven by the meme coin craze, Solana is causing a crisis of confidence in Ethereum. In the face of competition, Ethereum, a blockchain with a market value of $323 billion, has not fought back strongly, but it does have a very promising option in front of it.

Ethereum and its community are facing unprecedented challenges. It is being taken over by a friendlier competitor, Solana, which is benefiting from the promotion of millions of meme coins. In addition, the rise of L2 (Layer 2) networks has also exposed Ethereum to "internal competition". These interoperable networks directly divert Ethereum's users, transaction fees and market attention. On Tuesday, Uniswap, the world's largest decentralized exchange, launched its own L2, Unichain, on the Optimism network.

Ethereum's token price performance is also far behind Solana and Bitcoin, which has a market value of $1.9 trillion. Over the past 12 months, ETH has only risen 5.9%, while Bitcoin has soared 100.58% and Solana has risen 85%.

More notably, the price of ETH (currently around $2,600) has lagged behind Bitcoin and Solana over the past six months, indicating that investors are classifying the latter two as the same asset class, while Ethereum is being marginalized. "There is not a clear market demand for smart contract platforms among traditional investors," said Zach Pandl, head of research at Grayscale Investments. Ethereum needs to reshape its narrative to re-attract the attention of investors and the community, and the key to all this is to find a more accurate product market positioning. Ethereum, sandwiched between Bitcoin and Solana, has long been a "supporting role" for Bitcoin, and the market defaults to it being the second-ranked blockchain. But Bitcoin's "digital gold" narrative has consolidated its market position, and despite Bitcoin's limited functionality, low throughput and high transaction fees, it has maintained steady growth. However, during its development, Ethereum encountered a similar throughput bottleneck - it can only process dozens of transactions per second. In order to expand network capabilities, the Ethereum Foundation adopted an L2 expansion strategy and launched hundreds of L2 blockchains to increase overall throughput. This move was indeed effective, increasing the transaction processing capacity of the Ethereum network to more than 200 transactions per second, but it also brought side effects: Ethereum outsourced its core functions to a series of L2 blockchains, such as Optimism, Arbitrum, Base, Mantle, Zksync, etc. This change weakened the connection between Ethereum and its users.

Carlos Guzman, vice president of research at GSR, noted: “If you’re invested in Ethereum but don’t actually use it directly, you might think, ‘Why not buy Arbitrum’s tokens?’”

This trend accelerated in March 2024, when Ethereum introduced a temporary data storage solution called “blobs” through an upgrade, making transactions on L2 almost free. “You’ll never see a company give up 99% of its revenue to its own affiliates,” Gauntlet founder Tarun Chitra commented on The Chopping Block podcast.

That’s real money lost. For example, Coinbase’s L2 Base has generated nearly $100 million in revenue for the company since its launch in the summer of 2023, and that value ultimately accrues to Coinbase shareholders, not ETH holders.

Earlier, Ethereum’s reliance on L2 actually makes it more centralized. Almost all L2s rely on a single sorter to organize transactions and submit them to the mainnet, a mechanism similar to having the entire Bitcoin network controlled by just one miner. While L2s plan to be decentralized in the future, the current situation has undoubtedly exacerbated Ethereum’s centralization risk.

The most telling example of this is Ethereum’s circulating supply. In September 2022, Ethereum switched from a proof-of-work (PoW) mechanism to a proof-of-stake (PoS) mechanism and introduced a mechanism to destroy a portion of the network’s transaction fees, thereby reducing the circulating supply of ETH. In theory, during periods of high transaction volume, the fees destroyed should exceed the new ETH supply, putting Ethereum into deflationary mode. However, after the upgrade in March 2024, Ethereum returned to an inflationary state due to a drop in mainnet transaction volume, and the current total ETH supply has exceeded the 120.5 million before the upgrade. This is bad news for ETH holders. Another problem is that Ethereum's ecosystem is too fragmented, which makes the user experience confusing. In contrast, Solana's growth rate is amazing, and its ecosystem is simpler and friendlier. As a self-sufficient L1 blockchain, all functions on Solana run on the mainnet (L1), and users only need to use one wallet without paying attention to which L2 their assets are distributed. In addition, Solana's transaction fees are only a few cents, making it a natural home for the meme coin craze and continuing to attract new users.

Developers are also turning their attention to Solana. According to Electric Capital's 2024 Crypto Developer Report, Solana's developer count grew 83% in 2024, while Ethereum's developer count fell 22%.

Towards a broader market

Ethereum can do more to restore investor and community confidence in it. Some experts believe that the Ethereum community has been too focused on the obscure details of technical development and neglected basic market promotion. In contrast, the Solana Foundation not only launched a smartphone, but also opened a pop-up store in Hudson Yards on the west side of Manhattan to promote the ecosystem in a more user-friendly way.

Guzman, vice president of research at GSR, said that in the next few years, discussions on the expansion of the Ethereum mainnet will continue, which may include the adoption of technologies such as zero-knowledge proofs (ZK Proofs). One proposal under discussion is to increase the gas limit of Ethereum blocks to support more transaction processing. Ethereum founder Vitalik Buterin is already promoting these efforts. However, in Guzman's view, the implementation of any major expansion plan will take at least several years. In addition, Tron founder Justin Sun also proposed a more radical proposal. Although the details are limited, its core ideas include taxing L2 and reducing validator rewards to enhance Ethereum's deflation. These discussions will undoubtedly continue.

At the same time, more and more L2 projects are being launched. In addition to Unichain, tokenized treasury fund issuer Ondo Finance announced that it would launch its own L2, while gaming and entertainment giant Sony also launched its own L2. Christine Kim, vice president of research at Galaxy Digital, said: "Eventually, all applications may launch their own L2 on top of Ethereum to support their own business." She believes that the block space and ecosystem of the Ethereum mainnet are currently severely limited, so the rise of L2 is an inevitable trend.

Kim further pointed out that Ethereum could follow this trend and abandon its goal of becoming the main interaction layer for users. However, for this strategy to work, Ethereum's overall usage needs to grow exponentially, and it remains uncertain whether investors will accept this direction.

Despite investors' anxiety about ETH's price, according to the data, Ethereum has still outperformed almost all major L2 tokens over the past year. Due to the unlocking mechanism of L2 tokens, which allows early investors such as venture capital to sell their holdings, Optimism and Arbitrum's tokens have fallen 69% and 75% respectively in the past 12 months, despite their rapid growth in usage.

Grayscale research director Pandl believes that Ethereum should play to its core advantages - stability, security and decentralization, and leave the low-value transaction market to L2 and Solana to compete. He pointed out: "Ethereum is still the leading public chain in terms of total locked value (TVL) and economic security, which makes it a natural choice for institutional finance."

Pandl specifically mentioned that BlackRock, with a global asset management scale of up to US$11.5 trillion, chose to launch its US$1 billion tokenized treasury platform BUIDL on Ethereum. In fact, according to RWA.xyz, there are more tokenized real-world assets (RWA) on Ethereum than all other blockchains combined.

Furthermore, Ethereum’s share of TVL in the entire blockchain industry remains solid.

It is clear that high-end financial services on decentralized chains remain an area of ​​strength for Ethereum, and this trend is likely to continue to expand. Leaving aside the $200 billion stablecoin market, the total value of real-world assets on the current chain is only $17.1 billion, while the total size of global fixed income and equity capital markets reached $255.7 trillion in 2024 - huge room for growth.

Perhaps, instead of trying to become a "full-powered blockchain", Ethereum should focus on developing this market segment. In contrast, Solana or L2 projects are still too emerging or centralized to win the trust of mainstream financial markets.

Ethereum was once the birthplace of governance tokens, NFTs, and meme coins, and real world assets (RWA) may be the next step in the evolution of the crypto world, and it also fits perfectly with Ethereum's advantages. For ETH investors, this may be their best hope.