Can Ethereum be great again?

Solving the problem of liquidity fragmentation and improving token economics are the key to pushing ETH to rise again.

Author: The DeFi Investor

Compiled by: Shenchao TechFlow

ETH’s performance in this market cycle has been quite sluggish.

Back in 2022, when BTC was at its lowest point in the bear market, many people predicted that ETH was expected to easily exceed $10,000 in this cycle.

However, many people are now beginning to wonder whether ETH can reach a new all-time high this year.

Given the current downturn in market sentiment, this suspicion is understandable because even ETC outperforms ETH.

Of course, I am still a big supporter of the Ethereum ecosystem, but in my opinion, ETH’s poor performance reflects the need for some profound changes in the Ethereum ecosystem.

Next, I will try to answer a key question:

Why did ETH perform poorly in this cycle?

Although the reasons are difficult to fully determine, I think the following are the main factors.

Too many ETH Beta Tokens

Almost all Ethereum L2 projects issue their own tokens, which has led many Ethereum supporters to put money into these L2 tokens rather than ETH itself.

This significantly reduced the amount of capital flowing into ETH.

For example, if you are bullish on Solana (there is no L2 project), you only need to buy SOL; but if you are bullish on ETH, you may face dozens of ETH-related token options, such as L2 project tokens.

dispersion of liquidity

Currently, there are more than 100 L2 projects in the Ethereum ecosystem.

For skilled DeFi users, crossing chains from one L2 to another is not difficult, but for ordinary investors, the process can be complex and troublesome.

Although Ethereum L2 has fast transaction speeds and low costs, if the user experience across L2 cannot be improved, this expansion capability will be difficult to promote the large-scale popularization of Ethereum.

Other L1 technology catch-up

In the previous market cycle, Ethereum was undoubtedly the leading L1 blockchain among various indicators.

Although Ethereum still has the strongest DeFi ecosystem, other L1s (such as Solana) have surpassed Ethereum many times in indicators such as revenue and decentralized exchange (DEX) transaction volume.

This is partly due to their technological progress. Although Ethereum has made some important progress in recent years, some L1 competitors have developed faster technology and are now able to provide 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 the ecosystem, reduce the supply of tokens by burning part of transaction costs, thereby increasing the scarcity and value of ETH.

• Strengthen ETH’s core position in the Ethereum economy (Vitalik has suggested that there should be more support for decentralized applications (dApps) that use ETH as their main mortgage asset)

• Allocate more resources to solve L2fragmentationProblems, unified liquidity,It should become the top priority for the development of Ethereum.

• Accelerate Ethereum’s technology upgrades (Although Ethereum reduces the supply of tokens by more than $100 million annually through the destruction mechanism, the speed of its technology upgrades significantly lags behind other L1 blockchains.)

• Establish a sustainable income model for the Ethereum Foundation.By generating stable income from transaction fees or pledge proceeds, the Ethereum Foundation can reduce its reliance on selling ETH, thereby avoiding a negative impact on market prices.

• Promote the expansion of Ethereum L1.Although Ethereum’s long-term goal is to expand through L2, there is still huge potential for performance improvements in L1. By optimizing L1 ‘s expansion capabilities, Ethereum’s overall user experience and competitiveness can be further improved.

These measures may be an important step in pushing Ethereum to new heights.

However, over the past few years, the Ethereum Foundation and its community have seemed to have fallen into a degree of complacency, an attitude that could weaken the project’s competitiveness in the long run.

Ethereum is still the leading L1 blockchain, but if a more proactive strategy is not adopted, other L1 projects with fighting and innovative teams may gain the upper hand in this competition.

Now is the time for the Ethereum community to reinvigorate the “winner mentality” and ensure its leadership in the blockchain space.

The good news is that we can already see some positive changes, especially from the efforts of Ethereum Ecosystem projects that are trying to improve market confidence in ETH:

• MegaETH: A high-performance Ethereum L2 is being developed with the goal of supporting more than 100,000 transactions per second (TPS) processing capabilities to compete with the highly scalable L1 blockchain.

• Eclipse: We are committed to building the first Ethereum L2 supported by Solana Virtual Machine, aiming to combine Solana’s high-speed performance with Ethereum’s high security.

• Pectra upgrade: Ethereum’s upcoming major upgrade, Pectra, will significantly improve the user experience (UX) by introducing native account abstraction capabilities and make blockchain interactions more concise and efficient.

• Eric Trumpthe promotion of: Eric Trump recently publicly served as an ETH platform, which makes people wonder whether the United States may establish a national-level Ethereum reserve?

The first three technological advances mentioned above will undoubtedly promote the adoption rate of Ethereum L2. But the more important question is:

Can these developments really drive up ETH prices?This remains to be seen.

In my opinion, the following two points are the key to pushing ETH up again:

1. solve the liquidityfragmentationproblem(Need to optimize the user experience across L2).

2. Improving token economics for ETH(Vitalik recently proposed in a blog post that the value of ETH could be increased by reducing the supply of ETH by encouraging L2 projects to burn some transaction costs.)

Personally, I don’t currently hold a large amount of ETH because I prefer to invest in fast-growing DeFi project tokens.

However, the increase in ETH prices is good news for all copycat owners.

Judging from historical data, the rise in ETH is often an important trigger point in the Altseason.

The future development of ETH ecosystem is not only related to Ethereum itself, but will also have a profound impact on the entire encryption market.