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Asset manager VanEck evaluated various factors contributing to Ethereum’s (ETH) recent poor price performance. According to VanEck’s August 2024 Crypto Monthly Report, Ethereum’s share of decentralized exchange trading volume dropped from 42% in 2022 to 29% in 2024. The three main reasons for this decline are the overall decrease in network revenues, “conscious policy choices,” and the value loss caused by layer-2 solutions.
Decrease in Network Revenues
According to VanEck’s analysis, consumers turning to layer-1 blockchains with higher transaction volumes like Solana negatively impacted Ethereum’s network revenues. Ethereum had become one of the leading platforms for decentralized finance as the first mover in the smart contract space. However, blockchains like Solana, MATIC, Sui, and Aptos, with their high transaction capacities, are reducing Ethereum’s competitive advantage.
Internal and External Pressures
Ethereum is under revenue pressure both from the impact of layer-2 solutions within its ecosystem and from external competition. Ethereum’s layer-2 networks rapidly proliferated after the Dencun upgrade in March 2024, which reduced network fees by 99%. According to Adrian Brink, co-founder of Anoma, there are currently too many layer-2 solutions on Ethereum.
Impact of Competition
VanEck’s report states that new tokens are now being launched on networks offering higher transaction capacities to improve user experience. This situation is causing users to migrate to more efficient networks due to Ethereum’s transaction speed limitations. Networks like Solana can process thousands of transactions per second, reducing the demand on Ethereum.
Although Ethereum is trying to maintain its leadership in the decentralized finance world, increasing competition and internal pressures are negatively affecting the network’s revenues and price. The rapid proliferation of layer-2 solutions and the reduction in transaction fees are creating a revenue contraction despite expanding Ethereum’s ecosystem. For Ethereum to overcome these challenges in the future, it will need to solve scalability issues and develop more innovative policies.
