Ethereum has come under significant pressure after posting one of its worst quarterly performances on record in early 2025. With a decline of over 45%, the world’s second-largest cryptocurrency continues to slip drastically from its former highs, triggering concern among investors. Since reaching its peak of nearly $4,900 in November 2021, Ethereum has shed 71% of its value, with the downward momentum intensifying notably following the network’s Dencun upgrade in March 2024.
The primary catalyst behind Ethereum’s ongoing price deterioration seems intricately linked to the blockchain’s pivot towards supporting Layer 2 solutions and decentralized finance (DeFi) protocols. Originally envisioned as “the global decentralized computer,” Ethereum has increasingly transitioned from a mainnet-focused blockchain to primarily providing security and settlement infrastructure for Layer 2 chains. This strategic repositioning accelerated after the Dencun upgrade, which substantially lowered transaction costs for Layer 2 platforms, transforming Ethereum’s business model and reshaping its core value proposition.
By dramatically reducing settlement fees, Ethereum encouraged widespread adoption of Layer 2 scaling solutions. These Layer 2 networks have experienced impressive growth, capturing substantial transaction volumes and generating notable profits. Coinbase’s Base protocol, for example, has earned nearly $94 million in profit, yet transferred only $4.9 million to Ethereum as settlement fees—reinforcing concerns about whether Layer 2 models siphon value from Ethereum’s main chain.
Critics argue that rather than establishing mutual benefit, Layer 2 networks might be eroding Ethereum’s value. Lower revenues from settlement fees have had an adverse effect on Ethereum’s intended deflationary economics. Despite a total value locked (TVL) exceeding $44 billion within Ethereum-powered platforms, the decline in transaction fees collected by the Ethereum blockchain weakens the deflationary forces. Analysts tracking Ethereum supply dynamics note that, rather than shrinking supply, Ethereum is now projected to increase slightly each year.
As Ethereum adjusts to its reduced fee revenue environment, investors’ perceptions of ETH’s intrinsic worth have shifted profoundly. Previously, market participants assessed value based on metrics like transaction volume, DeFi adoption, TVL, and associated network activity. Now, valuations have transitioned primarily to reflect the revenues Ethereum generates from transaction fees, revenue distribution, and token burns. With increasingly finer margins and diminished fee collection, Ethereum’s transaction count has fallen significantly as activity increasingly migrates to Layer 2 networks.
Adding to complications, institutional investors have noticeably cooled in their interest, possibly due to uncertainty around Ethereum’s evolving role and business model. Enthusiasm toward Ethereum-focused exchange-traded funds (ETFs) in the U.S. has faltered, with institutional inflows severely muted and disappointing market consensus forecasts.
Ethereum’s prospects, moving forward, hinge greatly on upcoming blockchain upgrades, notably the much-anticipated Pectra update, which developers promise will reshape the ecosystem. Pectra, scheduled to roll out soon, will introduce critical Ethereum Improvement Proposals (EIPs) that streamline validator operations, boost deposit efficiency, reduce transaction congestion, and enhance validator operational flexibility. Experts suggest these technical improvements could bolster Ethereum’s attractiveness to validators and participants, potentially reversing recent bearish sentiment.
Marko Ratkovic, CTO of blockchain network Graphite, highlights the Pectra upgrade’s promise, noting specifically EIP-7691 and EIP-7623, which will incentivize Layer 2 transaction use via “blobs,” decreasing call data reliance while enhancing performance and transaction-effectiveness on Ethereum.
Simultaneously, Ratkovic underscores persistent institutional reservations around DeFi. While Ethereum’s updates cater primarily to efficiency, scalability, and transaction handling, many traditional finance entities still demand clarity regarding regulations, identity verification, and mechanisms curbing illicit financial flows—factors largely unaddressed by recent Ethereum upgrades.
Market sentiment remains precarious. Dr. Sean Dawson, Head of Research at Derive.xyz, remarks on heightened market volatility, pointing toward sharply rising implied volatility for ETH—from about 71% to over 120% recently—demonstrating intensifying investor apprehensions. Dawson further notes the odds of Ethereum slipping below $1,400 by late May have grown significantly, underscoring the market’s broadening bearishness amid turbulent macroeconomic backdrops.
In summary, the Ethereum blockchain stands at a pivotal juncture, adapting to pressures exerted by its strategic focus on Layer 2 scaling. As lower revenue generation and shifting investor interest challenge Ethereum’s value proposition, the upcoming Pectra update and subsequent developments over the coming months could prove crucial to reversing its course and reestablishing investor confidence in the market.
