Ethereum at a crossroads

It has been caught between explosive layer-2 growth, rising layer-1 challengers and uncertain strategic direction. This has resulted in disappointing token price performance and a change of leadership and direction at the Ethereum Foundation. While Ethereum introduced the idea of smart contracts and underpins vast DeFi and tokenization activity, competing platforms like Solana and Avalanche are dynamic rivals with the ability to take meaningful market share. This month, as Ethereum undergoes its highly anticipated Pectra upgrade, we will review Ethereum’s current positioning, how the landscape for layer-1 protocols has evolved and where Ethereum is headed.

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Ethereum remains the second-largest blockchain behind Bitcoin, with a market cap of USD245bn. It is a cornerstone of institutional crypto adoption, underpinning around 70% of all tokenized real-world assets (RWAs) as of Q2 2025, including projects by BlackRock, Franklin Templeton, and JPMorgan. It supports over USD50bn in DeFi total value locked (TVL), more than 5x the next-largest chain, making it the default platform for regulated stablecoins, permissioned finance applications, and enterprise-grade smart contract infrastructure.

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Despite this leading market position, Ethereum’s token price has underperformed over the last few years. Since the Merge in September 2022, Ethereum has dropped nearly 70% against Bitcoin, with the ETH/BTC ratio reaching multi-year lows. There are a couple of core narratives levelled at Ethereum as to why the token price has been underperforming. Firstly, it is generally agreed that Ethereum’s L2s have become parasitic to Ethereum’s mainnet. They serve end-user demand at a low cost but do not send back commensurate value. At the same time, most of these L2s have their own tokens which can be seen as competing with the value of ETH. Outside of the L2s, there are also a plethora of competing smart contract platforms that are gaining traction and offering developers and consumers a better user experience. Investors are increasingly looking to these competing chains instead of sticking with the incumbent.

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To understand the challenge that L2s are posing, it helps to first understand the L2s scaling model and how L2 transactions are linked to the Ethereum mainnet. A few years ago, the Ethereum mainnet was becoming congested and expensive. Therefore, by design, many transactions and applications moved to L2 rollups (Optimism, Arbitrum, Base, zkSync, etc.) to achieve lower cost and higher throughput. This trend has had mixed effects on Ethereum’s fee and token economics. Before 2024, L2s settled their proofs on the L1 using expensive calldata, contributing significant fee revenue (and ETH burn) to Ethereum. However, the March 2024 Dencun upgrade introduced “blob-carrying” transactions, meaning that L2s could publish batches in “blob space” at a tiny marginal cost. The impact was dramatic: L2 transaction throughput soared and network fees on the Ethereum L1 collapsed. Effectively, L2s cannibalized Ethereum’s revenue.

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The impact of the availability of blob space was that transacting on L2s became much cheaper and faster than transacting on Ethereum mainnet. ETH has competing issuance and burn mechanics; Ethereum blocks issue newly minted ETH to validators, while transactions on the L1 burn a small amount of ETH. The introduction of blob space led to fewer transactions on the L1. This meant that onchain fee revenue plunged and net issuance turned positive, with ETH becoming inflationary once again. Ethereum’s quarterly fee burn dropped from about USD1.1bn in Q1 2024 to USD300m in Q3, a 73% collapse. In practical terms, Ethereum’s blockspace utility increased, but its ability to “capture” that utility value in ETH declined.

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To share some statistics on the parasitic impact of L2s on Ethereum:

• Only about 20% of active blockchain addresses now transact on Ethereum L1, the rest use L2 rollups.
• In August 2024, OP Mainnet retained USD321.31 for every USD1 paid to Ethereum L1, while Base retained USD226.40 per USD1 to Ethereum.
• Ethereum’s burn rate, a key part of its value proposition, has dropped by ~70% since early 2024 due to L2s using blobspace instead of calldata.

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This negative trend of declining Ethereum L1 revenue has weighed on the token price and fueled concerns about the network’s health. As a result, the Ethereum Foundation (EF) was under pressure to respond. Key figures departed or shifted roles: Vitalik Buterin (Ethereum’s founder) stepped back from the Foundation, Aya Miyaguchi left her Executive Director role and other long-time leaders moved on. The Foundation restructured in early 2025, appointing new co-executive directors, Hsiao-Wei Wang and Tomasz Stańczak, and formally articulated an “Infinite Garden” vision: a decentralized approach to stewarding Ethereum’s development by identifying high-leverage initiatives and empowering community contributors. The new leadership is shifting EF priorities away from deep technical research, towards focusing on applications, prioritising mainnet scalability, improving L1/L2 interoperability, and enhancing the user and developer experience.

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This brings us to Ethereum’s Pectra upgrade, which was activated on May 7, 2025. This is the most significant upgrade the network has undergone since the 2022 Merge and is focused on improving L1 scalability, usability and staking efficiency. A standout feature of Pectra is EIP-7702, which introduces “account abstraction”. This allows EOAs (externally owned accounts) on Ethereum to act temporarily like a smart contract for the duration of a contract. An EOA is the term we use for regular Ethereum wallets that you and I own when we interact with the Ethereum network. Pre-Pectra, EOAs performed two tasks: they initiated transactions and they paid gas in ETH. Smart contracts on the other hand are capable of executing code, but they cannot initiate transactions, only respond to them. EIP-7702 fuses these two responsibilities so that now EOAs have many of the same smart contract functionalities.

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The scale of EIP-7702 is significant. It enables:

• Batching: Several transactions can now be batched into one. A common example of this is in token swaps. When you perform a token swap, you used to need to approve the token first, then make a swap (two transactions). Post-Pectra, users can now do this in a single atomic transaction.
• Gas sponsorship: The user no longer needs to pay for gas in native ETH. Instead, another separate application can pay for the user’s transactions on their behalf. This is a major UX upgrade on Ethereum as understanding how gas works is a well-established roadblock for new users who are onboarded onto crypto.
• Wallet privileges: Users can set permissions on wallets that are restrictive. The user can set up a wallet that only trades certain ERC-20 tokens but not others or a wallet that only interacts with a single smart contract. For example, a company could give an employee access to one of its wallets with the full confidence that the employee could only transact with a whitelisted address.

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Another critical component of the Pectra upgrade is EIP-7251, which raises the maximum effective balance for validators from 32 ETH to 2,048 ETH. This will lead to more efficient staking operations, particularly for institutional participants, as it reduces the need to manage multiple validator nodes. For example, today Ethereum has over 1 million active validators, each of which only hold 32 ETH in stake. Functionally; however, many of these validators are redundant as they are controlled by a single entity (Coinbase for example makes up 120k of these validators). Post-Pectra, these validators can consolidate and drastically reduce the number of P2P messages sent over the network, reducing bandwidth usage and making it easier for solo-stakers to participate.

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Finally, EIP-7691 increases the number of data blobs per block, further enhancing layer-2 scalability, but also potentially reducing transaction fees from L2s further. The hope is that these improvements position Ethereum to better compete with emerging layer-1 blockchains, by making the Ethereum mainnet cheaper and easier to use. But is it too little too late?

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While Ethereum has been refocusing, other layer-1 chains have been gaining momentum. Two prominent examples that we at CMCC Global are particularly focused on are Solana and Avalanche. Both chains are capturing distinct audiences and are seeing growing adoption:

• ‍Solana: Renowned for its ultra-high throughput and low fees, Solana has seen explosive user growth, averaging over 1.2 million daily active users in early 2025, far above Ethereum’s onchain addresses of only 600k. Solana’s ecosystem has thrived on consumer-facing apps, gaming, NFTs, and meme coins. Developer engagement remains strong with roughly 3.2k monthly active developers. While Solana’s DeFi TVL is still only a fraction of Ethereum’s at around USD8bn versus about USD50bn on Ethereum, its growth has been far outpacing Ethereum’s. From an investor standpoint, Solana offers a simple but compelling narrative. Solana is fast and cheap.‍
• Avalanche: Avalanche has cultivated a different niche to Solana, one focused on institutional and enterprise applications. Its key innovation is the subnet (rebranded to “Avalanche L1s”), which allows customizable, permissioned blockchains under the Avalanche umbrella. This model appeals to regulated finance as firms can spin up an Avalanche L1 with their own compliance rules and validators. For example, JPMorgan’s “Onyx” project built a proof-of-concept on Avalanche, and leading asset managers (BlackRock, Apollo, etc.) have trialed tokenized assets on Avalanche. A Bank of America report even highlights subnets as a “sticky revenue” opportunity for infrastructure providers. Avalanche’s overall ecosystem is smaller than Ethereum’s or Solana’s, but it shows strengths in cross-chain bridges and DeFi niches. The Avalanche developer community is earnest, with around 400 active developers per month and is focused on areas like gaming and institutional finance. In short, Avalanche is carving out an institutional blockchain position.

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Comparing these chains highlights that multiple L1 models can and will coexist. Solana and Avalanche have not stolen Ethereum’s premise but are rather targeting different use cases. Solana is pursuing consumer adoption; Avalanche is pursuing the permissioned finance ecosystem. It is certainly the case that both have gained momentum during Ethereum’s period of introspection. Ethereum’s challenge is now to reassert its leadership by playing to its strengths (institutional adoption, rich developer stack, upcoming tech improvements) while acknowledging that other L1s will continue to compete in their segments and play to their own strengths.

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The blockchain ecosystem has grown a staggering amount over the last decade and that growth is set to continue. DeFi TVL alone is over USD100bn and beyond this there are numerous use cases for smart contract platforms ranging from gaming to social tokens, NFTs and identity platforms. Ethereum has clear advantages as the dominant L1. It has institutional buy-in, a robust developer ecosystem and is the most battle-tested platform for real-world assets and DeFi. With new leadership at the Ethereum Foundation and a renewed focus on applications and users, Ethereum has the opportunity to sharpen its identity and double down on its strengths. While the price of ETH has suffered over the last few years, it is well positioned for a rebound. Outside of Bitcoin, it is the only crypto asset with a spot ETF in the US and is one click away for institutional buyers. While there will be many winners in the multi-chain future, unseating Ethereum as the leading smart contract network remains a formidable challenge.