Ethereum continues to lag behind Bitcoin as investor concerns over supply dynamics and the increasing focus on memecoins dampen demand.
Despite Ethereum’s dominance in the decentralized finance (DeFi) space, recent developments suggest that ETH may struggle to find a new growth narrative.
According to Muneeb Khan, Kraken OTC Executive Director, while ETH remains the cornerstone of DeFi, ETH is “in search of a new narrative that will fuel its continued growth.” Khan also noted that the initial excitement over ETH’s deflationary potential has faded, contributing to its underperformance relative to Bitcoin.
Layer-2 platforms like Arbitrum and Optimism, which help Ethereum scale by processing transactions off-chain, are starting to reduce ETH’s transaction fees. This shift impacts ETH’s deflationary mechanics, as the network relies on burning a portion of transaction fees to reduce the token supply. “Losing fees to Layer-2 platforms contributes to ETH being inflationary rather than deflationary,” said Cici Lu McCalman, founder of Venn Link Partners.
The shift of economic activity from Ethereum to these Layer-2 solutions has raised concerns about Ethereum’s long-term development focus and ETH’s future as an asset. Research firm Messari highlighted these concerns in a recent note, noting the uncertainties over Ethereum’s strategic direction amid these changes.
*This is not investment advice.