The Ethereum Enigma: Unpacking the 2025 Fundamentals-Price Divergence
In 2025, Ethereum found itself in the midst of a classic “fundamentals-price divergence.” August saw ETH prices surge past their 2021 peak, touching above $4,900 and setting a new all-time high. Market sentiment soared to “extreme greed,” reigniting fervent discussions about “Ethereum surpassing Bitcoin.”
However, this euphoria was short-lived. By year-end, ETH had retreated to around $2,900, a nearly 40% decline from its peak. Looking at the past 365 days, the drop was 13.92%, accompanied by a staggering 141% volatility.
What makes this downturn particularly perplexing is Ethereum’s stellar technical performance throughout the year. Two pivotal upgrades, Pectra and Fusaka, were successfully implemented, fundamentally overhauling the network’s scalability. The Layer 2 (L2) ecosystem experienced explosive growth, with Coinbase’s Base chain even surpassing many standalone public chains in annual revenue. Furthermore, giants like BlackRock solidified Ethereum’s position as the preferred settlement layer for Real World Assets (RWA) through its BUIDL fund, which swelled to over $2 billion.
Technical progress and ecosystem prosperity, yet a declining price. What truly lies behind this “fundamentals-price divergence”?
The Demise of the Deflation Myth
To grasp this divergence, one must first understand the Dencun upgrade.
The Dencun upgrade on March 13, 2024, was the direct catalyst that shattered Ethereum’s deflationary narrative. At its core, this upgrade introduced EIP-4844, providing a dedicated data availability layer for L2s via Blob transactions. Technically, Dencun was a resounding success: L2 transaction costs plummeted by over 90%, dramatically improving user experience on networks like Arbitrum and Optimism. Yet, its impact on tokenomics was profoundly disruptive.
Under the EIP-1559 mechanism, the amount of ETH burned (the deflationary driver) is directly proportional to block space congestion. Dencun significantly increased the supply of data availability, but demand did not keep pace. While L2 transaction volumes grew, Blob space remained oversupplied, causing Blob fees to linger near zero.
The data speaks volumes. Before the upgrade, Ethereum’s daily ETH burn could reach thousands during peak periods. Post-Dencun, the overall burn rate plummeted due to the collapse in Blob fees. Crucially, ETH issuance (approximately 1800 ETH/day per block) began to exceed the burn rate, pushing Ethereum from a deflationary to an inflationary state.
According to ultrasound.money, Ethereum’s annual inflation rate in 2024 shifted from negative before the upgrade to positive, meaning the total ETH supply was no longer decreasing but increasing daily. This fundamentally undermined the “Ultra Sound Money” narrative. Dencun effectively, if temporarily, “killed” Ethereum’s deflation story. ETH transformed from a scarce asset that became “less with more use” back into a mildly inflationary one. This abrupt shift in monetary policy disappointed many investors who had bought ETH based on the “Ultra Sound Money” thesis, prompting them to exit. As one long-term holder lamented on social media: “I bought ETH because of deflation. Now that logic is gone, why should I still hold?”
A technical upgrade, intended as a boon, ironically became a short-term price killer. This is Ethereum’s greatest paradox today: the more successful L2s become, the weaker the mainnet’s direct value capture; the better the user experience, the more ETH holders feel the pinch.
The Double-Edged Sword of L2s: Vampire or Moat?
In 2025, the debate surrounding the relationship between Layer 2s and Layer 1 reached a fever pitch.
From a financial statement perspective, the health of Ethereum’s L1 indeed appeared concerning. Coinbase’s Base chain generated over $75 million in revenue in 2025, capturing nearly 60% of the entire L2 sector’s profits. In contrast, Ethereum L1, despite active trading in August, recorded protocol revenue of only $39.2 million—less than Base’s quarterly performance.
If Ethereum were viewed as a company, its significant revenue decline coupled with a high market capitalization would render it “expensive” in the eyes of traditional value investors.
“L2s are parasites, draining Ethereum’s blood,” became a prevalent market viewpoint.
However, a deeper analysis reveals a far more nuanced picture.
All economic activity on L2s ultimately denominates in ETH. Users pay Gas fees in ETH on Arbitrum or Base, and ETH serves as the core collateral in DeFi protocols. The more prosperous L2s become, the stronger ETH’s liquidity as a “currency.”
This monetary premium cannot be solely measured by L1 Gas revenue.
Ethereum is transitioning from “directly serving users” to “serving L2 networks.” The Blob fees L2s pay to L1 are essentially purchases of Ethereum’s security and data availability. While Blob fees are currently low, as the number of L2s proliferates, this B2B revenue model may prove more sustainable than a purely B2C model reliant on retail users.
An analogy: Ethereum is no longer a retailer but a wholesaler. Though the profit per transaction is lower, the potential for scale is far greater.
The challenge lies in the market’s current inability to fully comprehend this fundamental shift in business model.
Competitive Landscape: Pressure from Multiple Fronts
Any comprehensive discussion of Ethereum’s challenges would be incomplete without addressing its competitors.
According to Electric Capital’s 2025 annual report, Ethereum remains the undisputed king of developers, boasting 31,869 active developers throughout the year, with a full-time developer count unrivaled by other ecosystems.
Yet, in the battle for new developers, Ethereum is losing its edge. Solana’s active developer count reached 17,708, an 83% year-over-year increase, showing remarkable traction among new entrants.
More significantly, specialization is fragmenting the landscape.
In the PayFi (Payment Finance) sector, Solana has established leadership with its high TPS and low fees. PayPal USD (PYUSD) issuance on Solana surged, and institutions like Visa began testing large-scale commercial payments on the network.
In the DePIN (Decentralized Physical Infrastructure) track, Ethereum suffered significant setbacks. Due to fragmentation between L1 and L2 and Gas fee volatility, star project Render Network migrated to Solana in November 2023. Leading DePIN projects like Helium and Hivemapper have all opted for Solana.
However, Ethereum is far from a complete rout.
In the RWA (Real World Assets) and institutional finance sectors, Ethereum maintains absolute dominance. BlackRock’s $2 billion BUIDL fund primarily operates on Ethereum. This demonstrates that when handling large-scale asset settlements, traditional financial institutions place greater trust in Ethereum’s security and legal certainty.
In the stablecoin market, Ethereum holds a 54% share, approximately $170 billion, remaining the primary vehicle for “network dollars.”
Ethereum, with its most seasoned architects and researchers, is ideally suited for building complex DeFi and financial infrastructure. Its competitors, conversely, attract a large number of Web2 application-layer developers, making them suitable for building consumer-facing applications.
These distinct ecosystem positionings will shape the future direction of competition.
Wall Street’s Ambivalent Embrace
“It seems to lack strong endorsement from mainstream Wall Street financial institutions.”
This perception is not unfounded. Data from The Block indicates that by year-end, Ethereum ETFs saw net inflows of approximately $9.8 billion, while Bitcoin ETFs attracted a far greater $21.8 billion.
Why is institutional interest in Ethereum seemingly so “lukewarm”?
The core reason: regulatory restrictions led to the exclusion of staking functionality from spot ETFs launched in 2025.
Wall Street prioritizes cash flow. Ethereum’s native 3-4% staking yield was its core competitive advantage against U.S. Treasuries. However, for clients of BlackRock or Fidelity, holding a “zero-interest” risk asset (ETH in an ETF) is far less appealing than directly holding U.S. Treasuries or high-dividend stocks.
This directly created a “ceiling” effect on institutional capital inflows.
A deeper issue is the ambiguous positioning. In the 2021 cycle, institutions viewed ETH as the crypto market’s “tech stock index,” a high-beta asset—if the market performed well, ETH was expected to outperform BTC.
But in 2025, this logic no longer holds. If seeking stability, institutions chose BTC. If pursuing high risk and high returns, they turned to other high-performance public chains or AI-related tokens. ETH’s “alpha” returns became less clear.
Nevertheless, institutions have not entirely abandoned Ethereum.
BlackRock’s $2 billion BUIDL fund, entirely on Ethereum, sends a clear signal: for multi-hundred-million dollar asset settlements, traditional financial institutions trust only Ethereum’s security and legal certainty.
Institutions’ attitude towards Ethereum is more akin to “strategic recognition, but tactical wait-and-see.”
Five Catalysts for Ethereum’s Resurgence
Facing its current slump, what will drive Ethereum’s turnaround?
1. The Breakthrough of Staking ETFs.
The 2025 ETFs were “half-finished products” as institutions holding ETH could not earn staking rewards. Once staking-enabled ETFs are approved, ETH will instantly transform into a dollar-denominated asset offering a 3-4% annual yield.
For global pension funds and sovereign wealth funds, such an asset, combining technological growth potential (price appreciation) with fixed income (staking returns), would become a standard component in their asset allocation tables.
2. The RWA Explosion.
Ethereum is becoming Wall Street’s new backend. While BlackRock’s $2 billion BUIDL fund has expanded to multiple chains, Ethereum remains one of its primary networks.
By 2026, as more government bonds, real estate, and private equity funds come on-chain, Ethereum will underpin trillions of dollars in assets. While these assets may not generate high Gas fees, they will lock up vast amounts of ETH as liquidity and collateral, significantly reducing the market’s circulating supply.
3. Reversal of Blob Market Supply and Demand.
The temporary failure of deflation caused by Fusaka is merely a supply-demand mismatch. Currently, Blob space utilization is only 20%-30%. As killer applications emerge on L2s (e.g., Web3 games, SocialFi), Blob space will be filled.
Once the Blob market saturates, its fees will rise exponentially. Liquid Capital analysis suggests that with growing L2 transaction volumes, Blob fees could contribute 30%-50% of total ETH burns by 2026. At that point, ETH will revert to the “Ultra Sound Money” deflationary trajectory.
4. Breakthroughs in L2 Interoperability.
The current fragmentation of the L2 ecosystem (liquidity silos, poor user experience) is a major barrier to mass adoption. Optimism’s Superchain and Polygon’s AggLayer are building unified liquidity layers.
More critically is the L1-based shared sequencer technology. This will allow all L2s to share the same decentralized sequencer pool, not only solving cross-chain atomic swap issues but also enabling L1 to recapture value (sequencers will need to stake ETH).
When users can switch between Base, Arbitrum, and Optimism as seamlessly as switching between mini-programs within WeChat, the network effects of the Ethereum ecosystem will explode exponentially.
5. The 2026 Technical Roadmap.
Ethereum’s evolution is relentless. Glamsterdam (H1 2026) will focus on optimizing the execution layer, significantly enhancing smart contract development efficiency and security, and reducing Gas costs, paving the way for complex, institutional-grade DeFi applications.
Hegota (H2 2026) and Verkle Trees are key to the endgame. Verkle Trees will enable stateless client operation, meaning users can validate the Ethereum network on a mobile phone or even a browser without downloading terabytes of data.
This will give Ethereum an unparalleled lead in decentralization over all its competitors.
Conclusion
Ethereum’s “underperformance” in 2025 was not a sign of failure, but rather the painful metamorphosis from a “retail speculation platform” into a “global financial infrastructure.”
It sacrificed short-term L1 revenue for the infinite scalability of L2s.
It sacrificed short-term coin price explosiveness for the compliance and security moat required by institutional-grade assets (RWA).
This is a fundamental shift in business model: from B2C to B2B, from earning transaction fees to becoming the global settlement layer.
For investors, present-day Ethereum resembles Microsoft in the mid-2010s during its transition to cloud services—though its stock price was temporarily subdued and it faced challenges from emerging rivals, the deep network effects and moats it was building were accumulating strength for the next phase.
The question is not whether Ethereum can rise, but when the market will truly grasp the value of this profound transformation.
