Ethereum has encountered significant FUD due to its weak price performance. Despite the introduction of the EIP-1559 burn mechanism, the decline in on-chain activity has slowed the burn rate, leading to continued inflation.
Decline in Ethereum Network Activity
On-chain activity has also declined, with daily active addresses and transaction volumes decreasing. Previously, DeFi and NFTs brought a surge of users and transactions to Ethereum, but as these applications lose steam, they can no longer sustain high on-chain activity, raising concerns about Ethereum’s future and further fueling FUD.
Scalability Issues and Layer 2
Although Layer 2 development and the introduction of blob structures have successfully lowered gas fees, on-chain demand is fundamentally driven by profit opportunities. The lack of these opportunities makes it difficult to attract users. While Layer 2 has alleviated the load on the main chain, it has also fragmented liquidity, impacting Ethereum’s overall economic performance.
VC Investment Preferences
VCs have always favored infrastructure projects due to higher certainty and larger profit margins. For instance, early VC investments in Ethereum, Cosmos, and Polkadot have yielded substantial returns. As modular blockchain solutions rise, more projects are creating their own Layer 2 solutions to boost valuations, making infrastructure building a common strategy in the Ethereum ecosystem.
Ethereum’s dilemma is clear: while its infrastructure has improved, offering better performance and scalability, the lack of a breakthrough, large-scale application remains a key challenge. VC funding has fueled the rise of Layer 2 and infrastructure projects, but they struggle to deliver user-driven applications, leading to a decline in on-chain activity and value fragmentation.
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