The wealth effect has been seriously lost. Can Ethereum survive the "midlife crisis"?

Author: 1912212.eth, Foresight News

Recently, Vitalik has once again been pushed to the center of criticism by the community. This is not the first time that Ethereum has encountered such a crisis. From 2018 to now, Ethereum has been questioned four or five times. The most direct trigger of this incident was Trump’s choice to issue his own meme currency TRUMP on the Solana chain. The exaggerated rise of the meme currency once made many people who firmly seized the opportunity become famous and successful. into retirement.

The exaggerated wealth effect has caused many investors who regretted missing out to sigh. Solana and meme coins have once again become the focus of public opinion. FOMO sentiment even caused the supply of SOL to exceed demand, causing Binance to suspend currency withdrawals. While TRUMP was gaining momentum, the price of SOL soared to $295, a record high. The market is turbulent, and both Bitcoin and SOL are making rapid progress. Only Ethereum, which ranks second in market capitalization, "will not rise for ten thousand years." What happened to ETH? Why did he fall into such a situation that everyone reviled him?

New and old money no longer prefers Ethereum

Once upon a time, the grand vision of Ethereum’s global computing layer attracted the favor of countless technology upstarts, financial giants, and industry giants, but now it seems that it is no longer popular. Bitcoin’s digital gold status is as solid as a mountain, with the approval of spot ETFs, crazy micro-strategy purchases, and increasing acceptance by government agencies. Even though its market value has become larger and larger, its growth rate starts from the bottom of $15,000. , has also achieved a return of more than 6 times. BTC is still the favorite of old money such as family fortunes.

On the other hand, Ethereum, despite misaligned competition with Bitcoin, has remained near US$3,000 since March last year. In the highly anticipated altcoin season, its performance is really disappointing.

As of January 16, the total net inflow of Ethereum spot ETFs reached US$2.66 billion, but this net inflow seems to have little effect on supporting and rising currency prices. Currency price is the result of consensus in the financial market. Long-term fluctuations have consumed a large amount of faith and sentiment, and market confidence has been exhausted.

On the other hand, Solana has attracted many new users with its low gas fee and the trend of making money through memes. According to the latest data from Circle’s official website, the USDC issuance on its Ethereum mainnet has reached US$31.53 billion, while the upstart public chain Solana has soared to US$7.72 billion.

L2 separates liquidity, and voices of doubt arise one after another

As early as the last cycle, the debate over L2 and L1 had already begun. In this cycle, as the "Four Kings" L2 have successively appeared on the stage, the debate over which one is better than L2 and L1 has been endless. However, at present, the voice favoring L1 has been generally recognized by the market.

As an L2 chain that focuses on capacity expansion, the cross-chain bridging of funds not only faces security and timeliness issues, but its user experience is also greatly compromised. Although the two chains have their own technical differences, they achieve the same goal by different paths, and users do not have a very obvious perception of the differences.

Even some project parties have repeatedly swung and migrated between L2 chains, further separating liquidity and user experience. In addition, each L2 has launched its own token system and has not really fed back to Ethereum, which has also weakened the appeal of ETH. Take Base as an example. Last year, most of the network fees turned into Coinbase's profits. Among them, very little funds were given to the Ethereum main network, and most of them were retained by Coinbase for its own use. If calculated on an annualized basis, Coinbase's revenue from Base is close to $100 million.

Kain, the founder of Synthetix and Infinex, said that if I were to run EF (Ethereum Foundation), I would definitely put pressure on L2 and ask them to use the sequencer revenue to destroy ETH.

Since the launch of each L2, its token performance has been mediocre. Although its total TVL has exceeded US$54 billion, there has been no particularly significant growth since March last year.

Now L2 technology is beginning to encounter bottlenecks again. The L2 chain continues to grow, and multiple L2s compete for limited blob storage, causing fees to soar and user costs to increase. Even if the number of blobs is increased to 6 through Pectra upgrade, the problem can only be temporarily alleviated but cannot be completely solved. Solutions include short-term Pectra upgrades, mid-term PeerDAS implementation, and long-term DA extensions.

In this regard, Cruve founder Michael Egorov said that it should abandon the L2-centered roadmap and instead fully expand L1. In addition, he bluntly said that L2 is not a moat, but a band-aid.

Ethereum mainnet TPS can now reach a maximum of about 90 transactions per second, but this is far from enough. As a financial settlement layer, Ethereum now needs to expand its capacity to meet the massive and high-frequency data processing. However, the challenges are huge. First of all, Ethereum must make complex technical adjustments and improvements to the protocol layer, such as sharding and proof of rights, etc., while ensuring security and decentralization. In addition, the issue of community consensus also deserves attention. The mainnet upgrade and expansion plan also needs broad support and recognition from the community. If there is a rush to switch from L2 to L1, the position of each L2 will become quite awkward, and community fragmentation and disputes will easily occur.

In the short term, whether Ethereum’s expansion will take the path of L2 or mainnet upgrade is still unresolved.

DeFi and NFT twin turbine power failure

As everyone knows, in the last bull market cycle, the crypto industry was flooded by macroeconomic conditions due to the two-wheel drive of DeFi and NFT, and the market ushered in an unprecedented crazy bull market. As the base currency on DeFi, Ethereum has had a very positive impact on the demand and popularity of ETH after DeFi ushered in explosive growth, and its currency price has continued to rise under the flywheel effect.

It is worth mentioning that NFT also made great contributions to Ethereum in the last bull market. During the NFT small picture craze, the prices of NFTs on many platforms and brands were priced in ETH, so to purchase NFTs you need to purchase ETH first. The popularity of NFT has greatly contributed to the expansion influence of ETH. Together with DeFi, it has contributed heavily to the crypto bull market and the glory of Ethereum.

Because of this, in the last bull market cycle, if calculated from the bottom, ETH's return exceeded 50 times.

Fast forward to this cycle, the lending and derivatives in the new DeFi protocol did not have many bright spots to attract a funding frenzy. Instead, they chose to build their own chains, and the value capture did not flow to Ethereum. Some DeFi protocol tokens have repeatedly reinvented the wheel and peaked when they were launched online, which has also dragged down the already precarious emotional side of the market. Since 2023, DeFi’s highlight moment only appeared at the climax of Q4 last year, and then was once again submerged in the wave of memes and AI. Data shows that the current total TVL of DeFi is still lower than the peak of US$180 billion set in the last cycle.

The explosion of NFT in the last cycle was often due to the market’s consumption after making a lot of money from currency speculation. But now, the market’s capital flow is limited to three main lines, Bitcoin, on-chain memes and AI coins. The former is an ordinary small currency. Retail investors no longer buy due to price factors, and the latter two extremely test PvP level and research capabilities. The once easy cycle of making money no longer exists.

The market has stopped generally rising, especially after the difficulty of making money increases, and the opportunities for making money in the market become smaller. Some altcoin holders did not wait for the altcoin bull market, but instead ushered in a "paradigm shift" in their wallets. The faster you run, the less you earn and the less you lose. If you run slowly, you will be severely trapped.

The market's attitude towards DeFi and NFT has always been difficult to show interest. Ethereum's powerful turbocharger stalled, and the price of ETH currency can be imagined.

Ethereum’s wealth effect is gone, Solana takes over

This week’s market cycle is different from the past, with the wave of AI and meme coins becoming the dominant wave of wealth. In past cycles, ETH's wealth effect has been quite strong thanks to its early ICOs and subsequent emerging DeFi protocols.

Ten years ago, Vitalik gave a speech full of code in Silicon Valley. The PPT demonstration process was all code. After the speech, the investors below were all excited, saying that this is the future, and then Ethereum was completed through ICO. The financing of US$20 million set a new record at the time, and at that time, the price of one ETH was around US$0.3.

Today, the current price of Ethereum is above US$3,000. If you participated in the public offering at that time and got it now, the return would be more than 10,000 times. ICO made the 2017 cycle filled with many hundredfold or even thousandfold returns, and the method of raising funds at that time was mainly ETH. After some fell silent, in the 2021 cycle, the returns of many DeFi protocols such as AAVE, COMP, SNX, and UNI emerged, allowing market investors to make a lot of money.

Don’t underestimate the wealth effect. Whether it’s project parties, exchanges, new platforms, etc., they are all racking their brains for the wealth effect. Although the market cannot make most people make money, it has at least allowed some people to make big money. This is very important, because the wealth effect will be imitated, spread wildly, and attract countless latecomers.

In this cycle, what has the most wealth effect is no longer the so-called VC coin, but the AI ​​concept coin and MEME coin. Taking MEME as an example, apart from the third oldest ones such as DOGE/SHIB/PEPE, there is not much of a meme wave on the Ethereum mainnet. Even L2 only had BRETT and DEGEN on the Base chain that were famous for a while. AIXBT and VIRTUAL have also become one of the few highlights of Base.

Memes and AI projects on Solana are springing up like mushrooms after a rain. Taking the recent TRUMP as an example, Circle has issued a total of 2.5 billion additional USDC on the Solana chain within 4 days since its issuance. Some high-level players on the chain in the Chinese community have even achieved a brilliant record of making tens of millions of dollars in 4 hours, which has attracted the envy of the Twitter community.

In addition, the rise of memes such as BONK/BOME/WIF/PENGU in the past has injected a lot of vitality into the Solana ecosystem, and a group of "meme super cycle" theoretical propagandists have also cheered for it to attract more users. Flood into the Solana ecosystem.

In terms of the AI ​​wave, Solana has also completely defeated Ethereum, and hot coins such as AI16Z/FARTCOIN/GOAT are leading the AI ​​wave.

Solana firmly occupies the market initiative in AI concept coins and meme coins. Dune data shows that the cumulative revenue of its issuance launch platform Pump.fun has exceeded US$400 million so far.

Raydium, a meme liquidity infrastructure, has annualized revenue of $363 million and annualized expenses of over $3 billion. In the past three months, expenses have increased by more than 370% and revenue by more than 260%. The market capitalization expense ratio is 1.1 times, and the market capitalization income ratio is 9.6 times.

Many memes and AI concept coins choose Solana instead of Ethereum and its L2. A large part of the reason is the vicious cycle caused by high mainnet gas fees, slow transactions, and L2 liquidity fragmentation. Eventually, Solana began to expand its wealth effect through a continuous flywheel effect.

Currently, according to Solscam data, its number of active wallets remains at a high of 6 million, an increase of nearly 6 times compared to May 2024.

Its daily number of new accounts (calculated based on multiple tokens in a single account) also remains at a historical high of 20 million.

Behind the crazy growth of Solana's data, perhaps a spark has turned into a prairie fire.

The Ethereum Foundation sells coins and the team is bloated

L2 was not favored by market investors, the twin turbines of DeFi and NFT stalled, the wealth effect was sluggish, and many contradictions caused the price of ETH to fluctuate. The community began to point the contradiction at Vitalik. The former Vitalik was pulled down from the altar by everyone, and was criticized and reviled by many. The noise is endless, and the Ethereum Foundation under the leadership of Vitalik has also become the target of public criticism.

As early as the last cycle, the Ethereum Foundation was famous for its escape from the top indicator. However, in this cycle, EF’s frequent currency selling actions were often discovered and reported by on-chain monitoring, and the community suddenly became angry. When the currency price rises, the community may choose to ignore this kind of currency selling behavior. Once the ETH currency price stagnates, the currency selling behavior becomes "sensitive selling pressure." Vitalik’s explanation for this is to maintain the salary of employees and the donation behavior of the community ecology, but the community does not buy it.

The founder of Aave also expressed his opinion at this time. After reading the Ethereum Foundation's annual budget report, Stani Kulechov said that EFEF was facing expenditure and financial problems and should immediately reduce its cash burn rate from US$130 million to US$30 million. A series of specific suggestions were made to streamline the number of employees and form a new leadership team.

If the behavior of selling coins is only one of the reasons why retail investors vent their anger, then the reason why some people are dissatisfied with EF focuses on its own lack of direction and leadership.

As an early investor in SOL, Multicoin Capital co-founder Kyle Samani wrote today that he was the first to enter the encryption field because of Ethereum and was very excited about it. However, after Devcon 3 in November 2017, confidence in Ethereum was lost. "I really can't understand why the Ethereum Foundation is so clueless. No one within the Ethereum Foundation has enough awareness to promote a concrete scaling plan."

In addition, Kyle also added, "In the past seven years, I feel that nothing has changed in the Ethereum Foundation. There is still a lack of urgency, the leadership is out of touch with the needs of core users, and there is still no clear direction."

Eric Conner, a well-known KOL on Twitter, even recently announced his withdrawal from the Ethereum community on social platforms. He once bluntly stated that the problem is that today's foundations do not report to stakeholders and are gradually falling into quagmire and resisting change. The foundation currently exhibits an "anti-winning and competitive mentality," which has led many community members to question whether to stay.

Under the pressure of doubts in the community, Vitalik had to stand up and respond, saying that major changes in its leadership structure are being made and have been going on for about a year. Some of these reforms have already been implemented and made public, while others are still ongoing. We also strongly support contact with funds, institutions and countries, and our willingness to discuss ETH from an asset perspective.

In response to the overwhelming abuse, Vitalik said, "If you continue to exert pressure, then you are actually creating an environment that is extremely harmful to top talents. Recently, some of the best developers in Ethereum sent me private messages to express their opinions. Dissatisfaction with the social media environment that people like you have created. You are making my job more difficult and making it less likely that I will have any interest in doing what you want. .

Summarize

Ethereum is facing a serious midlife crisis, and it is still unclear what actions Vitalik will take to deal with the crisis. Fortunately, Joseph Lubin, co-founder of Ethereum and founder of Consensys, stood up and spoke out: One of Vitalik’s most admirable traits is the way he makes decisions. When a problem arises, he listens to all sides, gathers information, weighs the pros and cons, and makes a decision when he feels he has considered most of the necessary data. He has listened to everyone's opinions and things are moving forward.

In addition, Joseph Lubin also said: "Based on what I've seen, there will be so many high-value plans being disclosed soon that it will make your eyes dizzy. It's best to stay calm now and not lose your mind before the craze starts." "

It remains to be seen whether the giant ship Ethereum still has a chance to make a comeback after years of ups and downs.