Ethereum’s Challenges and Prospects

Ethereum, the second-largest cryptocurrency by market cap, has faced significant challenges in the current crypto cycle. However, new initiatives could pave the way for a potential recovery, according to a recent investor note from VanEck.

Market Position

VanEck’s Head of Digital Assets Research Matthew Sigel and Senior Digital Assets Analyst Patrick Bush highlighted Ethereum’s declining market position in their report.

> “Ethereum has struggled in the current crypto cycle, both in terms of usage and asset valuation,” the analysts wrote, adding: “This decline is largely due to the erosion of the fundamental factors that once made Ethereum valuable.”

While rival networks like XRP and Solana have gained traction over the past year, Ethereum has lagged behind. One primary reason for this shift is Ethereum’s approach to scalability, leading to fragmented liquidity and a loss of market dominance in on-chain crypto trading.

Scalability Issues

Ethereum’s scaling strategy has focused on encouraging users to migrate from the main blockchain to various layer 2 networks like Arbitrum and Base. These networks offer lower transaction costs and higher throughput. However, this approach has spread liquidity across multiple chains, making trading less seamless compared to networks like Solana.

In contrast, Solana gained significant market share by offering a single-chain ecosystem with high transaction speeds. A significant portion of Solana’s revenue, approximately 80%, came from memecoin trading, which drove user adoption. As a result, Ethereum’s overall usage declined, and its deflationary tokenomics weakened.

According to VanEck’s report, Ethereum’s network revenue has fallen by 93% in the past year. The network’s share of total blockchain revenue has also declined from 55% in February 2024 to just 24% in February 2025.

Governance Concerns

In addition to these issues, the Ethereum Foundation, the nonprofit organization supporting Ethereum’s development, has faced criticism for its governance style. Co-founder Vitalik Buterin recently sparked controversy over a social media post referencing communism.

The Pectra Update

Despite Ethereum’s woes, VanEck analysts pointed to the upcoming Pectra update as a potential turning point. Pectra will introduce several key improvements, including:
– A wallet recovery mechanism
– Account abstraction
– Improved efficiency for Ethereum validators

Most importantly, the upgrade will double the number of “blobs” that Ethereum can process. Blobs are large packets of transaction data sent to Ethereum from layer 2 networks. Increasing the number of blobs is expected to reduce transaction fees and enhance network efficiency, potentially making Ethereum more competitive against faster and cheaper alternatives like Solana.

The Ethereum Foundation has also proposed a new transaction method called “intents.” Instead of manually bridging assets between different Layer 2 solutions, users will submit a desired result, and a network of resolvers will compete to accomplish it most efficiently. If successful, this could eliminate the need for cross-chain bridges, a security weakness that has led to billions of dollars in assets being stolen.

Conclusion

While Ethereum has seen significant declines in adoption and revenue, the upcoming Pectra upgrade and new transaction mechanisms could help reverse the downward trend. Industry experts, including Ethereum Foundation researcher Justin Drake, acknowledge the urgency of the situation.

> This is not investment advice.