Is Ethereum still a good chain?

For years, no new blockchain has been able to challenge Ethereum’s dominance as the second-largest asset in crypto. But as users migrate to L2 and ETH sees inflation, is it still a strong blockchain now?

In 2020, Ethereum shifted to an L2-centric roadmap. Now, after Dencun, rollups account for 87% of all daily transactions.

However, this scaling solution has also been criticized as Ethereum’s gas fees are at their lowest level in years, causing inflation in the ETH economy. In addition, Ethereum’s recent poor performance relative to BTC and SOL has also confirmed the critics’ point of view.

Is Ethereum still a competitive and viable blockchain? Let’s find out.

The Current State of Ethereum

Ethereum’s deflationary narrative appears to be in danger.

In the second quarter of 2024, Ethereum experienced its highest quarterly inflation rate since its transition to Proof-of-Stake consensus via The Merge in September 2022.

The surge in inflation is due to a sharp drop in gas consumption rates and unusually low gas prices. According to Ultra Sound Money, the network currently charges just 1 gwei for a typical transaction.

The Token Terminal data reveals the following about Ethereum:

• It ranks first in terms of revenue, but Tron and Tether are catching up quickly.

• The total locked value (TVL) ranks first at $50 billion.

• BNB Chain and Tron have surpassed Ethereum in third place in terms of the number of token holders.

• It is the seventh largest protocol in terms of monthly active users (MAU), with 6.5 million users.

• The number of transactions ranked 11th.

• Transactions per second (TPS) ranked 12th.

• In terms of daily active users (DAU), it ranks 12th with 371,000, behind Bitcoin L1’s 410,000.

• Disadvantages of the Rollup Strategy

• As mentioned above, declining user activity, inflationary economics, and poor performance have fueled criticism of Ethereum. Are there others?

• Some analysts have discussed the impact of Ethereum’s rollup-centric strategy on the value of ETH, highlighting the potential risks and uncertainties. The rollup strategy assumes that L2 will continue to use Ethereum’s block space, bringing more users and fees back to Ethereum in the long run.

• However, Ethereum cannot ensure that L2 is consistent with its base layer. There is a risk that L2 may develop its own ecosystem and spin off into an independent chain, no longer paying fees to Ethereum.

• If this happens, Ethereum’s transaction activity could be worth less and its revenues could be at long-term risk as L2 stops contributing fees.

On the other hand… despite ETH’s recent poor performance and challenges like fee reductions and user migration to L2, Ethereum remains a strong platform with a strong community.

The widespread use of ETH in DeFi on L2 indicates a positive outlook for the asset, as L2 could become an important economic hub with ETH at its core.

• On Arbitrum, ETH-related assets account for more than 50% of the total value, worth nearly $590 million.

• On Base, ETH and its derivatives account for more than 80% of the supply assets, totaling nearly $140 million.

• According to Optimism, ETH-based assets account for nearly 50% of the total value, worth approximately $110 million.

Additionally, Ethereum is the oldest and most successful smart contract platform, with a strong and resilient community that has withstood various challenges, including major upgrades such as “merges.”

The strength of the Ethereum community is a key differentiator , as it is not something that can be built quickly and is critical to the long-term success of the platform.

L2 has gained tremendous value from its alliance with Ethereum and is unlikely to leave.

Finally, there is renewed enthusiasm in the Ethereum community, with plans for base layer scaling and even more efficient L2s like MegaETH.