Ethereum is faster and cheaper than ever to use. Why aren’t investors excited?

Once a darling among crypto investors, Ethereum has suddenly fallen under serious scrutiny by some of its most ardent supporters.

The reason? A lagging valuation and a sense that perhaps its best days are behind it.

Yet, Ethereum developers have quietly fixed some of the thorniest problems in the second most valuable blockchain. Take network fees.

At the peak of DeFi Summer in 2021 — where budding decentralised finance applications doled out millions in tokens for anyone that used the apps — it cost a whopping $6 to complete a simple swap.

Now, it costs a nickel.

Advances

That’s not the only advance Ethereum has made — devs made transaction fees more predictable and reduced the network’s energy usage by more than 99%.

And Ethereum has reformed its $196 billion network without any downtime, hacks, or major bugs.

“The irony here is we’ve reduced the execution risk significantly,” Kain Warwick, the founder of the decentralised finance application Infinex, told DL News.

“But the people allocating capital, who are going to put a $50 million slug into ETH, they’re looking at the margins going down, like, ‘when does this stop?‘”

Indeed, Ethereum now faces a different kind of problem — perhaps its most existential yet: A lack of narrative.

Bitcoin has become known in the market as a “store of value.”

And Solana, one of the very first so-called Ethereum killers, has emerged as a speedy alternative for developers looking to deploy new kinds of crypto apps.

“This has left ETH caught in an awkward middle spot, without a clear differentiating advantage to highlight,” Carlos Guzman, an analyst at market maker GSR, told DL News.

Flexible alternative

Vitalik Buterin, the Russian-Canadian programmer who co-founded the network, shared a similar view during an industry event in 2024.

“Bitcoin has a simple narrative, which is digital gold,” he said. “But with Ethereum, it’s like ‘Whoa, what the heck is Ethereum?‘”

Launched in 2015, Ethereum was pitched to developers as a more flexible alternative to Bitcoin upon which anything from music apps to insurance to pieces of art could be built.

It wasn’t just a new way of sending money; Ethereum’s backers declared it a new substrate for building a decentralised internet.

‘We’ve economically cut our legs out.’

Kain Warwick, Infinex

But shifting the entire online experience to a blockchain was daunting. In the meantime, similar blockchains emerged that targeted Ethereum’s weaknesses, namely speed and cost.

Ethereum can send roughly 15 transactions per second at an average cost of $0.05 per transaction.

Solana cleared 4,400 transactions per second on April 14, according to Solana Explorer. The average cost per transaction on the network since January has been $0.0034, according to Token Terminal.

“Solana kept its mindshare for a while because it had the performance to support a few hundred thousand to a few million users using the chain,” Ashwath Balakrishnan, an analyst at crypto research firm Delphi Digital.

Expensive congestion

Unlike Solana, Ethereum has never officially crashed or stopped producing blocks.

That doesn’t mean it hasn’t been, at times, unusable.

Ethereum increases the fee to send transactions whenever users start piling into the network.

The first time expensive congestion reared its head was in 2017 via a buzzy digital card game called CryptoKitties. As punters piled in to collect pictures of onchain cats — and “breed” them to make even rarer derivatives — network fees soared.

In the summer of 2020, DeFi took off as users began pouring into crypto apps that promised lucrative token rewards, a process known as yield farming, on Ethereum.

As farmers rushed onto the network, Ethereum buckled under the load.

“DeFi Summer was the first time that gas spiked, and Ethereum became unusable for almost everyone,” Warwick said. “It didn’t fall over. But, functionally, that’s the same thing for the average user.”

Layer 2s

Meanwhile, a decentralised team of Ethereum developers around the world had been hard at work executing Buterin’s vision of a so-called rollup-centric Ethereum roadmap to solve the network’s growing pains.

The co-founder posited in 2020 that Ethereum could scale by moving activity — be it trading cats or coins — off of the main network onto any number of subsidiary networks called rollups or layer 2 networks.

These networks would still be tethered to Ethereum, of course, and would even pay a tax to leverage the primary network’s security features.

Every key upgrade to Ethereum over the following years would buttress Buterin’s vision.

First came Ethereum Improvement Proposal 1559 in 2021, which destroyed a small amount of Ethereum in every transaction, including those fees that layer 2 networks paid to use Ethereum.

With enough usage, the network could destroy more Ethereum than it created, creating a deflationary asset — music to crypto investors’ ears.

When Ethereum executed its first major upgrade, dubbed the Merge, in 2022, it pulled off the herculean task of switching from a proof-of-work system for processing transactions to a proof-of-stake “consensus mechanism.”

Supply crunch

The upgrade wasn’t designed to address transaction speeds or costs on the Ethereum network; instead, it laid out the technical bearings for a flourishing ecosystem of layer 2 networks.

The thinking went that with enough activity on these layer 2 networks, the tax those networks pay to Ethereum would be enough to sustain the network’s deflationary economic model.

As activity booms on these subsidiary networks, more Ether will be destroyed than minted, creating a supply crunch and boosting price.

In theory, at least.

There may be more than 60 different layer 2 networks collectively worth more than $27 billion, according to data from L2Beat.

It’s still not been enough to light a fire under Ether.

Assets underpinning other layer 1 blockchains, such as Solana and BNB Smart Chain, have all managed to notch fresh highs in the last six months.

As for Ether, it’s still 67% from its record of $4,874 set all the way back in 2021.

Ironically, many are pointing to the outsourcing to these speedy layer 2 networks — the very solution to solve Ethereum’s growth issues — as a key reason why.

”We’ve economically cut our legs out,” Warwick told DL News.

Raking in cash

Others say it was an error to encourage users to move to these subnetworks en masse.

“A potential mistake from the Ethereum community was we said that layer 2s are the only place you should interact,” Declan Fox, product lead for Consensys layer 2 network Linea, told DL News.

And while Ethereum lags, many layer 2 networks are raking in the cash.

Since Arbitrum and Optimism, two of the more popular layer 2s, have raked in $152 million and $86 million in fees, respectively.

Investors may have also opted to purchase native tokens for these networks instead of buying Ether, which has diverted an enormous amount of investment.

The total market for all layer 2 tokens is worth more than $7.4 billion.

If that money were instead invested into Ether, investors would likely tell a much different story about the network, Warwick says.

Course corrections are already in the works.

‘It’s time L2s pay a fair value for the services they receive!’

Dean Eigenmann, Project Blanc

In April, Jerome de Tychey, the CEO of crypto development outfit Cometh and the president of Ethereum France, and Dean Eigenmann, founder of crypto research firm Project Blanc, proposed charging layer2 networks more for using Ethereum whenever gas fees are low.

“It’s time L2s pay a fair value for the services they receive!” said Eigenmann on X.

Fox and Warwick instead are promoting a different tactic: Maximise demand on all levels.

“Let’s fucking induce some demand, like we’ve got a job here to do,” Warwick told DL News.

Tokenisation

For him, that means accelerating the tokenisation trend and moving big-ticket purchases like money market funds onto Ethereum.

BlackRock, Fidelity, and Franklin Templeton have already deployed similar funds on Ethereum and other layer 1 networks. Warwick says the network needs far more institutional players to move the needle.

“On what planet can you build a thing that’s as amazing as Ethereum and not feel okay selling it to people like that,” he told DL News. “Someone has to be the salesperson and sell this thing.”

Fox said that as payments and remittances on layer 2 networks like Linea’s pick up steam and hit Visa scale — 20,000 transactions per second — there will be plenty of money that trickles down to Ethereum.

Narratives

At which point, quipped Fox, critics may flip back to praising the sprawling network of layer 2s and the hard work from the Ethereum community.

After all, price drives narrative.

“We’ll see that as Ether price appreciates again, these narratives will fall behind, like ‘Oh, actually, the layer 2s are value additive to the layer 1, and the rollup-centric roadmap was clearly the right move.‘”

“It’s a chicken and the egg kind of problem.”

Liam Kelly is a Berlin-based reporter for DL News. Got a tip? Email him at liam@dlnews.com.