Ethereum, the second cryptocurrency in the world by capitalization, as well as the most popular blockchain platform for decentralized applications, is going through a very complex period. In recent months, the value of Ethereum (ETH) has dropped drastically, causing concern among investors, analysts, and the community itself. But what are the reasons for this crisis and what scenarios can we expect in the near future?

The reasons for the current Ethereum crisis are diverse and interconnected. First of all, one might wonder why a low price of Ethereum represents a problem for the entire network. Ethereum is based on a “proof of stake” system, meaning on the deposit of ETH by users to ensure the functioning of the blockchain. Those who stake receive an economic incentive, but if the price of Ethereum decreases too much, this incentive is drastically reduced. This makes the network less secure, because fewer and fewer people are incentivized to keep their Ethereum locked in staking. Less security means less trust from users, thus generating a further negative effect on the value of the cryptocurrency itself.

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Another important issue concerns the growing competition. Ethereum was the pioneer in decentralized finance (DeFi) and despite continuing to dominate the sector, its position is threatened by emerging blockchains, such as Solana, Cardano, and Avalanche, which offer faster, cheaper, and more scalable transactions. These new competitors are attracting more and more developers and users, thus reducing the absolute dominance that Ethereum once had.

Recently, moreover, Ethereum has carried out important technical upgrades, including the well-known “Dencun” upgrade, which has significantly reduced transaction fees, previously considered too high. Paradoxically, however, fees that are too low have proven to be a double-edged sword: lower fees also mean less ETH burned (the so-called “burn”), a mechanism designed to limit the overall supply of Ethereum and support the price in the long term. This mechanism, in fact, provides that part of the fees (the “base fee”) of each transaction are permanently destroyed by sending an equivalent amount of tokens to an inaccessible address (without a private key), making them effectively unrecoverable, and reducing the supply of Ethereum. Consequently, fees that are too low are currently limiting the economic sustainability of the network.

From a macroeconomic perspective, the global geopolitical situation and restrictive monetary policies have reduced investors’ risk appetite, heavily penalizing the cryptocurrency market, including Ethereum. This general economic scenario has led many investors to sell ETH, accentuating the price decline.

But it is not only the price of Ethereum that is concerning: this currency is now also facing increasingly fierce competition. On one side, we have numerous Layer 2 solutions that, although they help make the network faster and cheaper, retain a large portion of the fees, subtracting significant revenue from the main project. On the other side, the fees of Ethereum, which have now become very economical, further limit potential revenues.

The result of this complex situation is evident if we look at the “Dominance” of Ethereum, that is, its market share compared to the entire crypto sector. Today this value has dropped to 7.55%, reaching levels we haven’t seen since January 2020, and it is now close to its historical lows.

Even more impressive is the direct comparison with Bitcoin. On the exchange with Bitcoin ETH/BTC, Ethereum has lost about 80% compared to the highs reached in 2021, with a current value below 0.02. A significant drop that clearly shows the difficult phase that Ethereum is going through at this moment. 

Another element of pressure comes from the stablecoin ecosystem, which has reached a record value of 132 billion dollars on the Ethereum network. However, contrary to expectations, this growth has not generated a proportional demand for ETH itself, leaving many analysts puzzled about the real ability of stablecoins to support the price of the cryptocurrency.

Finally, the massive liquidations of speculative positions with leverage on DEFI platforms also played an important role. Many investors had used leverage, opening bullish (long) positions convinced that Ethereum would continue to grow. When the market started to decline, many of these investors were forced to sell forcibly, triggering a cascade of sales that further accentuated the fall in prices.

To emerge from this crisis, Ethereum will need to focus on innovation and quickly complete the ongoing technical upgrades. Additionally, it will be crucial for Ethereum to effectively integrate Layer-2 solutions, such as Optimism or Arbitrum, within its ecosystem, which allow for greater speed and lower costs, in order to benefit from their success without losing centrality. 

A further step forward could come from clearer regulation, which would once again attract institutional investors, currently uncertain due to regulatory ambiguity.

Another aspect not to be underestimated, finally, is how to address the issue of financial leverage within DeFi platforms, perhaps by adopting more prudent management policies and more efficient control mechanisms, thus limiting the risk of future massive liquidations.

In conclusion, despite the challenges, Ethereum maintains great potential thanks to its technological maturity and the vast ecosystem of developers and decentralized applications, with one of the largest and most active communities in the crypto world. Its future is not compromised, but it will depend greatly on the ability of the community and its developers to quickly adapt to changes and new demands of an ever-evolving crypto market, transforming current critical issues into opportunities to restart with renewed energy.

Greetings and happy trading!

Andrea Unger