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Ethereum (CRYPTO: ETH), the second-largest cryptocurrency by market capitalization, has charted a diametrically opposite trajectory when compared to its older sibling, Bitcoin (CRYPTO: BTC), over the past year.

Consider this. Bitcoin has jumped 32% in a year, reaching an all-time high of $109,000. Its share in the overall cryptocurrency market has expanded from 52% to 60%.

Ethereum, on the other hand, contracted 39% during the same time, reducing its market share from 16% to 8%.

The widening gap has sparked discussions about Ethereum’s role in the cryptocurrency hierarchy and its future course Benzinga spoke to a few analysts to understand the factors contributing to the ecosystem’s ongoing downturn.

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Jeffrey Hu, Head of Investment Research at digital asset manager HashKey Capital, believed the fault lies in Ethereum’s economic model.

“The activation of EIP-1559 allows more Ether to be burned for deflation when Ether activity is high on Ethereum; however, in order to further support on-chain applications, Ethereum must scale,” Hu stated.

The Ethereum London Hard fork, dubbed EIP-1559, introduced a token burn mechanism for the network. Under this mechanism, the base fee, i.e., the minimum fee per transaction, is removed to add deflationary pressure to ETH and boost its value.

So, what exactly is the problem?

Hu asserted that the rise of  Layer-2 blockchains and the Dencun Upgrade, which slashed fees on L2s by orders of magnitude, diverted on-chain activity away from the base Ethereum chain, resulting in inflation.

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According to Ultrasound Money, ETH’s deflation rate started slowing down in May 2024, and since early February, the coin’s supply has been net increasing.

Source: Ultrasound Money

Trever Koverko, Web3 investor and co-founder of Sapien, echoed these observations.

“Ethereum is struggling to establish a narrative around how L2’s are accretive and not extractive to the main chain,” he added.

However, L2s were not the only competition that Ethereum encountered.