How can Ethereum save itself amid the rise of Solana and the crisis of trust?

Solana, fueled by the meme coin craze, is creating a crisis of confidence in Ethereum. While the $323 billion blockchain isn’t fighting back, it does have a promising alternative.

Ethereum and its community are facing unprecedented challenges. It is being overtaken by a friendlier competitor, Solana, which is benefiting from the promotion of millions of meme coins. In addition, the rise of L2 (Layer 2) networks has also exposed Ethereum to "internal competition". These interoperable networks directly divert Ethereum's users, transaction fees and market attention. On Tuesday, Uniswap, the world's largest decentralized exchange, launched its own L2, Unichain, on the Optimism network.

Ethereum’s token price performance has also lagged far behind Solana and the $1.9 trillion market cap Bitcoin. Over the past 12 months, ETH has only risen 5.9%, while Bitcoin has soared 100.58% and Solana has also risen 85%.

More notably, the price of ETH (currently around $2,600) has lagged behind Bitcoin and Solana over the past six months, indicating that investors are classifying the latter two as part of the same asset class, while Ethereum is being marginalized. Zach Pandl, head of research at Grayscale Investments, said: “There is not a clear market demand for smart contract platforms among traditional investors.”

Ethereum needs to reshape its narrative and regain the attention of investors and the community, and the key to all this lies in finding a more precise product-market positioning.

Ethereum Caught Between Bitcoin and Solana

For a long time, Ethereum has been the "supporting role" of Bitcoin, and the market tacitly assumes that it is the second-ranked blockchain.

But Bitcoin’s “digital gold” narrative has helped it to maintain its position in the market, and despite its limited functionality, low throughput and high transaction fees, it has continued to grow steadily. However, Ethereum has encountered a similar throughput bottleneck during its development, with only dozens of transactions per second being processed.

In order to expand the network capacity, the Ethereum Foundation adopted the L2 expansion strategy and launched hundreds of L2 blockchains to improve the overall throughput. This move is indeed effective, increasing the transaction processing capacity of the Ethereum network to more than 200 transactions per second, but it also brought side effects: Ethereum outsourced its core functions to a series of L2 blockchains, such as Optimism, Arbitrum, Base, Mantle, Zksync, etc. This change weakened the connection between Ethereum and users.

“If you’re investing in Ethereum but you don’t actually use it directly, you might be thinking, ‘Why not just buy Arbitrum’s token?’” noted Carlos Guzman, GSR’s vice president of research.

This trend accelerated in March 2024, when Ethereum introduced a temporary data storage solution called "blobs" through an upgrade, making transactions on L2 almost free. Gauntlet founder Tarun Chitra commented on The Chopping Block podcast: "You never see a company giving away 99% of its revenue to its affiliates."

This is a loss of real money. For example, Coinbase’s L2 Base has generated nearly $100 million in revenue for the company since it went live in the summer of 2023, and this value ultimately belongs to Coinbase’s shareholders, not ETH holders.

Ironically, Ethereum's reliance on L2 actually makes it more centralized. Almost all L2s rely on a single sorter to organize transactions and submit them to the mainnet, a mechanism similar to the entire Bitcoin network being controlled by only one miner. Although L2s plan to be decentralized in the future, the current situation undoubtedly exacerbates Ethereum's centralization risk.

The most telling example of this is the circulating supply of Ethereum. In September 2022, Ethereum switched from a Proof of Work (PoW) mechanism to a Proof of Stake (PoS), and introduced a mechanism to destroy a portion of the network's transaction fees, thereby reducing the circulating supply of ETH. In theory, during periods of high transaction volume, the fees destroyed should exceed the new ETH supply, putting Ethereum into deflationary mode. However, after the upgrade in March 2024, Ethereum returned to an inflationary state due to a drop in mainnet transaction volume, and the current total ETH supply has exceeded the 120.5 million before the upgrade.

This is bad news for ETH holders. Another problem is that Ethereum's ecosystem is too fragmented, resulting in a confusing user experience. In contrast, Solana's growth rate is amazing, and its ecosystem is simpler and more friendly. As a self-sufficient L1 blockchain, all functions on Solana run on the mainnet (L1), and users only need to use one wallet without having to pay attention to which L2 their assets are distributed on. In addition, Solana's transaction fees are only a few cents, making it a natural home for the meme coin craze and continuing to attract new users.

Developers are also turning their attention to Solana. According to Electric Capital’s 2024 Crypto Developer Report, Solana’s developer count grew 83% in 2024, while Ethereum’s developer count fell 22%.

Heading to a wider market

Ethereum can do more to restore the confidence of investors and the community. Some experts believe that the Ethereum community is too focused on the obscure details of technology development and ignores basic marketing. In contrast, the Solana Foundation not only launched a smartphone, but also opened a pop-up store in Hudson Yards on the west side of Manhattan to promote the ecosystem in a more user-friendly way.

Guzman, vice president of research at GSR, said that in the next few years, discussions on the expansion of the Ethereum mainnet will continue, which may include the adoption of technologies such as zero-knowledge proofs (ZK Proofs). One proposal under discussion is to increase the gas limit of Ethereum blocks to support more transaction processing. Ethereum founder Vitalik Buterin is already promoting these efforts. However, in Guzman's view, the implementation of any major expansion plan will take at least several years. In addition, Tron founder Justin Sun also proposed a more radical proposal. Although the details are limited, its core ideas include taxing L2 and reducing validator rewards to enhance Ethereum's deflation. These discussions will undoubtedly continue.

At the same time, more and more L2 projects are being launched. In addition to Unichain, tokenized treasury fund issuer Ondo Finance announced that it will launch its own L2, and gaming and entertainment giant Sony has also launched its own L2. Christine Kim, vice president of research at Galaxy Digital, said: "In the end, all applications may launch their own L2 on top of Ethereum to support their own business." She believes that the block space and ecosystem of the Ethereum mainnet are currently severely limited, so the rise of L2 is an inevitable trend.

Kim further noted that Ethereum could follow this trend and abandon its goal of becoming the primary interaction layer for users. However, for this strategy to work, Ethereum’s overall usage would need to grow exponentially, and it remains uncertain whether investors will accept this direction.

Despite investor anxiety about ETH’s price, data shows that Ethereum has outperformed almost all major L2 tokens over the past year. Due to the unlocking mechanism of L2 tokens that allows early investors such as venture capital to sell their holdings, Optimism and Arbitrum’s tokens have fallen 69% and 75% respectively in the past 12 months, despite their rapid growth in usage.

Grayscale research director Pandl believes that Ethereum should play to its core strengths - stability, security and decentralization, and leave the low-value transaction market to L2 and Solana to compete. He pointed out: "Ethereum is still the leading public chain in terms of total locked value (TVL) and economic security, which makes it a natural choice for institutional finance."

Pandl specifically mentioned that BlackRock, which manages $11.5 trillion in global assets, chose to launch its $1 billion tokenized Treasury platform, BUIDL, on Ethereum. In fact, according to RWA.xyz, there are more tokenized real-world assets (RWA) on Ethereum than on all other blockchains combined.

In addition, Ethereum's share of TVL in the entire blockchain industry remains solid.

It is clear that high-end financial services on decentralized chains remain an area of ​​strength for Ethereum, and this trend is likely to continue to expand. Leaving aside the $200 billion stablecoin market, the total value of real-world assets on the chain is only $17.1 billion, while the total size of global fixed income and equity capital markets reached $255.7 trillion in 2024 - there is huge room for growth.

Perhaps, instead of trying to be the “all-around blockchain”, Ethereum should focus on developing this market segment. In contrast, Solana or L2 projects are still too new or centralized to win the trust of mainstream financial markets.

Ethereum was once the birthplace of governance tokens, NFTs, and meme coins, but real-world assets (RWAs) may be the next step in the evolution of the crypto world, and they also fit perfectly with Ethereum’s strengths. For ETH investors, this may be their best hope.