Analysis: Reasons Behind Ethereum's Current Price Slump

Author: Haotian

Original Link: https://x.com/tmel0211/status/1830481344574665157

Recently, FUD surrounding Ethereum and @VitalikButerin has been growing more intense. Especially concerning the usage of Blobs space and Layer 2 revenues, overseas KOLs have had some excellent discussions. Setting aside the emotional influence of the secondary market, how should we evaluate Ethereum’s Layer 2 strategy purely based on data? Here are my thoughts:

Let’s go back to the time before Ethereum’s Cancun upgrade. Everyone was excited about RaaS and the DA War because the explosion of Layer 2 projects due to one-click chain launches was expected to directly drive the demand for Ethereum mainnet DA capabilities via Layer 2 batch transactions. This, in turn, would trigger a price war for Blobs space, and a large amount of ETH would be burned in the Layer 2 War, leading to a shift from inflation to deflation for Ethereum, driving up its price — a win-win scenario.

However, the reality is that the grand narrative of Rollup as a Service lost momentum after the Cancun upgrade. Although the basic infra capability for one-click chain launches is in place, there hasn’t been as much competition among developers as expected.

1) The Blobs space utilization rate is still not saturated, with only about 80% utilization according to statistics. Layer 2 can optimize Blob usage, actively choosing whether to occupy Blob space in the current block. For example, by monitoring the current block’s Blob utilization, if the utilization is too high, it can directly skip to the next block. This directly prevents the Blob fee market from catching FOMO.

2) The usage fee rate for Blobs and the DA cost for Layer 2 projects currently only account for 0.3% of their total revenue. According to incomplete statistics, the daily revenue for Layer 2 projects is about $500,000, while the cost for using Blobs space accounts for only 0.3%, far from reaching a saturated utilization level. Although Layer 2 projects have other costs like Sequencer servers and Prover verification collaboration, the visible DA cost is not high.

This, on one hand, shows that after the Cancun upgrade, Ethereum has been very successful in reducing fees. But on the other hand, it indicates that the current state of Ethereum Layer 2 in terms of user base and transaction volume is far from delivering value to Layer 1, let alone fostering an optimistic “deflationary expectation.”

In my opinion, in the short term, based on data analysis, Ethereum’s Rollup-centric strategy can be considered successful. After all, DA costs have decreased, allowing Layer 2 projects to build their ecosystems with minimal expenses, and the gas fees for users on Layer 2 have dropped to an almost negligible range ($0.001–$0.01).

A significant portion of users will use Layer 2 as their chain for high-frequency transactions. Making Layer 2 the preferred choice in front of Ethereum, with low fees, good user experience, and high TPS, is precisely the first goal of Ethereum’s Rollup strategy. Therefore, in the short term, Ethereum’s Layer 2 strategy is undoubtedly successful.

In the long term, what changes will occur when the transaction volume on Layer 2 increases exponentially and Blob space usage becomes highly saturated?

DA fee costs will rise, although the space for growth from the current 0.3% is limited. However, if DA costs exceed 50%, a large number of Layer 2 projects will actively withdraw from the competition for Ethereum’s Blob space, and demand for third-party DA providers like Celestia will surge. Moreover, some Layer 2 projects may directly transform into Layer 3, or even Validium, making the Ethereum Rollup ecosystem more diverse and rich.

Here’s the problem: could the narrative and hype originally built around Ethereum Layer 2 not be sustained because the Cancun upgrade was too successful? Yes, exactly.

With Blob space usage not fully saturated and the dynamic Blob fee market not activated, all the points of tension now lie in the urgent need for growth in Layer 2 users and ecosystem scale. The crucial issue is that the daily active users and revenue of the leading Layer 2 projects are not too bad for a single project.

So, do you now understand the dilemma of Ethereum Layer 2?