The Ethereum Paradox: When Infrastructure Advances but Price Falls

In 2025, Ethereum experienced a year that would tell two completely different stories depending on how you look at it. On one side, developers celebrated technical successes: two milestone upgrades (Pectra and Fusaka), an ecosystem of Layer 2 growing explosively, and BlackRock’s BUIDL fund of $2 milliards that solidified ETH as the preferred infrastructure for Real World Assets. On the other side, investors witnessed a brutal crash: from the all-time high of $4,950 in August, ETH fell to around $2,900 by year’s end, a 40% drop from the peak and a 13.92% decline year-over-year. According to the latest data from January 2026, ETH is quoted at $3.28K, with a volatility of 141%.

This disconnect between technical vitality and market apathy raises a crucial question: what really happened behind the scenes?

The Final Blow to the Deflation Narrative

The Dencun upgrade on March 13, 2024, was the turning point that dismantled the “Ultra Sound Money” vision that had attracted many Ethereum investors. The introduction of EIP-4844 brought nearly perfect technical innovation—the transaction costs on Arbitrum and Optimism plummeted over 90%, drastically improving user experience. However, it created an unexpected economic problem.

Before Dencun, Ethereum burned thousands of tokens daily during network congestion periods, keeping the deflationary narrative alive. But with increased Blob space availability, fees dropped toward zero. The key data point: according to ultrasound.money, Ethereum’s annual inflation rate shifted from negative (deflationary) to positive in 2024. With a daily issuance of about 1,800 ETH per block, the amount burned can no longer keep up, and the total supply begins to grow instead of shrink.

For those who invested based on this premise, the disappointment was profound. A long-term holder summarized the sentiment: “I bought ETH because it was supposed to decrease over time, but that logic has disappeared. Why should I keep holding it?”

Is L2 Really a Parasite? The Debate Intensifies

In 2025, the debate over which layers truly contribute to the ecosystem reached its peak. The numbers seem definitive: Coinbase’s Base generated over $75 million in annual revenue, nearly 60% of all L2 segment profits. Meanwhile, Ethereum L1 saw its revenues sharply decline—only $39.2 million during the August peak period.

If Ethereum were a company, valuation analysts would shout “overvalued!”—market cap remains robust (currently $396.25 billion) while revenues contract. From this perspective, L2 is effectively draining resources from the mainnet.

However, the reality is more nuanced. All transactions on Arbitrum, Base, and other L2s are denominated in ETH. When these ecosystems thrive, demand for ETH as a “reference currency” increases—users pay gas in ETH, collateral in DeFi protocols is denominated in ETH. Ethereum is undergoing a fundamental transition: from a “platform serving its users directly” to “infrastructure serving other networks.”

Blob fees paid by L2 to L1 are essentially L2 “buying” Ethereum’s security and data availability. Even if today these fees are modest, a B2B model could prove more sustainable than the old B2C model that relied solely on retail traders. Ethereum is no longer a retail shop but a wholesale agency—the margins per transaction are lower, but the overall volume could be incomparably larger.

The problem: the market has yet to grasp this paradigm shift.

Growing Pressure on Multiple Fronts

According to Electric Capital’s 2025 annual report, Ethereum maintains its leading position with 31,869 active developers—an unmatched number in any other ecosystem. Yet, it is losing ground in the battle for new talent. Solana boasts 17,708 active developers, with an 83% year-over-year growth, emerging as the favorite among beginners.

Even more relevant is sector differentiation. In the payments segment (where PayPal USD thrives), Solana has built a leadership thanks to its speed and low fees. In DePIN (Decentralized Physical Infrastructure), Ethereum has suffered significant defeats—projects like Render Network, Helium, and Hivemapper have chosen Solana, frustrated by fragmentation between L1 and L2 and Ethereum’s volatile gas fees.

But Ethereum is not entirely defeated. It remains the undisputed leader in the world of Real World Assets and institutional finance. BlackRock’s BUIDL fund, while expanding to other chains, still considers Ethereum a cornerstone. In the stablecoin market, ETH hosts 54% of all utility tokens, worth about $170 milliards—“the internet dollar” par excellence. Ethereum has the most sophisticated researchers and architects to build complex DeFi infrastructure; its rivals have attracted legions of developers transitioning from Web2, specialized in consumer-oriented apps. Two ecosystems, two strategies, two potential futures.

Why Wall Street Is So Cold on Ethereum?

Data from The Block reveal a surprising gap: Ethereum ETFs recorded net inflows of about $9.8 billion in 2025, while Bitcoin ETFs saw $21.8 billion. Why do institutions treat ETH with such tactical disinterest?

The main reason lies in regulatory restrictions. Spot ETFs approved in 2025 lost their collateral function—the key element that made ETH attractive for institutional finance. Ethereum offers a native yield of 3-4% through staking, its main competitive advantage over US Treasury securities. But for a BlackRock or Fidelity client, holding an “high-risk, zero-yield” (ETH in an ETF without collateral features) is significantly less attractive than Treasury bonds or high-dividend stocks. This has created a real “crystal ceiling” on institutional flows.

There’s a deeper problem: positioning ambiguity. In the 2021 cycle, institutions saw ETH as the “tech index” of the crypto market— a high-beta asset expected to outperform Bitcoin when the market rises. By 2025, this logic collapsed. If investors seek stability, they choose Bitcoin; if they want high risk and high return, they turn to high-performance chains or AI-linked tokens. ETH’s alpha is no longer clear and convincing.

Yet, institutions have not completely abandoned Ethereum. The fact that BlackRock concentrates $2 milliards specifically on Ethereum sends a clear message: when it comes to settling hundreds of millions of dollars, traditional financial giants trust only Ethereum’s solidity and legal certainty. The institutional attitude is a compromise: “strategic recognition, tactical observation.”

Five Scenarios That Could Reverse the Course

How can Ethereum turn this difficult situation around? Several paths are emerging on the horizon.

First: staking in ETFs becomes reality. Current ETFs are just “semi-finished products.” Once ETFs with staking functionality are approved, ETH would instantly transform into a USD-denominated asset with an annualized yield of 3-4%. For pension funds and sovereign wealth funds worldwide, this mix of technological appreciation (appreciation) and fixed income (staking rewards) will become a standard part of their portfolio allocations.

Second: the RWA phenomenon continues to accelerate. Ethereum is becoming the new infrastructure for Wall Street. In 2026, as government bonds, real estate, and private equity funds are tokenized, Ethereum will support trillions of dollars of assets. Even if these operations do not generate high transaction fees, they will lock in massive amounts of ETH as liquidity and collateral, reducing circulating supply.

Third: Blob market reaches equilibrium. The deflationary crisis is only a temporary discrepancy between supply and demand. Currently, Blob space is used only 20-30%. As “blockbuster” applications (Web3 games, SocialFi) take off on L2, space will fill up. When saturation occurs, Blob fees would rise exponentially. Liquid Capital suggests that with increasing L2 volume, Blob fees could account for 30-50% of all ETH burned by 2026, restoring ETH’s deflationary path.

Fourth: L2 interoperability improves drastically. Fragmentation among various L2s (fragmented liquidity, inconsistent user experiences) is the main obstacle to mass adoption. Optimism’s Superchain and Polygon’s AggLayer are building a unified liquidity layer based on shared L1 sorters. When users can navigate between Base, Arbitrum, and Optimism with the same ease as switching between mini-apps in WeChat, the network effect of the Ethereum ecosystem will explode—L1 will regain value as sorters require ETH stake.

Fifth: the 2026 technical roadmap continues. Glamsterdam (first half 2026) will optimize the execution layer, significantly improving smart contract efficiency and security, paving the way for complex institutional-grade DeFi applications. Hegota and Merkle Verkle Trees in the second half of the year are the final keys. These trees will enable stateless clients to operate, meaning users will verify Ethereum from their phones or browsers without downloading terabytes of data—a massive victory for decentralization compared to all competitors.

Conclusion: A Painful Transformation, Not a Failure

Ethereum’s “negative” performance in 2025 does not tell a story of failure but of a painful transformation. Ethereum is sacrificing short-term L1 revenues to achieve unlimited scalability on L2. It is sacrificing immediate speculative gains to build regulatory compliance and security moats through institutional Real World Assets. It’s a paradigm shift: from a retail speculative platform to a global financial infrastructure, from B2C to B2B, from a transaction layer to a settlement layer.

For today’s investors, Ethereum resembles Microsoft in the mid-2010s during the transition to cloud services—depressed in price, under pressure from competitors, but with network effects and moats quietly accumulating for the next explosion. The real question is not if Ethereum will rebound, but when the market will recognize the true value of this transformation.