Ethereum has had a rough ride through the first quarter of 2025. Following Bitcoin’s disappointing Q1 performance, Ethereum fared even worse — posting a 45% drawdown from local highs. Since the Dencun upgrade in March 2024, ETH has been locked in a downward trajectory, raising a critical question among investors: Is Ethereum losing relevance in the age of DeFi and Layer 2 chains?
Ethereum’s Evolution: From Mainnet Powerhouse to Layer 2 Backbone
Once hailed as the “world’s decentralized computer,” Ethereum saw meteoric growth after its ICO, culminating in a peak price of $4,878 in November 2021. However, in the four years since, ETH has erased over 70% of that value.
The pivotal shift occurred with Ethereum embracing a Layer 2-centric scaling model. Rather than processing most transactions on the mainnet, Ethereum now acts as the security and data availability layer for Layer 2 and Layer 3 protocols.
The Dencun upgrade was key to this transformation — drastically reducing settlement costs for Layer 2 chains, encouraging explosive DeFi growth off-chain. As a result, networks like Base by Coinbase have seen profitability skyrocket, earning $94 million in profit while paying just $4.9 million back to Ethereum in fees.
Are Layer 2s Squeezing Ethereum Dry?
The debate is heating up: Are Layer 2s nurturing Ethereum or siphoning value from it?
While Ethereum secures these scaling solutions, it no longer captures the bulk of revenue. Fees have declined, token burn rates have dropped, and ETH’s “ultrasound money” narrative — dependent on deflationary pressure — is under threat.
According to Ultrasound Money, Ethereum’s supply is now expected to grow at under 1% per year — still far from deflationary. Meanwhile, TVL across Ethereum’s ecosystem sits around $44 billion, but fee revenue is falling.
Investor Sentiment: Fading Institutional Confidence
Metrics like total value locked and transaction count — once the primary valuation tools for Ethereum — are taking a backseat. Investors and analysts are now focusing on fee generation, token burn, and net protocol revenue.
Making matters worse, institutional interest is waning. The Ethereum Foundation has reportedly sold off ETH, and newly launched spot ETH ETFs in the U.S. have seen muted inflows throughout 2025.
Can the Pectra Upgrade Reignite ETH?
Scheduled for deployment later in 2025, the Pectra upgrade introduces a series of Ethereum Improvement Proposals (EIPs) aimed at improving validator efficiency, reducing congestion, and offering greater control for stakers.
Marko Ratkovic, CTO of Graphite Network, notes:
“Pectra supports L2 adoption directly. EIP-7691 increases blobs per block, and EIP-7623 raises calldata costs—both encouraging L2 efficiency.”
Another key addition is EIP-7702, which allows gasless transactions, solving a long-standing pain point for users.
However, experts caution that while the upgrade is developer-friendly, it does not directly bridge the gap between TradFi and DeFi. As institutions seek regulatory clarity and compliance tools, Ethereum’s upgrades still remain focused on technical scalability rather than institutional onboarding.
Volatility Surges: What Comes Next for ETH Price?
According to Dr. Sean Dawson, Head of Research at Derive.xyz:
“Implied volatility for ETH has jumped from 71.5% to 122%, with the probability of ETH falling below $1,400 by May 30 rising from 18% to 33%.”
Increased macro pressure, low ETF traction, and technical weakness have combined to shake confidence. Yet long-term investors still see ETH as a pivotal component in the broader Web3 ecosystem — if Ethereum can align value capture with usage growth.
Final Takeaway: Reset or Rebirth?
Ethereum is at a crossroads. Its pivot to Layer 2 scaling has scaled the ecosystem — but at the cost of direct value accrual. The Pectra upgrade may offer temporary relief and strengthen its technical backbone, but investor confidence and institutional traction will ultimately determine whether Ethereum can reclaim its dominance.
For now, Ethereum’s fate hinges on more than just tech — it needs to prove it can capture value in a multi-chain, high-stakes crypto economy.
