Ethereum surprises on the stock exchange

The price of ether has recently shown a clear sign of life. Within just one week, the second-largest crypto asset climbed by almost 40%. This so-called "relief rally" followed a prolonged period of weakness. Ether has clearly lost out to its big brother bitcoin in recent months.

Last year, ether (ETH) already lost ground in a direct comparison with bitcoin (BTC) - a trend that will continue in 2025. With a negative annual performance of -22% since the beginning of the year, ETH is well behind BTC, which recorded a plus of 10%. Critical voices are growing in the wake of these developments. The accusation that ether has passed its zenith is getting louder and louder. Some prominent investors from the crypto scene have even gone so far as to declare the project a failure. Is this harsh criticism justified?

Growing criticism of the ether coin

Of course, there have always been Bitcoin hardliners who dismissed Ethereum as a project full of empty promises. What is new, however, is that increasingly differentiated and well-founded voices are coming forward to critically scrutinise the current valuation of the ether asset.

For example, a well-known venture capital firm published a highly regarded thesis paper in which it concludes that ether is overvalued. Regardless of whether the coin is viewed as an equity-like instrument with cash flow claims, as a digital commodity or as a form of money - none of the valuation models used can justify the current valuation with the underlying fundamental data.

As a result, more and more investors are taking the view that while the Ethereum network has a technological and conceptual raison d'être, ether itself is not able to ‘capture’ the value generated in the network. Unlike bitcoin, ether has also not managed to establish itself as a new type of digital store of value. Accordingly, there is a lack of strategic buyers such as MicroStrategy or Tether, which regularly accumulate BTC.

Ethereum as a victim of its own success?

The argument of the lack of "value accrual" - i.e. the inadequate capture of value by the ether coin - can now also be empirically substantiated. The successful scaling of the Ethereum ecosystem through a multitude of layer 2 solutions has led to the majority of applications migrating from the mainchain to these so-called layer 2 networks. There are now more than 150 such protocols that enable the main blockchain to be relieved.

However, this shift is also reducing the revenue generated directly via the Ethereum blockchain, particularly in the form of transaction fees. As a result, the mainchain is increasingly losing economic relevance in its own ecosystem (see the figure below). Ironically, Ethereum is thus becoming a victim of its own scaling success. The layer 2 networks are not only acting as an extension but also as competitors to the mainchain, as they are capturing a growing share of the value creation that used to directly benefit Ethereum and thus ether.

^{The fee history on the Ethereum blockchain. Source: Tradingview.com}

Like Amazon in the past, Ethereum is focusing on market share instead of short-term profits

Some market observers argue that this cannibalisation is ultimately part of Ethereum's plan and that the company is pursuing a strategy similar to that of Amazon in the late 1990s. Back then, today's tech heavyweight deliberately avoided profitability despite achieving high sales. The reason: Amazon sold many products at cost price in order to take market share from established retailers, eliminate the competition and thus achieve a quasi-monopoly position.

By only charging a small amount for its layer 2 solutions at present, Ethereum is pursuing a strategy that is strongly reminiscent of Amazon's approach: maximising the network effect instead of short-term profits. The aim is to attract as many layer 2 protocols as possible and thus strengthen its own ecosystem. At the centre of this model is Ethereum as the base layer (layer 1), which provides security and data availability. Layer 2 networks utilise this infrastructure by publishing their transaction data on the Ethereum blockchain - for example in the form of so-called blobs, which were introduced with the latest "proto-thanksharding upgrade". They pay fees for this, which generates revenue for Ethereum - but in a new, more indirect way.

The declining traditional transaction fees on the mainchain are often interpreted as a weakness, but are actually intended to be an integral part of the strategy. After all, when projects such as Base, the layer 2 network of the crypto exchange Coinbase, generate considerable profits, the incentive for new layer 2s to settle on Ethereum also increases. The more profitable a layer 2 protocol can operate on Ethereum, the more attractive Ethereum becomes as a basic infrastructure. This leads to a positive network effect: more applications, more users, more economic activity - and in the medium term, more revenue for Ethereum as a provider of security and data availability services.

^{Coinbase's scaling solution Base regularly pays the most fees to Ethereum, closely followed by layer 2 networks such as World Chain, Polygon, Arbitrum and Optimism. Source: GrowthePie}

Between scaling and costs: the balancing act in the layer 2 era

If the world is indeed moving towards an "on-chain future", layer 2 networks could be as omnipresent in the near future as websites are today. In traditional finance alone, there are currently an estimated 100 to 200 billion transactions per day, for example in share trading, payments and derivatives markets. If tokenisation fulfils its promise, a substantial proportion of these activities could be processed via blockchain networks such as Ethereum in the future.

However, for Ethereum's strategy to work in the long term, it must also be possible to sufficiently monetise the layer 2 networks without jeopardising their competitiveness. The so-called blob fees are already a key instrument for this. These are incurred when layer 2 networks publish transaction data on Ethereum. The more layer 2 protocols use the Ethereum mainnet, the higher this income will be. However, higher revenues for Ethereum also mean higher costs for the layer 2 networks and consequently higher usage fees for end users. This in turn could slow down adoption, especially for mass-market applications.

Important legal information

_{This publication is intended for information and marketing purposes only, and does not constitute investment advice or a specific individual investment recommendation. It is not a sales prospectus and does not constitute a request or an offer or a recommendation to buy or sell investment instruments or investment services, or to engage in any other transaction. Maerki Baumann & Co. AG does not provide legal or tax advice. Investors are therefore advised to obtain independent legal or tax advice concerning the suitability of such investments, since their tax treatment depends on the personal circumstances of the investor in question and is subject to change at any time. Maerki Baumann & Co. AG holds a Swiss banking license issued by the Financial Market Supervisory Authority (FINMA). Please note that Maerki Baumann & Co. AG does not provide legal or tax advice. The above information should not be considered as such. It is only an initial assessment without any claim to completeness or correctness. For a final and legally binding assessment, please contact a tax expert.}
 

Editorial deadline: 14 May 2025

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