The Web3 vision recedes, Ethereum faces challenges

The Web3 frenzy of 2021 has already subsided, and Ethereum is undergoing severe tests. The shift in market perception of Web 3.0, combined with the competition for market share from emerging platforms, has put Ethereum in a difficult position. Issues such as Layer 2 fragmentation, decline in value capture, dilution of ecological control, and lack of leadership have weakened Ethereum's user experience and economic value, and have shaken its position as the influence of layer 2 networks increases. These factors have led to a sharp correction in the price of ETH.

However, hope remains. By promoting L2 interoperability, improving ETH core infrastructure, and adopting decisive, performance-oriented leadership, Ethereum still has the opportunity to make a comeback. Its solid underlying architecture and active developer ecosystem are lasting advantages, but restoring ETH's outstanding position requires swift strategic action.

The shift from the Web3.0 utopia to a realistic understanding has prompted the market to reassess the value proposition of Ethereum. The once highly anticipated ideal of a "user-governed decentralized internet" has now been replaced by a more ironic narrative: the cryptocurrency space is either a store of value game for Bitcoin or has devolved into a digital casino. This reversal in sentiment has had a particularly significant impact on Ethereum.

More critically, Ethereum is no longer the sole representative of the Web 3.0 vision. Regardless of the outlook on the industry, it is evident that other platforms are becoming new centers for crypto consumption activities. This article aims to analyze Ethereum's most pressing strategic challenges and propose feasible solutions to help it regain an advantage amidst the transformation.

Core Challenges

Ethereum faces multiple challenges, this analysis focuses on four key issues: L2 network fragmentation, decline in value capture ability, dilution of ecological control, and lack of strategic leadership.

L2 network fragmentation and user experience disconnection

The most significant crisis is the fragmentation of Layer 2 networks. Multiple competing execution layers have fragmented the user experience and on-chain liquidity, weakening the composability advantage of the Ethereum mainnet, which remains apparent in certain siloed blockchains.

Users need to cope with inconsistencies across various protocols, standards, and cross-chain bridges, making the seamless interactions promised by Ethereum difficult to achieve. Developers must maintain multiple versions of protocols across several L2s, and startup teams face complex market strategies due to resource fragmentation. As a result, many consumer-facing applications choose other platforms to focus on innovation rather than getting bogged down by fragmented infrastructure.

Ecological Control Rights Dilution: An Increasingly Serious Threat

Ethereum has outsourced its scaling roadmap to L2, a decision that continues to weaken its control over the ecosystem. General-purpose L2 Rollups create strong network effects as they build their own ecosystems, gradually forming a moat that is difficult to surpass. Over time, the influence of these execution layers relative to Ethereum's settlement layer is increasing day by day, and the community may gradually overlook the importance of the mainnet. Once assets begin to exist natively on the execution layer, Ethereum's potential for value capture and influence will be significantly weakened, and the settlement layer may eventually become a commoditized service.

Value Attribution Erosion: Structural Challenges

The rise of L2 has significantly impacted the value capture of ETH, with these platforms increasingly occupying MEV and transaction fee revenues, leading to a substantial decrease in the value flowing back to the Ethereum mainnet. This shift directs economic benefits away from ETH holders toward L2 token holders, weakening the intrinsic motivation to hold ETH as an investment asset. While this trend poses an inevitable challenge for any Layer 1 token, Ethereum has experienced this phenomenon earlier and more prominently due to its early practice of a centralized L2 approach.

It is foreseeable that when application-layer dominant MEV capture becomes the norm, not only will individual blockchains face similar dilemmas, but L2 itself will also encounter a value capture crisis. Although this is not a predicament unique to Ethereum, how to formulate precise strategies to address this structural challenge remains a core issue that urgently needs to be resolved.

Leadership Crisis: The Idealism Dilemma

Ethereum, in addressing the aforementioned challenges, has also revealed deep-rooted deficiencies in strategic leadership. The community has long been caught in a repetitive balancing act between efficiency goals and egalitarian values, which has hindered critical progress. Additionally, the commitment to "trustworthy neutrality" in governance, although initially aimed at reducing regulatory and state crackdown risks, often becomes a constraint on strategic decision-making. Furthermore, ETH holders lack mechanisms to directly influence significant strategic choices, and their only means of expressing dissatisfaction is often through selling tokens.

In hindsight, these issues may be easy to define, but to some extent, they may stem from considerations of regulatory pressure and national-level risks, rather than a lack of insight into governance and leadership.

Strategic Response: Challenges and Solutions

L2 Network Fragmentation: Self-Correcting Mechanism

Two paths to resolve the L2 fragmentation crisis:

1. Rely on market mechanisms to achieve organic integration of the ecosystem, ultimately forming 2-3 general-purpose L2 dominant markets with absolute activity. Other projects will either exit the competition or transform into Rollup service providers targeting vertical scenarios.

2. By establishing strong and binding interoperability standards, we can eliminate internal frictions within the Rollup ecosystem and prevent a single execution layer from building a monopolistic moat.

Ethereum should seize the current window of influence that L2 still holds and promote the implementation of a second solution. It is necessary to recognize that this dominance is continuously fading; the slower the action, the weaker the strategic effectiveness. By building a unified L2 ecosystem, Ethereum is expected to regain the composability advantage of the mainnet era and compete directly with other standalone chains in terms of user experience.

Relying solely on market-driven consolidation will darken the future prospects of ETH. Once a power-law distribution emerges around 2-3 dominant execution layers, Ethereum's influence on these execution layers may significantly weaken; in this case, each execution layer tends to prioritize the value attribution of its own tokens, thereby marginalizing ETH and undermining Ethereum's economic model. To avoid this situation, Ethereum must take decisive action to shape its own L2 ecosystem, ensuring that value and control are always tied to the mainnet and ETH.

Value Re-Capture Mechanism

Relying solely on the narrative of "productive assets" is not a sustainable long-term strategy for ETH. The time window for Layer 1 to dominate MEV capture will last at most five years, as the trend of value capture levels continuously migrating upstream in the application stack has become established. Meanwhile, Bitcoin has firmly occupied the "store of value" narrative, making it likely that if ETH tries to compete in this area, it may be seen by the market as the "poor man's Bitcoin," similar to the historical positioning of silver relative to gold. Even if ETH could demonstrate a clear advantage in value storage in the future, such a transformation may require at least ten years, and Ethereum cannot afford to wait for such a long cycle. Therefore, during this period, Ethereum must carve out a unique narrative path to maintain its market relevance.

Positioning ETH as the "internet-native currency" and the highest quality on-chain collateral is the most promising direction for the next decade. Although stablecoins dominate as a payment medium in on-chain finance, they still rely on off-chain ledgers; the true internet-native and unstoppable currency role has yet to be substantively occupied, and ETH uniquely holds this first-mover advantage. However, to achieve this goal, Ethereum must regain control of the universal execution layer in the ecosystem and prioritize the promotion of ETH adoption, rather than allowing the proliferation of the Wrapped ETH standard.

Regaining Dominance in the Ecosystem

Re-establishing ecological ownership can be achieved through two key approaches: first, by enhancing the performance of Ethereum L1 to reach a level comparable to centralized chains, ensuring that consumer applications and decentralized finance experiences are without delay; second, by launching Ethereum-native Rollups, focusing all business development and adoption efforts on this. By centering ecological activities on the infrastructure controlled by ETH, Ethereum can strengthen ETH's core position within the ecosystem. This requires Ethereum to shift from the outdated "ETH-compatible" paradigm to an "ETH-dominant" ecological model, prioritizing direct control over core resources and maximizing ETH's value capture.

However, whether it is to regain ecological control or to strengthen the adoption rate of Ether, these are tricky decisions that could alienate key contributors such as Rollup and liquidity staking providers. Ethereum needs to carefully weigh the balance between strengthening control demands and the risk of community fragmentation to ensure that ETH can successfully establish its new narrative as the cornerstone of the ecosystem.

Leadership Innovation

Ultimately, the Ethereum leadership must innovate to address governance and strategic challenges. Ethereum leaders need a performance-oriented mindset, a stronger sense of urgency, and a pragmatic attitude to drive ecosystem development. This shift requires abandoning the previous excessive insistence on "trustworthy neutrality," especially when making decisive decisions regarding product roadmaps and ETH asset positioning.

At the same time, the market has expressed dissatisfaction with Ethereum's practice of outsourcing key infrastructure to decentralized entities. To turn this situation around, Ethereum must bid farewell to the old model of "aligned with ETH" and shift towards a new model of "led by ETH," ensuring that core infrastructure is unified under a single token system ($ETH). This move will further solidify ETH's core position and restore market confidence in Ethereum's strategic direction.

Marketing Challenges and Narrative Potential

Despite facing numerous challenges, Ethereum still possesses strong advantages that support its position in the cryptocurrency field—these advantages are often downplayed by its leadership, causing negative criticism to overshadow its core narrative. Systematically sorting through these advantages helps to establish an objective framework for understanding Ethereum's potential.

Proven infrastructure

Ethereum offers unparalleled decentralized security that meets the stringent requirements of sovereign entities and large financial institutions. The security guarantees provided by the consensus mechanism far exceed those of other smart contract platforms, ensuring true censorship resistance—which is indispensable for infrastructure carrying hundreds of billions of dollars in value. The Ethereum DeFi ecosystem has cumulatively secured approximately $76.32 trillion in value (TVL × days), and major security incidents are extremely rare, with the time-tested security moat continuing to deepen.

Currently, the scale of stablecoins hosted on Ethereum has exceeded $120 billion, and these funds have accumulated mainly during an era where the regulatory framework is not yet clear and institutional adoption has not yet formed widely. As the regulatory environment becomes clearer and institutional demand drives further growth of stablecoins, it is expected that the scale of stablecoins hosted on Ethereum will突破 $1 trillion within the next decade. This growth comes not only from new issuance demand but also from the market's established trust in its security and composability, which may solidify its position as a cornerstone platform in global finance.

Forward-looking design

The architecture of Ethereum is significantly forward-looking. Compared to Bitcoin, it offers a more robust transition plan against quantum attacks, driven by its continuously evolving technological culture that fosters innovation. Unlike the security budget constraints that Bitcoin may face in the future, Ethereum's flexible monetary policy allows it to maintain strong security incentives while adapting to market conditions, ensuring long-term resilience.

Unparalleled developer ecosystem

Ethereum has the largest and most diverse developer community in the blockchain field, with nearly a decade of accumulated knowledge systems and best practices. This intellectual and social capital has built another layer of moat for the EVM ecosystem, allowing it to maintain a leading position in terms of innovation speed and application scale.

Modular Path: The Only Solution for Scalable Decentralized Systems

The modular design of Ethereum has made significant progress in balancing decentralization, scalability, and security. As time goes on, it has become increasingly clear that for a monolithic chain to achieve global financial scale, it must inevitably sacrifice decentralization.