Why the market underestimates Ethereum: the metamorphosis crisis of the global financial infrastructure

In January 2026, Ethereum finds itself in a strange situation. The price has fallen from its all-time high of $4.95K in August to the current $3.09K — a nearly 38% drop over six months. Meanwhile, the network is experiencing its most technologically successful period: two major upgrades have radically changed scalability, the Layer 2 ecosystem has exploded exponentially, and institutional players like BlackRock have begun to see Ethereum as a backbone for real-world assets. The paradox is clear: fundamental metrics are growing, but the price is falling.

When success becomes a trap: the story of Dencun and the collapse of the deflation narrative

The main culprit of the current Ethereum crisis is not failure, but success. On March 13, 2024, the Dencun upgrade was implemented, introducing the EIP-4844 mechanism. From a technical standpoint, it was revolutionary: fees on Arbitrum and Optimism dropped by over 90%, and user experience improved dramatically. But the cost of this success was paid in ETH.

The core issue lies in the token burn economy. The EIP-1559 mechanism directly links the amount of ETH burned to network congestion. When Dencun sharply increased the capacity of Blob data (allocated level for L2 transactions), demand couldn’t keep up with supply. Blob fees dropped to nearly zero, and ETH burning collapsed.

The result is staggering: the issuance of ETH (around 1800 tokens per day) began to exceed the burn volume. Ethereum, which was a deflationary asset that “shrinks with use,” suddenly turned into an asset with positive annual inflation. This shattered the entire “ultrasound money” narrative that underpinned many holders’ investment theses.

One long-term investor wrote online: “I bought ETH because it was deflationary. That logic is gone now — why should I hold it further?” This wave of disappointment spread across the industry. The technological progress that was supposed to strengthen Ethereum’s position instead triggered a wave of sell-offs.

L2 as a vampire or a protective moat: the duality of the economy

If you ask crypto exchange traders, they will say: “Layer 2 is draining Ethereum dry.” And the numbers seem to confirm their point. In 2025, the Base chain generated revenue of over $75 million, accounting for about 60% of total L2 segment profits. Ethereum L1 itself earned only $39.2 million — less than what Base made in a single quarter. Viewing the network as a company, its annual revenue has plummeted, while market cap remains stagnant. For traditional investors, it looks like an “expensive” asset with declining earnings.

But this reflects a fundamental misunderstanding. All economic activity on L2 ultimately manifests in ETH. On Base or Arbitrum, users pay gas fees in ETH, and ETH remains the primary collateral asset in DeFi protocols. Ethereum is shifting from directly serving end-users to acting as infrastructure for L2 — essentially, from B2C to B2B.

Blob fees paid by L2 chains to the main network are not expenses but payments for security and data availability. Although these sums are modest now, as L2 volumes grow, this model could prove far more sustainable than full dependence on retail users. A simple analogy: Ethereum is transitioning from retail to wholesale. Margins are lower, but the potential scale is limitless.

The problem is that the market has not yet understood this. Traders continue to compare “L1 revenue” with competitors’ earnings, failing to see the business model transformation.

When everyone fishes in the same pond: competitive fragmentation

Ethereum remains the absolute leader in developer count (31,869 active over the year), but its dominance is weakening. Solana grew by 83% in new developers and now has 17,708 active participants. Moreover, sector specialization has occurred.

In payments, Solana clearly leads. PayPal USD on Solana is gaining momentum, and Visa has begun testing large payments on the chain. In the race for decentralized physical infrastructure (DePIN), Ethereum has suffered significant losses: Render Network, Helium, Hivemapper — all migrated to Solana due to fragmentation between L1/L2 and unpredictable gas fees.

But Ethereum has not suffered a complete defeat. In the RWA (real-world assets) and institutional finance sector, Ethereum remains strong. The BUIDL fund from BlackRock worth $2 billion is on Ethereum because traditional financial institutions simply do not trust anyone else when dealing with trillions. The stablecoin market is also dominated by Ethereum, controlling 54% of ($170 billion), and remains the standard for “internet dollars.”

This creates two different worlds: Ethereum owns complex infrastructure (DeFi, finance), while its competitors attract consumer applications. These are two different futures, and the winner has yet to be determined.

Wall Street watches but does not invest: the positioning problem

Institutional inflows into Bitcoin ETFs reached $21.8 billion in 2025, while Ethereum ETFs received only $9.8 billion. Why is Wall Street so cold toward Ethereum? The main reason is regulatory restrictions: spot ETFs of 2025 lost their staking function.

For institutional investors, this is critical. ETH with native staking yields of 3-4% was competitive with Treasury bonds. But ETH in ETFs without staking is a risky asset with “zero yield,” much less attractive than US bonds or dividend stocks. This has created a ceiling for capital inflows.

Deeper still is the issue of positioning. In the 2021 cycle, institutions viewed ETH as a “high-beta asset” of the crypto market — if the market was good, ETH was expected to outperform BTC. But that narrative has died. If institutions need stability — they buy BTC. If they seek risk and growth — they look at other chains or AI tokens. The alpha strategy for ETH has been diluted.

However, a complete rejection has not occurred. The BlackRock fund worth $2 billion entirely on Ethereum is a signal: when dealing with assets worth hundreds of millions, traditional capital trusts only Ethereum based on parameters like “security + legal clarity.” The attitude is better described as “strategic approval with tactical patience.”

Five paths to revival: from refuge to wolf

Faced with the current turmoil, what can Ethereum expect?

Breakthrough in ETF staking. When ETFs with staking functions are approved, ETH will instantly transform into a dollar-denominated asset with 3-4% annual yield plus potential capital gains. For global pension funds, this will become a standard portfolio component.

Explosive growth of RWA. Ethereum is becoming the banking backend for the new generation of Wall Street. As government bonds, real estate, and private equity funds migrate onto the blockchain, Ethereum will hold trillions in collateral. This will lock huge amounts of ETH in liquidity, reducing circulating supply and creating a market deficit.

Blob market saturation. Currently, Blob space utilization is only 20-30%. When mass applications (Web3-games, SocialFi, commerce) appear on L2, Blob will fill up, and fees will rise sharply. According to analysts, by 2026, Blob fees could account for 30-50% of total ETH burn. Ethereum will return to a deflationary trajectory.

Breakthrough in cross-L2 interoperability. Superchain from Optimism and AggLayer from Polygon address ecosystem fragmentation through shared sequencers supported on L1 (requiring ETH staking). When users can switch chains as easily as switching apps in WeChat, Ethereum’s network effect will explode exponentially.

Development roadmap for 2026. Glamsterdam (first half) will optimize execution layer, sharply reducing gas for DeFi. Hegota and Merkle Trees (second half) will enable full nodes to run in browsers — Ethereum will pull ahead of competitors in decentralization.

Summary: metamorphosis instead of death

Ethereum’s weak price in 2025 is not a sign of defeat but evidence of a painful transformation from a “retail speculative platform” to a “global financial infrastructure.” The network sacrifices short-term L1 revenue for unlimited L2 scalability. It sacrifices short-term price growth for regulatory clarity and asset protection of the trillion-dollar class.

This is a fundamental shift from B2C to B2B, from transaction fees to the role of a global settlement layer. Today, Ethereum is like Microsoft in the mid-2010s, transitioning to the cloud. The price is down, competitors press, but deep network effects and defensive moats are gaining strength.

The question is not whether Ethereum can grow. The question is when the market will realize the value of this transformation.