Has the Merge been good for Ethereum?

Ever since Ethereum’s switch to Proof of Stake  consensus mechanism following  the Merge on September 15th 2022, the network appears to have struggled as other  Layer 2 solutions, as well as faster, lower-cost blockchains like Solana, Avalanche, Base, and Aptos, grow. Despite the Merge’s expected benefits, Ethereum’s higher transaction costs and congestion has meant some  users and developers have been attracted to alternatives, resulting in a decline in on-chain activity and network revenue for Ethereum. The muted impact of Ethereum spot ETFs has further dampened market sentiment. Ethereum’s future success depends on its ability to quickly implement upgrades that enhance scalability and reduce fees to remain competitive.

Has the Merge had a Negative Overall Effect on Ethereum?

It has been two years today since Ethereum underwent its famous Merge which saw the blockchain transition from a Proof of Work (PoW) to Proof of Stake (PoS) consensus mechanism. It has not been plain sailing since the transformation and  the ecosystem has faced both opportunities and challenges. The move to PoS was heralded as a significant improvement for Ethereum, primarily by reducing its energy consumption and aligning with environmental sustainability. However, the Merge did very little to increase Ethereum’s scalability or to alleviate the high-fee environment on the base layer chain. Since the Merge, Ethereum has also underperformed relative to Bitcoin, and market sentiment has been lukewarm. One reason for this is that the benefits expected from PoS, such as an immediate boost to the network’s scalability and activity, have not materialised as swiftly as anticipated. In addition, a soft response to the new Ethereum ETFs in the US which were launched for the first time this year has meant that the price of ETH has struggled to keep pace, in particular in comparison to Bitcoin.

A further issue that has conspired against Ethereum has been the migration of economic activity to Layer 2 (L2) solutions and competing blockchains. As Ethereum’s Layer 1 remains relatively expensive and congested for transactions, many users and developers have moved onto L2 platforms like Optimism, Arbitrum, and ZK-rollups, where transactions are faster and cheaper. Additionally, newer blockchains such as Solana, Sui, and Aptos have gained traction by offering higher throughput and lower fees, syphoning away some of Ethereum’s market share. This migration has led to a noticeable decline in Ethereum’s on-chain activity, including a sharp drop in network fees, a critical revenue source for validators and the network as a whole.

Market sentiment surrounding Ethereum has been further dampened by the limited success of Ethereum spot ETFs, which have failed to generate the expected inflows from institutional investors. Despite the long-awaited approval of these financial products, ETH prices have continued to underperform, driven by broader macroeconomic factors and Ethereum’s inability to reclaim its leadership in certain sectors, such as Decentralised Finance (DeFi) and Non-Fungible Tokens (NFTs). Competing ecosystems are now vying for dominance in these areas, putting further pressure on the Ethereum price.

In the face of these challenges, the future of Ethereum hinges on its ability to adapt. The network’s roadmap includes several important upgrades aimed at improving scalability, reducing fees, and enhancing the user experience. However, competition from both L2s and alternative Layer 1s will remain a critical factor in the platform’s ability to retain its developer and user base. Despite the current downturn, Ethereum’s deep-rooted developer community and its strong position in smart contract platforms mean that it is still a key player in the blockchain space. However, whether it can regain its previous dominance will depend on how quickly and effectively it addresses its current limitations.

Can Ethereum Remain Competitive Amongst Faster More Efficient Blockchains?

A growing number of users have been migrating their transactions to Layer 2 solutions and competing blockchains. These platforms offer lower transaction fees, addressing a critical pain point for many users. While Ethereum remains the most established and secure smart contract platform, its high gas fees and network congestion have driven users to explore alternatives. Layer 2 solutions like Arbitrum, Optimism, and zkSync provide a way to offload transactions from the Ethereum main chain, enabling cheaper and faster transactions while maintaining a connection to Ethereum’s security. This cost efficiency has made Layer 2s a more attractive option for everyday transactions, especially as users seek to maximise the value of their crypto activity.

Competing blockchains like Solana, Avalanche, and Aptos are also gaining traction by offering similar DeFi capabilities as Ethereum but with even lower fees and faster transaction speeds. Solana, for example, can process thousands of transactions per second at a fraction of Ethereum’s cost, making it a viable alternative for users who prioritise speed and affordability. These blockchains often attract new projects and developers looking to avoid Ethereum’s scaling challenges. As a result, users can access the same types of DeFi applications, such as lending platforms, Decentralised Exchanges (DEXs), and NFT marketplaces, but without the high costs associated with Ethereum transactions.

The proliferation of EVM-compatible chains and cross-chain bridges has made it increasingly easier for users to move liquidity between Ethereum and competing blockchains, significantly impacting Ethereum’s ecosystem. These bridges enable seamless transfers of assets, allowing users to leverage lower fees and faster transactions on alternative blockchains like Binance Smart Chain, Avalanche, and Polygon, while still using Ethereum-compatible smart contracts. This fluidity has fragmented Ethereum’s liquidity, as users can now spread their assets across various Layer 2 solutions and competing chains, reducing the concentration of liquidity on Ethereum itself. As a result, Ethereum’s dominance in DeFi and DApp activity is being diluted, with liquidity increasingly flowing to platforms that offer similar services but with enhanced scalability and cost-effectiveness.

As these Layer 2 solutions and alternative blockchains have matured, they’ve become more than just cost-effective substitutes for Ethereum. They’ve evolved into thriving ecosystems that offer a similar, if not superior, user experience in terms of speed, availability of DeFi protocols, and support for Decentralised Applications (DApps). Many users have realised that the main advantages of Ethereum, its extensive DApp ecosystem and developer support, are no longer unique to Ethereum. With Layer 2s and competing blockchains now boasting comparable functionality, users increasingly feel less tied to Ethereum and more open to experimenting with alternatives, which often provide the same services but in a more user-friendly and affordable manner.

The rise of these platforms has been further fueled by what many users refer to as “altcoin casinos”, where speculative trading in low-cost alternative tokens is a primary activity, such as the recent meme coin craze on Solana earlier this year. These platforms enable users to trade a wide variety of tokens at lower fees, often in high-risk, high-reward environments. Layer 2s and competing blockchains have become favoured venues for such speculative trading due to their cheaper transaction costs and faster settlements. The lower barrier to entry in terms of fees allows traders to make more frequent and smaller bets, leading to a surge in activity as users seek better returns on these faster and more flexible platforms. In essence, users are finding that they can access similar speculative opportunities on these platforms while avoiding Ethereum’s expensive transaction environment.

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It’s Not All Doom and Gloom, A Bright Future Still Awaits Ethereum

Despite the recent challenges, Ethereum remains the second-largest cryptocurrency by market capitalisation, solidifying its place as a cornerstone of the crypto ecosystem. While its price and dominance have seen fluctuations, Ethereum continues to host the majority of DApps and smart contract platforms, making it integral to the growth of DeFi, NFTs, and other innovations. The network’s established reputation and influence ensure that Ethereum remains a key player, even as it faces competition from faster and cheaper alternatives.

One of Ethereum’s biggest strengths is its highly active and innovative developer community, which remains at the forefront of blockchain research and development. The Ethereum ecosystem has been a breeding ground for groundbreaking technologies, including the introduction of ERC-20 and ERC-721 tokens, which set standards across the crypto space. The development and expansion of Layer 2 solutions like Optimism and Arbitrum, as well as Ethereum’s transition to PoS through the Merge, showcase how Ethereum’s developers are continuously evolving the network to address its scalability and efficiency challenges.

Ethereum’s Ethereum Virtual Machine (EVM) and Solidity smart contracting language have become ubiquitous across the blockchain space, establishing themselves as the industry standard for DApps and smart contracts. This widespread adoption of Ethereum’s technology has significantly strengthened its position as a foundational platform in the crypto ecosystem. As developers build on EVM-compatible chains, they reinforce Ethereum’s relevance by aligning with its architecture and tools. This broad acceptance ensures that Ethereum remains at the core of innovation in DeFi, NFTs, and other blockchain-based sectors, positioning it favourably for future growth and dominance.

Even though funds such as Wisdom Tree are shutting down their ETH spot ETF and VanEck their Ethereum Futures ETF,  and the overall performance of Ethereum ETFs has been underwhelming so far, it’s important to recognise that these products are still in their infancy. The lacklustre start can be attributed to broader market conditions and timing, rather than a fundamental issue with the ETFs themselves. As the market matures and investor confidence in Ethereum strengthens, these ETFs have the potential to attract more interest. They shouldn’t be disregarded or counted out just yet, as they offer new avenues for traditional investors to gain exposure to Ethereum.

Looking ahead, Ethereum’s roadmap is packed with upgrades that could restore its competitiveness and bring it back to prominence. With the coming scalability improvements, particularly through sharding and continued Layer 2 development, Ethereum’s transaction throughput will be significantly enhanced. These upgrades, aimed at reducing congestion and lowering on-chain fees, will address the primary concerns driving users to alternative blockchains. This should not only improve the user experience but also allow Ethereum to compete with newer platforms that currently offer faster and cheaper transactions.

As these developments roll out, Ethereum is well-positioned to regain a stronger footing in the industry. While the crypto landscape has become more competitive, Ethereum’s foundational infrastructure and commitment to innovation make it difficult to dethrone. Should it succeed in implementing its upcoming upgrades and enhancing its performance, Ethereum could once again lead the charge in blockchain adoption, attracting developers, users, and liquidity back to its network. Its potential for scalability and reduced fees may restore its dominance in the ever-evolving crypto space.

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