There’s no time for complacency when the stakes are this high.
Alright, Ethereum. Although you’ve been around for nearly 10 years and remain the leading smart contracts platform, people are growing increasingly frustrated with the lack of network progress on your base chain.
Yes, Layer 2 scaling solutions (L2s), I know. They’ve been handling most of your transactions, but so have other L1s—Solana, BNB Chain, XRP Ledger, Cardano, etc.—but with less decentralisation.
However, certain activities conducted directly on your network, especially ERC-20 token swaps, remain relatively expensive compared to what is offered by your above-mentioned rivals, notably Solana.
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Today, we’ll discuss a major upgrade set to be fully rolled out on Ethereum shortly (the exact date is to be confirmed) and explore a major issue with L2s that is often overlooked.
Even though some are beginning to lose faith in Ethereum, to its defence, it still has more total value locked (TVL) directly on its chain than all other networks combined.
Straight-up Ethereum data, at least according to data from DefiLlama, as L2 stats are represented separately.
For anyone complaining about Ethereum’s lacklustre performance in recent years, these statistics are a worthy reminder that the network is far from dead.
However, we can’t become complacent. This space is evolving rapidly, and Ethereum needs to keep pace, which leads me to my next point.
What is Pectra, and why it’s needed more than ever
Pectra – a portmanteau of “Prague” and “Electra” – aims to enhance Ethereum’s consensus layer, the Beacon Chain, which is required to enforce network rules, manage blocks and associated rewards, as well as the execution layer, the Ethereum Virtual Machine (EVM), for processing smart contracts and transactions.
Some benefits of this upgrade include:
– A simpler process for creating Ethereum wallets, including account abstraction.
– Increasing the validator limit from 32 ETH to 2,048 ETH, along with more flexible withdrawal options.
– Higher scalability directly on Ethereum’s base chain.
– Options to pay for gas fees with ERC-20 tokens (more on this shortly).
– Verkle trees (“Vector commitment” and “Merkle Trees”) enable Ethereum nodes to continue validating blocks without needing to store the entire state database. This piece by Consensys explains Stateless Ethereum and its role in further enhancing the blockchain’s scalability.
N.B. Verkle trees will be introduced in Phase 2, likely to be deployed sometime (early?) in 2026.
The Pectra Testnet Announcement page provides the latest updates and a full list of EIPs to be implemented, as mentioned here.
Unlike past upgrades that generally took longer than usual to launch on the Ethereum mainnet, developers working on Pectra cannot rest on their laurels this time.
While I understand the importance of resolving software bugs, particularly those in more severe categories such as critical, major, and normal bugs, they must proceed with the upgrades as soon as possible.
Following initial testing in January on the Holesky and Sepolia testnets, Pectra was slated for a mainnet rollout on March 6. How recent reports
This should be at least once the devs believe it’s highly unlikely for any irreversible and significant damage to the mainnet.
Why?
The feeling of urgency boils down to one thing: Competition.
From a price perspective, SOL has set multiple all-time highs versus ETH (see SOL/ETH pair) since the bull market’s return in December 2023, marking an impressive comeback after collapsing to $10/SOL in December 2022.
Moreover, Solana has steadily grown its TVL in recent years, currently at 7.5% of total DeFi TVL across all blockchains.
On the other hand, Ethereum’s TVL has been steadily declining, reaching its lowest point since May 8, 2022. Despite this trend, it still accounts for half of the overall DeFi TVL.
Putting aside memecoins, Solana has been gradually hosting more serious projects in the space, such as Render, Helium, Pyth Network, Hivemapper, and Virtuals Protocol, among others.
Additionally, the blockchain supports popular stablecoins such as USDT and USDC, emerging ones like USDS (formerly DAI) and PayPal USD (PYUSD), as well as synthetic assets like Ethena USDe (USDE).
Many of these projects began on Ethereum but have expanded to multiple chains, not just to take advantage of cheaper and faster transactions but also for decentralisation and to minimise the risks of having all their assets on a single network.
This collectively equates to tens of billions of dollars in market capitalisation and cumulative trading volumes being taken away from Ethereum and redirected to a rival L1, specifically Solana.
Let’s not forget about BNB (previously Binance Smart Chain), which remains a moderately popular alternative to Ethereum, albeit to a lesser extent than Solana.
Then there’s Sui, which has been steadily growing since May 2023. It’s still early days for this L1 touted as a “Solana killer,” but I digress.
However, before you get ahead of yourselves and think Solana’s going to trounce Ethereum, the latter is still the preferred option for institutional investors and offers greater decentralisation, a larger ecosystem, and a more established reputation.
Even though many people love L2s, there’s a dark side to them that few people realise.
The elephant in the room
Although much progress is needed for the network to seamlessly handle billions of transactions weekly, I’ll give some credit where it’s due.
According to statistics from Dune Analytics, we’ve observed a noticeable increase in Ethereum transactions over the years, primarily driven by L2s.
Even though Solana handles more transactions, a whopping 20x more^ than Ethereum (directly on its base chain), the latter still manages nearly triple the 30-day total transaction volume.
^ Total transactions over the past 30 days as of the time of writing.
At the peak of the 2021 bull run, which still represents Ethereum’s all-time high of approximately $4,800, the blockchain processed around 40 million transactions in November that year
Since introducing Proto-Danksharding a year ago, the top-10 L2s have consistently handled over 450 million Tx/month in Q4 2024. Including activity on the base chain, this is closer to half a billion.
Despite a significant jump in the number of transactions, fees are still 80% lower on average compared to the 2021 bull run.
It’s a far cry from reports of people forking hundreds of dollars for just one swap on Uniswap, one of Ethereum’s earliest decentralised exchanges (DEXs), which is still the most popular, albeit with more multi-chain support.
You can thank L2s and the rise of Solana for preventing extensive periods of intense Ethereum network congestion during the early stages of the NFT craze in 2021.
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However, there is an important issue to address regarding L2s, and that’s lost revenue on Ethereum’s chain.
Standard Chartered has downgraded its 2025 price target for ETH due to the rapid rise of some L2s, notably Base.
In a recent article from The Block, Geoff Kendrick, the Global Head of Digital Assets Research at Standard Chartered, said:
“We estimate that Base (the dominant layer 2) has removed $50 billion of market cap from Ethereum alone.”
This scaling solution has become increasingly dominant in this space, regularly processing 80 UOPS and doing over 120 UOPS in January.
Besides these figures, why might raise some eyebrows?
Base is closely aligned with Coinbase, which refers to it as “Coinbase’s L2 Network”, and is built on the OP Stack from Optimism, another Ethereum L2.
Its shareholders benefit from transaction fees paid in BASE.
Looking at the company’s latest Shareholder Letter: Fourth Quarter and Full Year 2024, you will notice a significant increase in profits (see page 4 – Total Revenue, listed as ‘Other transaction revenue, net’), which helps boost revenues for the publicly listed exchange.
This is lost revenue for ETH holders, whereby using it to pay for gas fees on Ethereum is no longer the only option.
But from a user’s perspective, this allows for more flexibility when settling transactions rather than being forced to use ETH.
Fortunately, one of the main benefits of the Pectra Upgrade that I mentioned earlier is the option to cover gas fees with certain ERC-20 tokens, such as USDC and USDS, initially; additional tokens will be added in the future.
This flexibility will partially compensate for lost revenue through L2 tokens such as BASE, but it’s not a silver bullet. For that, we need more UOPS directly on Ethereum, similar to Solana, which we’ll see in due course.
Notably, as Coinbase also holds a stake in Circle, the issuer of USDC, the exchange’s shareholders (of which I am one) will also benefit from the adoption of this stablecoin.
Danksharding: Ethereum’s holy grail
Does the name sound familiar?
Last year, Ethereum devs rolled out its precursor, Proto-Danksharding, a.k.a. Ethereum Improvement Proposal (EIP)-4844. This was one of nine EIPs introduced as part of the Dencun Upgrade in March 2024.
This significantly reduced daily on-chain costs by introducing blobs, which are large amounts of data stored temporarily (for 18 days) instead of permanently accessible calldata.
Since the introduction of EIP-4844, Ethereum has experienced a massive reduction in on-chain costs and has seen vastly improved L2 scalability.
While it’s a major step in the right direction, it’s far from ideal. We need higher activity (user operations per second, or UOPS) and ultra-cheap transactions on the base chain, especially to counter Solana’s rise.
Danksharding is the full realization of the rollup scaling that began with Proto-Danksharding…This means Ethereum will be able to support hundreds of individual rollups with ease and make millions of transactions per second a reality.
Ethereum > What is Danksharding?
Before continuing, I acknowledge that I’ve unintentionally misled people by placing too much emphasis on transactions per second (TPS) in the past, which is not a particularly important metric, at least not compared to UOPS or another metric known as gas per second.
Dr Steven Goldfeder, co-founder of Offchain Labs, an organisation working on the popular L2, Arbitrum, provided this useful analogy in an X post.
Comparing L2 activity to Ethereum using TPS is like counting the number of bills in your wallet but ignoring that some are singles, some are twenties, and some are hundreds.
A much better metric is gas-per-second and Arbitrum One alone is already processing way more than L1. pic.twitter.com/oUfjOeY536
— Steven Goldfeder (@sgoldfed) January 23, 2024
Source: Steven Goldfeder at X/Twitter
This blog post outlines the differences between TPS, UOPS and gas-per-second.
Additional thoughts
With Ethereum’s poor performance in recent years – the ETH/BTC chart is at its lowest since April 2020 – many are losing patience with the project, testing the persistence of its long-term coin holders, much like XRP enthusiasts up until recently.
Nevertheless, do I believe Ethereum is in terminal decline?
I doubt it. Rather, it’s too early to conclude this.
One of the biggest drawcards for this ecosystem is the Enterprise Ethereum Alliance – an international consortium of “blockchain leaders, adopters, innovators, developers and businesses.”
Launched in February 2017, the EEA now has over 35 members, including renowned corporations such as Accenture, Banco Santander, BNY Mellon, CME Group, ConsenSys, J.P. Morgan Chase, and Microsoft.
Beyond this partnership, ETH remains the only altcoin with spot ETFs in the USA, gaining a head start over SOL, XRP, and other cryptocurrencies. It will be interesting to see the inflows and outflows of these different assets once they are eventually approved, likely within 6 to 9 months.
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Looking ahead, I see both networks continuing to grow and remaining dominant forces in this space.
They will coexist, focusing on specific niches and catering to particular stakeholders, such as retail versus institutional, or concentrating on certain use cases, including DeFi, NFTs, RWAs, and AI agents.
The same applies to Bitcoin, XRP Ledger, and some other blockchains. Their networks and native assets will continue to grow, sticking to what they do best, which I believe are digital gold (BTC) and XRP for use in gross payment settlement systems, remittances, and other applications.
Will the swathe of Pectra upgrades do enough to reignite activity on Ethereum? Comment below.
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https://medium.com/@cryptowithlorenzo/bitcoin-is-going-to-zero-5562122f5481
https://cryptowithlorenzo.medium.com/why-we-shouldnt-be-investing-in-crypto-6ea5bc7de737
https://medium.com/@cryptowithlorenzo/why-the-big-bucks-will-be-made-with-real-world-assets-rwa-bc8dea8144c2
https://decrypt.co/resources/what-is-the-pectra-upgrade-inside-ethereums-future-roadmap
Disclaimers
• N.B. None of this is financial advice; I am not a financial advisor. This content is for educational purposes only. You are ultimately responsible for your investments.
• My opinions in this piece may not reflect those of any news outlet, person, organisation, or other entity listed here.
• Please conduct thorough research before investing in any crypto assets, staking, NFTs, or other products promoted by these individuals and organisations, as well as other products associated with this space.
• Bitcoin (BTC) and Ethereum account for approximately half of my crypto holdings, followed by Cardano (ADA) and XRP, making up another 25%.
• I have a few Coinbase (NASDAQ: COIN) shares, but my USD holdings in it are far less than what I have in ETH.
Featurd image by whatawin at Freepik.