Ethereum, neglected by Wall Street: Why are the fundamentals and ETH price diverging?

Author: Clow Plain Language Blockchain

In 2025, Ethereum experienced a classic case of "fundamentals and price divergence".

In August, the price of ETH broke through the previous high of 2021, reaching above $4,900 and setting a new all-time high. Market sentiment reached "extreme greed," and discussions about "Ethereum surpassing Bitcoin" once again intensified.

However, the good times didn't last long. By the end of the year, the price of ETH had fallen back to around $2,900, a drop of nearly 40% from its peak. Looking at the data over the past 365 days, the decline reached 13.92%, with a volatility of 141%.

Ironically, Ethereum actually delivered a stellar technical performance that year: it successfully implemented two milestone upgrades, Pectra and Fusaka, completely reconstructing the network's scalability; the Layer 2 ecosystem experienced explosive growth, with the Base chain's annual revenue surpassing that of many public chains; and giants like BlackRock established Ethereum's position as the preferred settlement layer for Real-World Assets (RWA) through the BUIDL fund, with the fund size exceeding $2 billion.

Technology is advancing, the ecosystem is thriving, but prices are falling.

What exactly happened behind this "divergence between fundamentals and prices"?

The Debunking of the Deflation Myth

To understand this divergence, we must start with the Dencun upgrade.

The Dencun upgrade on March 13, 2024, was the direct trigger for the collapse of Ethereum's deflationary narrative.

The core of this upgrade is the introduction of EIP-4844, which provides a dedicated data availability layer for L2 through Blob transactions. Technically, this upgrade is near perfect—L2 transaction costs have plummeted by over 90%, and the user experience on networks like Arbitrum and Optimism has been significantly improved. However, it has caused significant turmoil in terms of token economics.

Under the EIP-1559 mechanism, the amount of ETH burned (deflationary momentum) directly depends on the congestion level of the block space. Dencun significantly increased the supply of data availability, but the demand side did not keep up—although L2 transaction volume is increasing, the supply of Blob space exceeds demand, causing Blob fees to hover near zero for a long time.

Data speaks volumes. Before the upgrade, Ethereum burned thousands of ETH daily at peak times; after the Dencun upgrade, the overall burning amount plummeted due to the sharp drop in Blob fees. More importantly, the issuance of ETH (approximately 1800 ETH per block per day) began to exceed the burning amount, and Ethereum returned to an inflationary state from deflation.

According to data from ultrasound.money, Ethereum's annual inflation rate turned positive in 2024, changing from negative to positive, meaning that the total supply of ETH no longer decreased but instead increased daily. This completely overturned the narrative foundation of "Ultra Sound Money".

Dencun has effectively "killed" Ethereum's deflationary narrative. ETH has transformed from a scarce asset that "decreases with use" back into an asset with mild inflation. This sudden shift in monetary policy has disappointed many who invested in ETH based on the "ultrasonic money" theory, leading them to exit the market. One long-term holder wrote on social media: "I bought ETH because of deflation, but now that logic is gone, why should I still hold it?"

Technological upgrades are generally a positive development, but in the short term, they have become a price killer. This is Ethereum's biggest paradox: the more successful L2 is, the weaker the value capture on the mainnet becomes; the better the user experience, the more ETH holders are hurt.

L2's double-edged sword: vampire or moat?

In 2025, the debate about the relationship between Layer 2 and Layer 1 reached its peak.

From a financial statement perspective, the situation of Ethereum L1 is indeed worrying. Coinbase's Base chain generated over $75 million in revenue in 2025, accounting for nearly 60% of the entire L2 segment's profits. In contrast, while Ethereum L1 saw active trading in August, its protocol revenue was only $39.2 million, less than a single quarter of Base's revenue.

If Ethereum were viewed as a company, its revenue would have declined significantly, while its market capitalization would remain high, making it appear "expensive" to traditional value investors.

"L2 is a parasite, sucking Ethereum dry." This is a mainstream view in the market.

However, a deeper analysis reveals that things are far more complex than that.

All economic activities in L2 are ultimately denominated in ETH. On Arbitrum or Base, users pay for gas with ETH, and in DeFi protocols, the core collateral is ETH. The more prosperous L2 becomes, the stronger the liquidity of ETH as "currency".

This currency premium cannot be measured solely by L1 gas revenue.

Ethereum is transitioning from "directly serving users" to "serving the L2 network." The Blob fees paid by L2 to L1 are essentially purchasing Ethereum's security and data availability. While Blob fees are currently low, this B2B revenue model may be more sustainable than a B2C model that solely relies on retail users, as the number of L2 users surges.

One analogy is that Ethereum is no longer a retailer, but a wholesaler. Although the profit per transaction is lower, the scale effect may be greater.

The problem is that the market has not yet grasped this shift in business models.

Competitive Landscape: Under Pressure from Multiple Fronts

Ethereum's predicament cannot be fully discussed without talking about its competitors.

According to Electric Capital's 2025 annual report, Ethereum remains the undisputed developer leader, with 31,869 active developers throughout the year, a number unmatched by any other ecosystem.

However, Ethereum is losing ground in the battle for new developers. Solana has 17,708 active developers, an 83% year-over-year increase, and is performing exceptionally well among new entrants.

More importantly, there is differentiation in the industry sectors.

In the PayPal (payment finance) sector, Solana has established a leading position thanks to its high TPS and low fees. The issuance of PayPal USD (PYUSD) on Solana has surged, and institutions such as Visa have begun testing large-scale commercial payments on the platform.

In the DePIN (Decentralized Physical Infrastructure) race, Ethereum suffered a major setback. Due to fragmentation between L1 and L2 and gas fee volatility, the star project Render Network migrated to Solana in November 2023. Leading DePIN projects such as Helium and Hivemapper also chose Solana.

However, Ethereum did not suffer a complete defeat.

Ethereum maintains absolute dominance in the RWA (Real-World Asset) and institutional finance sectors. BlackRock's $2 billion BUIDL fund is largely powered by Ethereum. This demonstrates that traditional financial institutions have greater trust in Ethereum's security when handling large-scale asset settlements.

In the stablecoin market, Ethereum holds a 54% share, worth approximately $170 billion, and remains the primary vehicle for the "Internet dollar."

Ethereum boasts the most experienced architects and researchers, making it suitable for building complex DeFi and financial infrastructure; while its competitors attract a large number of application layer developers transitioning from Web2, making them suitable for building consumer-facing apps.

These are two different ecological positioning, which will determine the future direction of competition.

Wall Street's "ambiguous" attitude

"It doesn't seem to have gained strong recognition from mainstream financial institutions on Wall Street."

This feeling is not an illusion. Data from The Block shows that by the end of the year, Ethereum ETFs had net inflows of approximately $9.8 billion, while Bitcoin ETFs saw a staggering $21.8 billion.

Why are institutions so "indifferent" to Ethereum?

The core reason is that, due to regulatory restrictions, spot ETFs listed in 2025 have had their collateralization function removed.

Wall Street prioritizes cash flow. Ethereum's native 3-4% collateralized yield was its core competitive advantage against US Treasury bonds. However, for BlackRock or Fidelity clients, holding a "zero-interest" risky asset (ETH in an ETF) is far less attractive than directly holding US Treasury bonds or high-dividend stocks.

This directly led to a "ceiling" effect on institutional fund inflows.

A deeper problem is the ambiguity in its positioning. During the 2021 cycle, institutions viewed ETH as the "tech stock index" of the crypto market, i.e., a high-beta asset—if the market was good, ETH should outperform BTC.

However, this logic will no longer hold true in 2025. If institutions prioritize stability, they will choose BTC; if they seek high risk and high return, they will turn to other high-performance public chains or AI-related tokens. The "alpha" yield of ETH will no longer be clear.

However, institutions have not completely abandoned Ethereum.

BlackRock's $2 billion fund is all on Ethereum, which sends a clear signal: when dealing with the settlement of assets worth hundreds of millions of dollars, traditional financial institutions only trust Ethereum's security and legal certainty.

The institutional attitude towards Ethereum is more like "strategic recognition, but tactical observation".

Five possibilities for a comeback

Faced with the current downturn, what will Ethereum rely on to turn things around in the future?

First, breaking the ice on ETF pledging.

The 2025 ETF is only a "semi-finished product," and institutional holders of ETH cannot obtain staking rewards. Once an ETF with staking capabilities is approved, ETH will instantly become a USD-denominated asset with an annualized return of 3-4%.

For global pension funds and sovereign wealth funds, this type of asset, which combines technological growth (price appreciation) and fixed income (collateralized returns), will become a standard component of their asset allocation.

Second, the RWA phenomenon.

Ethereum is becoming the new backend for Wall Street. BlackRock's $2 billion BUIDL fund, while now expanding to multiple chains, still considers Ethereum one of the main chains.

In 2026, as more government bonds, real estate, and private equity funds are put on the blockchain, Ethereum will support trillions of dollars in assets. While these assets may not necessarily generate high gas fees, they will lock up a massive amount of ETH as liquidity and collateral, significantly reducing the circulating supply in the market.

Third, the supply and demand in the Blob market have reversed.

The deflationary failure caused by Fusaka is only a temporary supply-demand mismatch. Currently, the utilization rate of Blob space is only 20%-30%, and as blockbuster applications (such as Web3 games and SocialFi) emerge on L2, Blob space will be filled.

Once the Blob market becomes saturated, its fees will rise exponentially. Liquid Capital analysis suggests that with the growth of L2 transaction volume, Blob fees could contribute 30%-50% of total ETH burning by 2026. At that point, ETH will return to the deflationary trajectory of an "ultrasonic currency."

Fourth, a breakthrough in L2 interoperability.

The fragmentation of the L2 ecosystem (lack of liquidity and poor user experience) is currently the main obstacle to large-scale adoption. Optimism's Superchain and Polygon's AggLayer are building a unified liquidity layer.

More importantly, it's based on L1's shared sorter technology. This will allow all L2s to share the same decentralized sorter pool, not only solving the problem of cross-chain atomic swaps, but also allowing L1s to recapture value (the sorter requires ETH to be staked).

When users can switch between Base, Arbitrum, and Optimism as smoothly as switching between mini-programs in WeChat, the network effect of the Ethereum ecosystem will explode exponentially.

Fifth, the 2026 technology roadmap.

Ethereum's evolution continues. Glamsterdam (first half of 2026) will focus on optimizing the execution layer, significantly improving the development efficiency and security of smart contracts, reducing gas costs, and paving the way for complex institutional-grade DeFi applications.

Hegota (second half of 2026) and Verkle Trees are key to the endgame. Verkle Trees will allow stateless clients to run, meaning users can verify the Ethereum network on their phones or even in browsers without downloading terabytes of data.

This will put Ethereum far ahead of all its competitors in terms of decentralization.

summary

Ethereum's "bad" performance in 2025 was not because it failed, but because it was undergoing a painful transformation from a "retail speculative platform" to a "global financial infrastructure".

It sacrifices short-term L1 revenue in exchange for the unlimited scalability of L2.

It sacrificed short-term price surges in exchange for the compliance and security moat of Institutional Grade Assets (RWA).

This is a fundamental shift in business models: from B2C to B2B, from earning transaction fees to becoming a global settlement layer.

For investors, Ethereum today is like Microsoft in the mid-2010s when it was transitioning to cloud services—although its stock price is currently depressed and it faces challenges from emerging competitors, its deep network effects and moats are building up strength for the next phase.

The question is not whether Ethereum can rise, but when the market will understand the value of this transformation.