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09/18/2024

Two Years Into Ethereum's PoS Transition: Data Reveals the Deeper Reasons Behind ETH's Underperformance

Ethereum's shift to Proof-of-Stake (PoS) was widely expected to establish a deflationary monetary model and support demand for large-scale applications, ultimately driving ETH's price higher. Yet two years after the Merge, Ethereum is facing a wave of skepticism. On the surface, that skepticism stems largely from ETH's poor performance during the recent market cycle — especially relative to peers like BTC and SOL. But when you dig deeper, the criticism reflects two core tensions in Ethereum's evolution: first, the competitive-cooperative dynamic between Layer 1 and Layer 2, where the crux is defining what role Layer 2 plays and how it relates to Ethereum; and second, the contradiction between staking and liquidity, which comes down to how you understand what ETH fundamentally is.

Two Years Into Ethereum's PoS Transition: Data Reveals the Deeper Reasons Behind ETH's Underperformance

Ethereum's shift to Proof-of-Stake (PoS) was widely expected to establish a deflationary monetary model and support demand for large-scale applications, ultimately driving ETH's price higher. Yet two years after the Merge, Ethereum is facing a wave of skepticism. On the surface, that skepticism stems largely from ETH's poor performance during the recent market cycle — especially relative to peers like BTC and SOL.

But when you dig deeper, the criticism reflects two core tensions in Ethereum's evolution: first, the competitive-cooperative dynamic between Layer 1 and Layer 2, where the crux is defining what role Layer 2 plays and how it relates to Ethereum; and second, the contradiction between staking and liquidity, which comes down to how you understand what ETH fundamentally is.

To illustrate Ethereum's current state and the challenges behind these criticisms, PAData — the data vertical of PANews — conducted a comprehensive analysis of changes in Ethereum's transaction fees, Blob fees, Layer 2 demand fluctuations, and shifts in the amount of staked ETH and total value locked. Key findings include:

  • Ethereum has lowered transaction fees, but Layer 2 has redirected on-chain activity and now interacts with Ethereum at lower cost — creating challenges for ETH's fee response mechanism and value accrual.
  • If ETH is positioned as a payment currency — implying high, sustained long-term demand is needed for stable long-term ETH appreciation — the market's willingness to pay for that long-term expectation may weaken amid intensifying competition.

Key Results:

  • Over the past two years, ETH has gained approximately 44.28% against the USD, while its value against BTC has declined roughly 48.70% and against SOL roughly 63.55%.
  • Over the past two years, Ethereum's monthly transaction fee revenue (tip fees only) showed a notable upward trend, averaging approximately $32.81M per month. However, monthly revenue began declining in August 2023.
  • After the introduction of Blobs, Arbitrum One, Base, and OP Mainnet saw their average daily TPS increase by 122.00%, 694.69%, and 54.94% respectively. Arbitrum One and Base achieved average daily TPS exceeding Ethereum's by 60.24% and 158.85%.
  • The top 20 Blob submitters sent a combined 263.93K Blobs, paying a total of $5.99M — averaging approximately $2.27 per Blob. Among them, Base, which had the fastest TPS growth, paid just $109,300 in total.
  • Total staked ETH has grown roughly 150.18% over the past two years, but the marginal growth rate is slowing. The average daily growth rate for the first nine months of this year was 0.06% — down more than 0.1 percentage points from the 0.17% daily growth rate for all of last year.
  • Ethereum DeFi TVL has grown 50.12% this year, while Solana's TVL has surged 242.20%. At current monthly growth rates, Solana's TVL is on pace to surpass Ethereum's within 12 months.

Deeper Analysis:

01. ETH's exchange rate falls against BTC and SOL, Ethereum transaction fee revenue shifts from growth to decline:

The immediate reason behind the questions surrounding Ethereum is ETH's underperformance — but looking at its standalone trend, ETH has maintained a clear uptrend since the Merge. According to CoinGecko data, over the past two years ETH has gained approximately 44.28%, at one point crossing $4,000 and peaking at $4,071, and currently remains above $2,300, its high for the two-year period.

When ETH is compared against peers like BTC and SOL, however, it clearly lags. Examining these exchange rate trends over the two years since the Merge: BTC has consistently outperformed ETH, while SOL initially trailed ETH before eventually surpassing it.

Statistically, over the past two years, 1 ETH could be exchanged for 0.0807 BTC at the start of the period but has since fallen to 0.0414 BTC — a decline of roughly 48.70%. The ETH/BTC ratio has shown a clear downward trend overall.

Against SOL, prior to September 2023, 1 ETH could be exchanged for more than 50 SOL and was generally trending upward, peaking at 125.1895 SOL. After September 2023, however, the rate dropped sharply, pulling the two-year aggregate lower. Today, 1 ETH exchanges for just 17.4939 SOL — an overall decline of roughly 63.55%.

Some argue the direct cause of ETH's underperformance is the drop in transaction fee revenue, even though fee reduction was a primary goal of post-Merge upgrades. CryptoQuant data, however, shows that Ethereum's monthly transaction fee revenue (tip fees only) has actually trended notably higher over the past two years.

Through September, over the past 25 months, Ethereum's average monthly transaction fee revenue was $31.84M. Excluding September, the average over the prior 24 months rises to $32.81M. Moreover, from November 2023 through July 2024, monthly transaction fee revenue consistently exceeded $33M — well above most prior periods — and at one point surpassed $60M.

In August, however, Ethereum's monthly transaction fee revenue fell to $27.96M. Based on average daily fees for the first ten days of September, monthly revenue for September looks likely to fall further to around $25.68M — indirectly reflecting market concern about ETH's future value accrual.

02. Three major Layer 2s see TPS surge after Blob introduction; top 20 Blob submitters paid just $5.99M combined:

The continued decline in Ethereum's transaction fees could be seen as an intended outcome — so why has it become the focal point of recent criticism? One underlying reason is an imbalance between on-chain activity demand and transaction fee pricing.

Ideally, Ethereum — through Layer 2 and other upgrades — would lower transaction fees, which would directly or indirectly stimulate long-term on-chain activity demand, reaching an equilibrium where ETH can still accrue value. The current problem is that aggregate on-chain activity demand is insufficient, and Layer 2 is absorbing a growing share of that activity while interacting with Ethereum at lower cost. In this environment, continually falling transaction fees creates challenges for ETH's fee responsiveness and value accrual. Put simply, Ethereum's fee optimization — designed for high-demand periods — is now operating in a mismatched low-demand environment.

Data from Dune (@hildobby) shows that after the introduction of Blob transactions, TPS across the three Layer 2s with the highest TVL increased significantly, with two of them surpassing Ethereum's TPS. Ethereum's fee optimization has objectively supported Layer 2 growth — Base in particular.

Between the start of this year and March 14, Arbitrum One, Base, and OP Mainnet posted average daily TPS of 9.68, 4.33, and 4.15 respectively. From March 14 onward, those figures rose to 21.49, 34.41, and 6.43 — representing growth of 122.00%, 694.69%, and 54.94% respectively.

Furthermore, between the start of the year and March 14, Arbitrum One, Base, and OP Mainnet all had average daily TPS below Ethereum's over the same period — trailing by 26.86%, 67.19%, and 68.76% respectively. After the introduction of Blobs, however, Arbitrum One and Base's average daily TPS exceeded Ethereum's by 60.24% and 158.85%. OP Mainnet's average daily TPS remains below Ethereum's, though the gap is narrowing.

Growing Layer 2 demand is also partly reflected in TVL shifts. According to DefiLlama data, after the introduction of Blobs, Ethereum's TVL fell 22.13% — a decline surpassed only by Blast and Optimism. Base, which posted the fastest TPS growth, saw its TVL rise 105.33%, and Linea — the second-highest Blob fee payer — saw its TVL jump 414.02%. Arbitrum's TVL also declined, by 19.13%, though less than Ethereum's.

03. Ethereum's staking growth slows; TVL rises but at a slower pace than Solana:

Another challenge Ethereum faces post-Merge is finding a stable equilibrium between the amount of staked ETH and total value locked — ensuring on-chain activity is maintained at a certain level safely. The interplay between ETH's price and staking yields will be key to reaching that equilibrium. Fundamentally, this will determine whether ETH has sufficient liquidity and demand — both of which are critical prerequisites for ETH to function as a payment currency. Another requirement is that ETH holds its value over time, which implies that sharp short-term swings or significant price spikes are actually undesirable.

If the payment currency thesis is accepted, high and sustained long-term demand would be needed for stable, durable ETH appreciation. The question is whether the market is willing to price in that long-term expectation. When that expectation is insufficiently held, skepticism naturally follows.

Looking at the demand-side picture reflected in the data: total staked ETH currently stands at 34.38M ETH, up roughly 150.18% from two years ago — representing significant growth. However, examining the growth rate of staked ETH, the average daily growth rate per month is trending downward, suggesting the marginal increase in total staked ETH is decelerating. The average daily growth rate in September fell to 0.02%, and the average daily growth rate for the first nine months of this year was 0.06% — down more than 0.1 percentage points from the 0.17% daily growth rate for all of last year.

The three entities with the highest cumulative staked ETH are Lido, Coinbase, and ether.fi — with Lido alone exceeding 9.75M ETH. Renzo, ether.fi, and Everstake achieved the fastest staking growth this year, with growth rates exceeding 7,457%, 3,128%, and 2,044% respectively.

While total staked ETH remains high and is slowly growing, Ethereum DeFi TVL reached a short-term high of $67.90B in June of this year. It currently stands at $44.47B, representing a 50.12% increase this year and a 50.53% increase over the past two years. In other words, there has been some recovery in application-layer demand on Ethereum this year.

Compared to Solana, however, Ethereum's demand growth looks considerably less dynamic. Solana's TVL currently stands at approximately $4.78B — roughly one-tenth of Ethereum's. But this year, Solana's TVL has grown 242.20%, and over the past two years it has grown 267.89%, reflecting rapid expansion.

Conclusion:

While Ethereum's transition to PoS has delivered benefits — lower transaction fees and stronger security — challenges remain. Competition from Layer 2 and rival blockchains like Solana, combined with a slowing growth rate in staked ETH and concerns about long-term value accrual, has cast a shadow over Ethereum's future. The market's willingness to price in the long-term expectations tied to Ethereum's vision as a payment currency has yet to be fully realized.