Ethereum's Decline: The Rise of Solana and the Impact of Layer-2 Networks

Ethereum's Decline: The Rise of Solana and the Impact of Layer-2 NetworksOnce the undisputed leader in the cryptocurrency space, Ethereum has recently experienced a decline in market dominance, its position as the "second-largest cryptocurrency" under fierce attack from competitors like Solana. This decline isn't sudden; it's the result of multiple contributing factors, including the rise of Layer-2 networks, Solana's high efficiency and low costs, and the lagging effects of Ethereum's own technical upgrades

Ethereum's Decline: The Rise of Solana and the Impact of Layer-2 Networks

Once the undisputed leader in the cryptocurrency space, Ethereum has recently experienced a decline in market dominance, its position as the "second-largest cryptocurrency" under fierce attack from competitors like Solana. This decline isn't sudden; it's the result of multiple contributing factors, including the rise of Layer-2 networks, Solana's high efficiency and low costs, and the lagging effects of Ethereum's own technical upgrades.

The Rise of Layer-2 Networks and the Plummet of Ethereum Transaction Fees

Since March of this year, Layer-2 networks such as Arbitrum and Optimism have seen an explosive growth in transaction volume, surging by as much as 430%. This phenomenon is closely correlated with a dramatic drop in Ethereum's transaction fees, which decreased by 87% during the same period. Layer-2 solutions, by building secondary networks on top of the Ethereum mainnet, effectively reduce transaction costs and improve efficiency, directly diverting transaction volume away from the Ethereum mainnet and significantly reducing its revenue. This also reflects market dissatisfaction with high transaction fees, pushing users towards more cost-effective alternatives.

Solana's Strong Ascent: The Competitive Advantage of Low Cost and High Efficiency

Solana, a major Ethereum competitor, boasts high processing speeds and low transaction fees as its core competitive advantages. According to Blockworks Research, Solana's daily on-chain transaction fees have consistently surpassed Ethereum's since October 19th, exceeding $10 million on October 24th. The popularity of the meme coin sector further fueled capital inflow into the Solana ecosystem, making it one of the most dynamic ecosystems in the current cryptocurrency market. Data from DefiLlama also shows that Solana's token has increased by 300% in the past year, significantly outperforming Ethereum's growth. Eliezer Ndinga, VP and Head of Strategy and Business Development at 21.co, points out that low-cost networks like Solana are rapidly catching up to Ethereum. Max Resnick of Special Mechanisms Group even considers Ethereum to be in a "danger zone," arguing that Solana's rise poses a serious threat to Ethereum's market position, emphasizing the need for Ethereum to focus on scaling to protect its users and its moat.

However, some analysts hold differing opinions. They argue that while Solana might have surpassed Ethereum in terms of base-layer activity, considering Ethereum's Layer-2 networks, Solana is not yet in a position to completely overtake Ethereum. DefiLlama data shows that Solana accounted for 35.4% of decentralized exchange (DEX) trading volume in November, up from 27.2% in October; while Ethereum and its Layer-2 ecosystem held a 45.2% market share in November, slightly down from 50.1% in October, but still maintaining dominance.

Ethereum's Predicament: Lagging Effects of Technical Upgrades and Sluggish Market Performance

Although Ethereum has undergone several technical upgrades, such as "The Merge" in 2022, aiming to reduce energy consumption and stabilize token supply by switching to a Proof-of-Stake (PoS) mechanism, the actual effects have been underwhelming. Since the "Dencun" upgrade in March this year, Ethereum's token supply has experienced inflation, with the number of tokens continuously increasing, shaking market confidence in its long-term value. Furthermore, Ether (ETH) has risen by approximately 75% in the past year, but still pales in comparison to Bitcoin's performance. Bitcoin more than tripled during the same period, repeatedly setting new all-time highs. Meanwhile, Ethereum ETFs (Exchange Traded Funds) haven't garnered significant investor interest. In 2024, Bitcoin ETFs saw $31 billion in inflows, while Ethereum ETFs only saw $242 million. These all reflect market concerns about Ethereum's future prospects.

Ethereum's Future: Vitalik Buterin's Confidence and Layer-2 Collaboration

Despite the numerous challenges, Vitalik Buterin, one of Ethereum's founders, remains confident in its future. He mentions that many Layer-2 platform teams are interested in strengthening collaboration with the Ethereum ecosystem and are actively seeking ways to enhance cooperation and support. This suggests that Ethereum might counter competition by strengthening its collaboration with Layer-2 networks, further improving the overall ecosystem's efficiency and user experience. However, whether this collaboration can effectively reverse Ethereum's current predicament remains to be seen.

Conclusion: Challenges and Opportunities Coexist

Ethereum currently faces immense pressure from competitors like Solana and Layer-2 networks. The effects of its technical upgrades haven't fully materialized, and its market performance remains relatively sluggish. However, Ethereum still boasts a large user base and a rich ecosystem, and is actively exploring new development paths, such as strengthening cooperation with Layer-2 networks. Whether Ethereum can successfully overcome these challenges and restore its position in the cryptocurrency space will depend on its ability to effectively address technical bottlenecks and continuously improve user experience. Solana's rise has undoubtedly served as a wake-up call for Ethereum, injecting new vitality and a competitive landscape into the entire cryptocurrency market. Ultimately, the market's direction will be determined by technological innovation, user demand, and market sentiment.