Ethereum Bulls Have Reason to Worry If L2s Remain Dominant, Says VanEck Analyst

Ethereum’s adoption of layer-2 networks could cost ETH trillions of dollars in potential market capitalization over the next few years if its associated dynamics remain unbalanced, according to VanEck Head of Digital Assets Research Matthew Sigel.

In a Twitter (aka X) post, the analyst posited Thursday that Ethereum’s “changing fundamentals suggest a model update is in order.” Instead of climbing to $22,000 by 2030, Ethereum’s price projection would plummet 67% to $7,300 if “the current reality” was reflected, Sigel wrote.

VanEck’s model factors in Ethereum’s expected growth in total value locked, reflecting the value of assets used in decentralized finance (DeFi) applications. It also considers the amount of Ethereum consumed by the network—and burned, or removed from circulation—as a result of transaction fees.

Data gathered over the past four months indicates that layer-2 networks are “taking more value from Ethereum” than previously thought, Sigel said. Instead of Ethereum benefiting from the bulk of user activity compared to layer-2 networks, the trend has been vastly reversed.

“Our original model assumed [a] 90:10 split on transaction revenue between Ethereum and L2s,” Sigel explained. “The actuals are currently 10:90 in favor of L2s.”

Earlier this year, layer-2 networks helping Ethereum scale got a boost through Dencun. The Ethereum upgrade introduced so-called blobs, providing layer-2 networks with dedicated storage space for posting transactions, which lowered costs for scaling networks. Before, layer-2 networks were forced to post bundled transactions in the form comparatively costly of “calldata.”

As networks like Coinbase’s Base and Optimism continue to attract users and developers, Ethereum’s supply has turned inflationary. Transaction fees had outweighed Ethereum’s issuance in the year prior to Dencun, but the asset’s supply has increased by 318,000 ETH since mid-April, according to ultrasound.money.

While Sigel’s projection showed a jarring drop in Ethereum’s projected price, he later clarified to Decrypt that his post was “simply a sensitivity analysis to show the impact on price, all else equal, if ETH doesn't take back some margin from its L2s.”

“We expect the underperforming token price to catalyze the community to tweak ETH’s roadmap in an attempt to reverse some of the declining profitability,” he added. “We are already seeing some evidence this is happening.”

Sigel pointed to potential fee sharing models between Ethereum mainnet and layer-2 networks, which Ethereum co-founder Vitalik Buterin recently advocated for, as an example.

“We need to maintain an ecosystem where Ethereum people feel they are on the same team," Buterin tweeted, "and this has a tech interoperability part, a values/culture part, and an economics part too.”

Buterin published a blog post Thursday outlining his vision for layer-2 networks. Standing by Ethereum’s rollup-centric roadmap, he wrote that a flaw with the current ecosystem is that “it is difficult for users to navigate.”

Critics have argued that having many layer-2 networks fragments users and liquidity, siloing activity and assets. Highlighting the need for “maximum interoperability,” Buterin wrote that “Ethereum should feel like one ecosystem, not 34 different blockchains.”

Among major cryptocurrencies, Ethereum’s performance has lagged peers over the past year. The asset’s price has climbed 65% during that time to $2,591, underperforming against Bitcoin’s 135% rise to $67,000 and Solana’s 517% leap to $148, according to CoinGecko.

Ethereum’s relationship with layer-2 networks isn’t the only thing hurting the asset’s price. The crypto’s recent struggles can be partly explained by the performance of spot Ethereum ETFs, Kraken Head of Institutional Tim Ogilvie told Decrypt. Aside from a lack of staking yield for ETF investors, Ogilvie said the thesis around Ethereum isn’t as clear as Bitcoin from an institutional investment perspective.

The concept of Ethereum being a “programmable computer” powered by smart contracts or “ultrasound money” based on burnt fees isn’t as palatable as digital gold, he explained. So far, since launching in July, spot Ethereum ETFs have collectively seen $160,000 in cumulative outflows, according to CoinGlass.

“ETH is in a funky spot right now, that’s for sure,” Ogilvie said. “If you're constructing a portfolio for a pension fund, are you really investing in the future of blockchain as a thing? Maybe some people, but it’s a weird leg to add to things.”

Edited by Andrew Hayward