Analysts attribute Ethereum’s lag behind Bitcoin to inflationary issues and Dencun upgrade

The second-largest cryptocurrency, Ethereum ETH/USD, has taken a different path compared to Bitcoin BTC/USD over the past year. While Bitcoin has seen a 32% increase and reached an all-time high of $109,000, Ethereum has seen a 39% decrease, reducing its market share from 16% to 8%. This significant difference has led to discussions surrounding Ethereum’s position in the cryptocurrency hierarchy and its future direction.

Jeffrey Hu, the Head of Investment Research at HashKey Capital, pointed out that Ethereum’s economic model could be the root of the issue. The implementation of EIP-1559 aimed to burn more Ether for deflation during times of high activity on the Ethereum network. However, in order to support on-chain applications effectively, Ethereum must scale up.

One major challenge facing Ethereum is the rise of Layer-2 blockchains and the Dencun Upgrade. These developments have led to a diversion of on-chain activity away from the base Ethereum chain, resulting in inflation. The deflation rate of ETH started to slow down in May 2024, and the coin’s supply has been increasing since early February.

Trever Koverko, a Web3 investor and co-founder of Sapien, highlighted the struggle Ethereum faces in creating a narrative around the value of Layer-2 solutions to the main chain. Additionally, competition from other platforms, such as Solana, has also impacted Ethereum’s performance. Solana has focused on building a meme coin community culture, which has attracted more application development and on-chain transactions.

Despite being the only cryptocurrency, along with Bitcoin, to have a spot exchange-traded fund on Wall Street, Ethereum has not seen significant institutional inflows. Himanshu Maradiya, Founder & Chairman of CIFDAQ Global, suggested that Ethereum’s lack of a clear narrative and perceived role as the “middle child” of the crypto ecosystem has hindered its institutional attractiveness. The absence of staking rewards for Ethereum ETFs has also played a role in this.

In response to these challenges, the Ethereum Foundation remains focused on ecosystem development and research. At the time of writing, Ethereum was trading at $1,978.99, down 2.17% in the last 24 hours and 41% year-to-date. The future of Ethereum hinges on its ability to address the underlying issues surrounding its economic model, scalability, and narrative to remain competitive in the evolving cryptocurrency landscape.