Ethereum’s identity crisis deepens as inflation returns, analyst warns

The third quarter revealed a challenging landscape for the crypto market, marked by low on-chain fees, rising Bitcoin dominance, and Ethereum struggling with inflation and underperformance.

Ethereum (ETH)’s identity is changing as it moves from a deflationary model towards inflation, raising doubts about its role as a cryptocurrency amid the rise of layer 2 solutions and the dominance of Bitcoin (BTC).

Lucas Outumuro, head of research at IntoTheBlock, noted in an Oct. 4

“Although fees rebounded slightly in September, Ethereum’s trend towards significantly lower fees is a significant contributor to ETH’s underperformance as the market effectively rejects the thesis that ETH is money.”

Lucas Outumuro

Meanwhile, Bitcoin’s market share climbed to its highest level since April 2021 despite its price remaining mostly stable throughout the quarter, Outumuro said, adding that Ethereum and altcoins continued to hit new year’s lows. Meanwhile, Bitcoin fees fell by 86% in the quarter; This shows that the market is not affected by this decline.

“The difference between the price of BTC and ETH shows that while fees for both are decreasing, one is gaining value as money, while the other is more closely tied to cash flows.”

Lucas Outumuro

The Dencun upgrade that introduced EIP-4844 had a huge impact on Ethereum’s economics. Despite encouraging Layer 2 transaction volumes, mainnet fees have reached all-time lows, raising concerns about Ethereum’s deflationary narrative. Outumuro noted that fewer fees meant less ETH was burned, which led to “the Ethereum community becoming inflationary again after being constantly focused on its deflationary path before this.”

Apart from this, the ETH/BTC ratio has dropped almost 30% since the Dencun upgrade, signaling an “identity crisis” for Ethereum, according to Outumuro. As of press time, Ethereum is trading at $2,390, 50% below its all-time high from three years ago.