Ethereum’s lowered yield might signal a paradigmatic shift in the ecosystem

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In mid-August 2024, Ethereum (ETH) gas fees dropped to 0.6 gwei; This is a record low since 2019. While some may see this as a concerning decline, it is symptomatic of broader, healthier changes in the ecosystem.

Lower gas fees reflect reduced mainnet transaction volume, resulting in reduced staking returns for validators. Simultaneously, the slow adoption of Ethereum exchange-traded funds in the US increases uncertainty in the market. These recent events have caused some to question the viability and long-term future of Ethereum. However, rather than signaling a crisis, these developments point to a new phase in Ethereum’s evolution; a phase that marks the transition to a more mature and sustainable ecosystem.

Diminishing returns should not be viewed as a sign of declining activity or liquidity, but as a result of Ethereum’s success in scaling and distributing its load across layer-2 solutions. This shift, along with new investment vehicles such as Spot ETH ETFs, creates a more efficient and accessible market and provides long-term benefits to Ethereum and decentralized finance as a whole.

Ethereum’s paradoxical growth

Ethereum is currently experiencing what can best be described as paradoxical growth. On the one hand, it seems that transaction activity on the mainnet has decreased and returns have decreased. On the other hand, L2 solutions designed to reduce transaction congestion are evolving. Daily transactions across L2 ecosystems rose to an all-time high of 12.42 million in mid-August, coinciding with the lowest gas fees seen on the Ethereum mainnet in recent years. These dynamics reveal that rather than a slowdown in the ecosystem, Ethereum is shifting its activity to more scalable, efficient layers.

The reduced staking returns of validators, which many people are concerned about, is a natural consequence of moving activities from the mainnet to L2s. Over time, Ethereum’s mainnet could evolve into a payment layer dedicated to high-value transactions, allowing the bulk of low-value activities to be handled by L2s. This is not a sign of decline, but rather a sign of a maturing market that can meet the demands of a growing user base while optimizing costs and efficiency.

Stakeholders would do well to consider the Ethereum ecosystem as a whole rather than focusing narrowly on the mainnet’s return. Attracting more users to the protocol, increasing accessibility, and implementing initiatives such as incentivized airdrops and points systems could help Ethereum further solidify its position as the go-to platform for decentralized applications and DeFi innovations.

DeFi’s expanding influence

Ethereum’s role as the foundational layer of DeFi continues to shape the broader blockchain space. Despite current concerns, Ethereum’s growth remains a strong driver of innovation, and this evolution is vital to the future of decentralized finance.

At the protocol level, Ethereum’s continued development and expansion is creating a more competitive and accessible network for both users and developers. As Ethereum scales, its capacity to support new dApps and financial products increases, further contributing to the success of DeFi. This increases network effects, where increased participation increases security, utility, and ultimately adoption.

Ethereum’s influence is also spreading into traditional finance, particularly through the introduction of spot ETH ETFs, which provide a more familiar and regulated entry point for institutional and retail investors. These ETFs lower the barrier to entry for those who are unfamiliar with blockchain technology but want to invest in the space. Spot ETH ETFs are attracting traditional investors to the Ethereum ecosystem by offering a regulated framework and a product perceived to be safer than direct token purchases. This not only expands Ethereum’s reach, but also positions ETH as more than a technology-focused asset, turning it into a recognized store of value.

As this trend continues, we can expect greater integration between Ethereum and real-world assets, increasing the utility and long-term potential of the network.

Supporting ecosystem transitions

As Ethereum continues this paradigm shift, it is important to realize that these changes are a natural part of the evolution of the ecosystem. Declining staking returns and gas fees are not indicators of failure, but reflections of Ethereum’s capacity to adapt and scale. Supporting this transition is vital to the long-term success of the network and can be achieved through initiatives that prioritize user engagement and developer incentives.

For example, platforms like Base, an L2 solution, processed over 109 million transactions in the last 30 days, while Ethereum had 33 million transactions. This is a clear sign that L2s play a critical role in the growth of the network. However, accepting this change is not enough; The ecosystem should prioritize collaboration between DeFi protocols to create dApps that maximize Ethereum’s potential. This is the only way Ethereum can achieve its main goal of serving the masses with decentralized technology.

A new dawn for Ethereum

The low yields and gas fees of the Ethereum mainnet may seem to indicate a slowdown, but they are actually signs of Ethereum’s increasing scalability and efficiency. As L2 networks take on more transaction activity and new financial products like spot ETH ETFs open the door to traditional investors, Ethereum is evolving into a more robust and versatile platform.

The ups and downs in market dynamics (like recent yield declines) are part of a larger shift that is reinforcing Ethereum’s role as the backbone of DeFi. The future of Ethereum lies in its ability to scale and integrate real-world assets and foster a thriving community across its ecosystem. Far from being a disaster, low returns signal a new dawn in which Ethereum will continue to lead in decentralized innovation.

Danny Chong

Danny Chong is the co-founder of Tranchess, a multi-staking protocol, and the co-founder of Digital Assets Association Singapore, a non-profit organization supporting the convergence of TradFi and DeFi. With over 17 years of experience in investment banks, Danny previously held leading roles in trading, sales and management at leading French banks including BNP Paribas and Société Générale for the APAC region.