Charles Esther
Ethereum (ETH) continues its upward trajectory toward the $5,000 milestone, with daily transaction activity reaching near record highs.
On Tuesday, the Ethereum network processed over 1.7 million transactions, according to data from Nansen, reflecting strong on-chain activity despite rising competition from other networks.
Layer-2 Networks Outperform Ethereum
Ethereum layer-2 networks like Arbitrum and Base recorded over 3.4 million and 8.6 million transactions, respectively, while Aptos, a competing layer-1 blockchain, hosted 3.8 million transactions on Monday.
This indicates that much of Ethereum’s traffic is shifting to alternative networks, reducing its market share and protocol revenue.
Active Addresses Show Flat Growth
Ethereum’s active addresses have remained largely stable, fluctuating between 400,000 and 600,000 since 2018, with occasional spikes above 1 million.
The data suggests that while transaction volume is high, user engagement growth is limited, as participants explore other blockchain options.
Rising Competition Threatens Market Share
The Ethereum network, once dominant in the smart contract space, is now facing increased competition from both internal layer-2 solutions and external high-throughput networks like Solana and Sui.
This competition is putting pressure on Ethereum’s fees, revenues, and user retention, forcing the network to rethink its strategy.
Declining Network Fees After Dencun Upgrade
Network fees on Ethereum’s base layer have fallen sharply since 2022, largely due to the Dencun upgrade in March 2024.
The upgrade lowered costs on layer-2 solutions, making them more attractive to users seeking cheaper transaction options, sometimes saving up to $50 per transaction during congestion periods.
Layer-2 Solutions Divert Users
As layer-2 networks provide lower fees and faster transaction speeds, Ethereum’s main network loses traffic to these alternatives.
This shift is affecting the overall revenue for Ethereum and impacting stakeholders’ incentives.
High-Throughput Layer-1 Networks Increase Pressure
Emerging blockchains like Solana and Sui are also capturing users’ attention, competing directly with Ethereum for mindshare and transaction volume.
The competition challenges the Ethereum Foundation to adapt its scaling and execution roadmap to maintain relevance.
Ethereum’s Strategy Under Review
Polygon Labs CEO Marc Boiron warned that attempting to directly compete with newer high-throughput networks on metrics like throughput could be risky for Ethereum.
Instead, the focus may shift toward enhancing Layer-2 ecosystems and optimizing smart contract execution rather than raw performance.
Ethereum Faces Misaligned Incentives
The combination of declining fees, competition from newer networks, and flat active address growth highlights misaligned incentives within Ethereum’s ecosystem.
Developers and stakeholders are considering new strategies to sustain engagement and preserve market dominance.
Ethereum Ecosystem Evolves Amid Challenges
Despite the challenges, Ethereum remains a leading smart contract platform, with Layer-2 solutions providing a bridge to scale usage and maintain its relevance in a crowded blockchain market.
The network’s ability to adapt will determine its future market position against faster, cheaper competitors.
