Ethereum has long been recognized for its versatility in hosting a wide range of applications and assets. However, the investment outlook for its native token, ETH, has become increasingly intricate. With significant protocol changes, such as the implementation of EIP-1559 and EIP-4844 through hardforks, investors are questioning how Ethereum’s growing adoption will impact ETH’s long-term value.
While the Ethereum platform has scaled, the direct connection between its growth and ETH’s supply and demand—and consequently its price—is no longer as clear-cut as it once was.
The Impact of EIP-1559: Connecting Utility to Token Value
In 2021, Ethereum introduced EIP-1559, fundamentally changing its economic model by burning the majority of transaction fees (base fees), permanently reducing ETH’s supply. This burn mechanism linked network usage directly to ETH’s deflationary pressure, creating upward momentum for its price. As Ethereum users transacted, the burn reduced circulating ETH, theoretically supporting a rising token value.
In 2023, CoinShares’ valuation model projected that if Ethereum generated $10 billion annually in L1 transaction fees—a level achieved during the 2021 market peak—ETH could potentially reach $8,000 by 2028. However, the landscape has shifted with the Dencun hardfork and the growing dominance of Layer-2 (L2) solutions, complicating ETH’s value potential.
The Rise of Layer-2 Solutions: A Double-Edged Sword
Layer-2 platforms were designed to scale Ethereum by offloading transactions from the main chain (L1) to faster and more cost-efficient networks. Initially, L2s complemented Ethereum’s base layer, helping manage network congestion during high-traffic periods. This allowed Ethereum to maintain balance while still burning ETH as part of the transaction fees.
However, with the introduction of “blob space” in 2024, L2s now have the ability to settle transactions on Ethereum’s L1 at a fraction of the cost. This innovation significantly reduced the need for expensive L1 fees, which in turn diminished the supply burn that EIP-1559 was intended to sustain.
As more activity migrates to L2s, the burn rate of ETH has slowed, and with it, the deflationary forces that supported its price. The steady decline in L1 transaction fees has raised questions about the distinction between services offered by L1 and L2, and what might drive L1 fees in the future.
Restoring the Burn or Adapting to New Realities
Despite these challenges, there are potential strategies to reignite demand for L1 transactions and subsequently restore ETH’s valuation.
One possibility is the development of high-value use cases that specifically require the security and reliability of L1, although this seems unlikely in the short term given current trends. Another option is that L2 adoption could grow so rapidly that the sheer volume of transactions compensates for the lower fees—but this would require extraordinary growth beyond current projections.
Perhaps the most controversial solution is repricing blob space to increase L2 settlement fees, thereby restoring some of the L1 burn. However, this could disrupt the economics of L2s, which have played a crucial role in Ethereum’s recent success and competitiveness against other platforms like Solana and Binance Chain.
The Uncertain Future of ETH’s Value
While L2s have scaled Ethereum and enhanced its ecosystem, they have also disrupted the mechanisms that tie ETH’s value to its utility. For investors, this means that ETH’s future now hinges on Ethereum’s ability to balance innovation with sound economic policies.
As Ethereum navigates this evolving landscape, ETH’s investment case remains unsettled, with significant risks as the community determines its next steps.
