The Ethereum dilemma behind the Golden Worm Index: Why fundamental prosperity struggles to save the price

From extreme greed to fear based on the Crypto Fear & Greed Index, Ethereum experienced a classic “sentiment reversal” in 2025. Although Ethereum delivered impressive results in technology and ecosystem development, its price failed to rise accordingly, with market sentiment indicators diverging from fundamentals in a rare occurrence over the years.

In August, ETH price hit a historic high of $4.95K, with the market at extreme greed; by the end of the year, the price retreated to around $2.90K, a nearly 40% decline. Entering early 2026, ETH hovered around $3.02K, with an annual decline of -9.10%, and volatility remained high. But what’s most perplexing is that the improvement in fundamentals could not explain this price downturn.

The Collapse of the Deflation Narrative: How the Dencun Upgrade Broke Expectations

To understand the paradox between the Crypto Index and fundamentals, we must start with the Dencun upgrade on March 13, 2024.

This upgrade introduced EIP-4844, which provides a dedicated data availability layer for L2 via Blob transactions. The technical performance was near perfect—L2 transaction costs plummeted over 90%, significantly improving user experience on networks like Arbitrum and Optimism. However, token economics experienced a rapid reversal.

Under the EIP-1559 mechanism, ETH burn volume directly depends on network congestion. Dencun greatly increased data availability supply, but Blob space became oversupplied, causing fees to hover near zero for a long time. Before the upgrade, Ethereum’s daily burn could reach thousands of ETH; after, burn volume sharply declined, and the network shifted from deflationary to inflationary.

This completely overturned the “Ultra Sound Money” narrative(Ultra Sound Money). ETH, once a scarce asset that “becomes less with use,” reverted to a mildly inflationary asset. Many holders who bought based on the deflationary thesis exited en masse. A senior investor publicly questioned in the community: “I bought ETH because of deflation. Now that logic is gone, why should I still hold?”

This is the hidden driver behind the Crypto Index’s shift from extreme greed to fear—market participants discovered a fundamental expectation bias.

L2 Ecosystem Explosion vs. Mainnet Value Capture Imbalance: The Deep Contradiction the Crypto Index Fails to Reflect

The biggest debate in 2025 is: Is L2 Ethereum’s moat or a vampire?

From a financial perspective, the answer is concerning. The Base chain generated over $75 million in revenue in 2025, accounting for nearly 60% of L2 profits. In contrast, Ethereum L1’s protocol revenue was only $39.2 million (August data), less than a quarter of Base’s quarterly revenue. If Ethereum is viewed as a company, this sharp revenue decline with a high market cap appears excessively expensive to traditional investors.

“L2 is parasitic,” such market commentary is rampant.

But deeper analysis reveals a more complex reality. All economic activity on L2 is denominated in ETH; users pay Gas in ETH, and ETH is the core collateral. The more prosperous L2 is, the more liquid ETH as a “currency” becomes. This currency premium cannot be simply measured by L1’s Gas revenue.

Ethereum is transitioning from “directly serving retail” to “serving L2 networks”—a fundamental shift in business model that the market has yet to fully grasp. The Blob fees paid by L2 to L1 are essentially the cost of purchasing Ethereum’s security and data availability. Although current fees are low, with the proliferation of L2s, this B2B revenue model could be more sustainable than relying solely on retail B2C.

The problem is, traditional financial logic cannot interpret this business model shift, causing the Crypto Index to fail in accurately reflecting Ethereum’s true long-term value.

The Rise of Solana and the Departure of DePIN: Why Ethereum’s Competitive Landscape is Rebuilding

Without discussing competitors, it’s impossible to fully explain Ethereum’s predicament.

According to Electric Capital’s 2025 report, Ethereum remains the ecosystem with the most developers—31,869 active developers. But in the battle for new developers, Ethereum is losing ground. Solana’s active developers reached 17,708, an 83% increase year-over-year, and performed well among new developers.

More critically, the track is diverging. In the PayFi (payment finance) sector, Solana has established dominance with high TPS and low fees. The issuance of PayPal USD on Solana surged, and institutions like Visa are testing large-scale commercial payments on Solana.

In the DePIN (decentralized physical infrastructure) sector, Ethereum suffered a heavy blow. Render Network migrated to Solana in November 2023, and leading projects like Helium and Hivemapper also chose Solana. This is no coincidence—the fragmentation between L1 and L2, along with volatile Gas fees, has driven cost-sensitive infrastructure applications away.

But Ethereum is not entirely defeated. In RWA (real-world assets) and institutional finance, Ethereum maintains an absolute dominance. The $2 billion BUIDL fund by BlackRock operates mainly on Ethereum, and the stablecoin market on Ethereum accounts for 54% (about $170 billion). This demonstrates that traditional financial institutions prioritize Ethereum’s security when settling large assets.

Wall Street’s Cold Signal: Why ETFs Didn’t Save Ethereum

“The market doesn’t seem to get strong recognition from Wall Street,” this feeling is supported by concrete data.

Data from The Block shows that by the end of 2025, Ethereum ETFs had a net inflow of about $9.8 billion, while Bitcoin ETFs reached $21.8 billion. Why are institutional investors so “lukewarm” on Ethereum?

The core reason is: regulatory restrictions led to the delisting of spot ETFs with staking features in 2025. The native 3-4% staking yield of Ethereum was a key competitive advantage against US Treasuries, but for clients of BlackRock or Fidelity, holding a “zero-yield” risk asset is less attractive than directly holding US Treasuries or high-dividend stocks. This creates a “ceiling” on institutional capital inflows.

A deeper issue is the ambiguous positioning. In the 2021 cycle, institutions viewed ETH as the “tech stock index” of the crypto market—high beta assets expected to outperform BTC in bull markets. But this logic no longer holds in 2025. Risk-averse institutions prefer BTC, while those seeking high returns shift to other high-performance chains or AI tokens. ETH’s “alpha” returns are no longer clear, causing the institutional asset allocation indicator in the Crypto Index to continue declining.

However, institutional sentiment toward Ethereum is more like “strategic approval, tactical hesitation.” The BUIDL fund of BlackRock operates entirely on Ethereum, indicating that when settling multi-hundred-million-dollar assets, institutions still trust Ethereum’s security and legal certainty.

Five Major Turning Points: Can Ethereum Break the Crypto Index Curse in 2026?

Given the current downturn, what mechanisms could enable Ethereum to reverse its fortunes?

Staking ETF breakthrough is the first turning point. The 2025 ETFs are only “semi-finished”; institutional holders cannot earn staking yields. Once a staking ETF is approved, ETH will instantly become a dollar-denominated asset with an annual yield of 3-4%. For global pension funds and sovereign wealth funds, this kind of asset combining technological growth and fixed income will become a standard allocation.

RWA explosion is the second catalyst. In 2026, with more government bonds, real estate, and private equity assets on-chain, Ethereum will carry trillions of dollars of assets. While this may not generate high Gas fees, it will lock in vast amounts of ETH as liquidity and collateral, significantly reducing circulating supply.

Supply-demand reversal in the Blob market is the third mechanism. Currently, Blob space utilization is only 20%-30%. As blockbuster applications (like Web3 games and SocialFi) emerge on L2, Blob space will gradually saturate. Liquid Capital’s analysis suggests that by 2026, Blob fees could contribute 30%-50% of ETH’s total burn, pushing ETH back into a deflationary trajectory.

Breakthroughs in L2 interoperability are the fourth driver. Optimism’s Superchain and Polygon’s AggLayer are building unified liquidity layers. More importantly, shared sequencers based on L1 technology will allow all L2s to share a single decentralized sequencer pool. When users switch between Base, Arbitrum, and Optimism as if switching apps, the network effects of the Ethereum ecosystem will explode exponentially.

The 2026 roadmap is the fifth long-term support. Glamsterdam (first half) will optimize execution layers, greatly improving developer efficiency and security. Hegota (second half) and Verkle Trees are key to the final stage—allowing stateless clients to run, enabling users to verify the network on mobile phones or browsers without downloading terabytes of data. This will position Ethereum far ahead of all competitors in decentralization.

Conclusion: From Retail Platform to Global Financial Infrastructure Transformation

Ethereum’s poor performance in 2025 is not due to failure but a painful transformation from a “retail speculative platform” to a “global financial infrastructure.”

It sacrificed short-term L1 revenue for unlimited scalability via L2; sacrificed short-term price explosion potential for a compliance moat for institutional assets. This is a fundamental shift in business model—from B2C to B2B, from earning transaction fees to building a global settlement layer.

Although the Crypto Index is currently in the fear zone, this is precisely the market’s misreading of the long-term trend. Ethereum is like Microsoft in the mid-2010s transitioning to cloud services—its stock price is temporarily subdued, facing emerging competitors, but its deep network effects and moats are accumulating strength for the next phase.

The question is not whether Ethereum can rise, but when the market will recognize the true value of this transformation.