Ethereum is undergoing a profound transformation. Once a developer-centric experimental platform, it has evolved into the foundational infrastructure for DeFi and is now emerging as a strategic, long-term asset on corporate balance sheets. This shift prompts a critical question: what fundamentally drives the value of ETH?
This analysis breaks down Ethereum's technological evolution, economic model, and strategic positioning to uncover the core value proposition of ETH for long-term holders.
The DeFi Breakthrough: Ethereum's First Product-Market Fit
Ethereum's initial vision was to create a globally shared, trustless computing platform. Its journey from a technical experiment to the backbone of decentralized finance (DeFi) was catalyzed by a key inflection point: achieving product-market fit (PMF).
During the 2018-2020 bear market, the emergence of core DeFi primitives—ERC-20 tokens, Uniswap, DAI, Aave, and Compound—collectively transformed Ethereum into a self-custodial, composable, and permissionless financial system. The "DeFi Summer" of 2020 was the climax of this PMF, with total value locked (TVL) soaring and on-chain transaction volumes briefly surpassing those of major centralized exchanges.
This explosion of utility demonstrated Ethereum's network value but also exposed its scalability limits, paving the way for its subsequent technical roadmap.
The Value Acceleration: EIP-1559 and The Merge
If DeFi demonstrated utility, two key upgrades fundamentally rewired ETH's value accrual mechanism: EIP-1559 and The Merge.
Implemented in 2021, EIP-1559 overhauled Ethereum's fee market. It introduced a base fee that is burned (destroyed) instead of being paid to miners. This created a direct correlation between network activity and ETH scarcity: the more the network is used, the more ETH is burned, reducing net inflation and creating a stronger value foundation.
In September 2022, Ethereum successfully executed The Merge, transitioning its consensus mechanism from Proof-of-Work (PoW) to Proof-of-Stake (PoS). This technically monumental achievement slashed energy consumption by 99.95% and reduced the annualized issuance rate needed to secure the network from approximately 4% to under 1%.
The combination of EIP-1559's burn and The Merge's reduced issuance led to periods of net negative inflation for ETH, transforming it into a potentially deflationary asset during times of high demand.
The Rollup Era: A Symbiotic Relationship
Ethereum's chosen path to scale is the Rollup-centric roadmap. Rollups execute transactions off-chain and post compressed data back to the main Ethereum chain (Layer 1), leveraging its security while dramatically increasing throughput.
This transforms Ethereum's primary role from a pure execution layer into a security and data availability (DA) layer. However, this shift altered value flow. While most user transactions now occur on Rollups (Layer 2s), reducing direct fee pressure on L1, it also sparked a "parasitic" narrative—suggesting L2s extract value without sufficiently contributing back to Ethereum's security budget.
In reality, Rollups are better understood as Ethereum's business expansion arm. They depend on L1 for security and data, and their growth brings vastly more users and transactions into the ecosystem. While direct L1 transaction demand may decrease, ongoing upgrades aim to increase L1's capacity by 100x or more, strengthening the foundation for all L2s. The relationship is symbiotic, not parasitic.
Analyzing Ethereum's Current Performance and Challenges
Since the 2022 market downturn, ETH's price performance has lagged behind assets like Bitcoin (BTC) and Solana (SOL). A key reason is that ETH's price is highly correlated with network fee revenue, which has seen slower growth. Three core factors explain this pressure.
Factor A: The Perceived "Parasitism" of Rollups
The argument is that Rollups profit from user fees but do not feed enough value back to Ethereum mainnet. Currently, this impact is minimal. Rollup weekly revenues are in the millions of dollars, not billions, partly because their lower costs allow for cheaper user fees. Furthermore, Ethereum's strategy of offering initially cheap DA space was a conscious decision to foster ecosystem growth—a necessary "land grab" phase in a competitive market.
Factor B: Strategic Focus Shift to DA, Perceived Neglect of L1
With the Rollup-centric roadmap, Ethereum's strategic focus and growth narrative shifted heavily toward L2s, potentially leaving L1 development under-resourced. This critique holds some truth. The "all-in" bet on Rollups was a pragmatic response to urgent scaling needs, but it may have led to underinvestment in parallel L1 scaling research. With hindsight, paths like zkEVM on L1 are becoming clearer. However, given the technological constraints at the time, the Rollup-first strategy was the most rational decision to solve congestion.
Factor C: DA Demand Has Not Yet Surpassed Supply
This is the most critical and overlooked factor. The demand for Data Availability (blob space) from Rollups has not yet exceeded Ethereum's supply.
Until the recent Pectra upgrade, Ethereum provided 3 blobs per block (approx. 210 TPS of DA capacity). For most of 2024, this supply outstripped demand. Even as demand grew, blob gas prices remained low, indicating the market was not strained. The Pectra upgrade doubled blob capacity to 6 per block, further increasing supply. Factor C is the fundamental variable influencing A and B. Only when Rollup demand for blobs consistently exceeds supply will blob fees become a significant and sustainable revenue stream for the network.
The Business Logic: How to Value ETH?
Is ETH a productive asset or a currency? We argue it must be first a productive asset, and secondarily a currency.
Ethereum's strongest moat is its technical advantage: a battle-tested foundation of trust and stability, decentralization that ensures neutrality and censorship-resistance, a leading DeFi ecosystem, a high-quality research and developer community, and robust network security. It is the "unstoppable world computer."
Its monetary value is strengthened by its utility as a productive asset. Relying solely on "ETH as money" narratives without a strong technological foundation is unsustainable.
In essence, ETH's price is a function of three components:
- The discounted value of future fee revenue.
- Monetary premium (as a store of value, medium of exchange, or unit of account).
- Speculative premium (including cultural and meme value).
While the latter two have a large influence, strengthening all three requires maximizing the underlying network revenue. This is the bedrock of ETH's value.
The Long-Term Rollup Strategy: Why It's the Right Bet
Ethereum's commitment to a Rollup-centric scaling roadmap is based on a clear rationale: it is the only architecture that can simultaneously deliver security, scalability, and neutrality.
From a supply perspective, Ethereum is the most secure and decentralized smart contract platform. Through validating bridges and its DA layer, it can "wholesale" its security to Rollups, allowing them to launch without building their own trust networks from scratch.
From a demand perspective, users don't care which chain they are on—they care about cheap and secure transactions. Long-term, the most rational choice for a new chain is to become a Rollup, purchasing security, DA, and consensus from Ethereum. This creates a powerful market convergence where Rollups naturally congregate around Ethereum's "neutral ledger" rather than fragmenting across isolated chains.
Ethereum vs. Solana: A Comparison
Some 2024 data suggested Solana was surpassing Ethereum in fee revenue. However, Solana's hardware-centric scaling model carries risks, with the network experiencing periodic congestion. To achieve its full potential of hosting global financial infrastructure, Solana would likely need to adopt a form of sharding, a path where Ethereum already has a significant head start in research and implementation.
Crucially, a large portion of Solana's on-chain activity has been driven by Memecoin trading, a volatile and potentially ephemeral phenomenon. Ethereum's activity is more heavily weighted toward established, high-stakes DeFi applications—a sign of more sticky, "real" financial behavior.
The most significant difference is decentralization. Ethereum boasts the most diverse and distributed validator set in the world. This decentralization is its ultimate moat.
Challenges to the Rollup Strategy
If the Rollup strategy is correct, why is ETH's price performance lagging?
Technically, the biggest flaw is the lack of native interoperability between Rollups, leading to a fragmented user and developer experience.
Strategically, the key issue is that Ethereum has not clearly communicated its Rollup business model:
- Short-term adoption strategy: How will it drive Rollup growth?
- Long-term moat: Why won't Rollups migrate to other, cheaper DA platforms?
The Rollup Business Strategy: Expansion, Differentiation, and Moat
1. Prioritize Expansion with Cheap, Abundant Data Availability
The blockchain scaling market is fiercely competitive. The winning strategy is to offer a superior product (security + decentralization) and expand the user base as quickly as possible by keeping prices low. Ethereum must keep DA prices inexpensive to minimize barriers to entry for Rollups. The current oversupply of blob space, while accidental, is effectively executing this strategy.
2. Solve Rollup Interoperability
Fragmentation is the biggest UX problem in the Rollup era. Solving interoperability is paramount to creating a unified user experience and is key to building a liquidity moat. Community efforts like ERC-7683 for fast cross-chain swaps are critical steps forward.
3. differentiation and Building the Moat
Ethereum must differentiate its DA service to attract marginal Rollup clients and build moats to lock in the ecosystem.
The key moats come from three network effects: trust, liquidity, and composability.
- Trust: Rollups using Ethereum DA inherit the highest security standard available. This is a powerful and defensible advantage.
- Liquidity: Ethereum L1 possesses deep, institutional-grade liquidity. By plugging into Ethereum DA, Rollups can tap into this entire ecosystem, dramatically improving capital efficiency.
The market will naturally push Rollups to use Ethereum DA to access this security and liquidity. Ethereum must reinforce these advantages.
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The Path to Value Accrual: From "Maximizing Fees" to "Maximizing Value"
Once Ethereum scales its DA capacity to millions of TPS (e.g., via technologies like PeerDAS) and the Rollup ecosystem is voluntarily and firmly anchored to it, Ethereum will generate significant fee revenue.
On Mainnet (L1), widespread DeFi and enterprise adoption will be primary drivers, amplified by Rollup growth. Rollups will also pay fees for interoperability and settlement services.
At the DA layer, the key to a sustainable economic model is establishing a minimum blob price. This involves monitoring overall Rollup revenue and setting a floor price that ensures a portion of that value is passed back to ETH holders.
For example, in a future where Rollups handle ~10,000 TPS for CeDeFi payments, generating billions in annual revenue, a minimum blob fee of $0.003 per transaction could generate approximately $1 billion in annual revenue for the network.
Extending this to cover high-frequency trading, social apps, and AI agent coordination at 30,000+ TPS could push DA fee revenue over $10 billion, all while keeping transaction costs under a cent.
This minimum price would likely be set by community consensus, similar to the gas limit mechanism today. The focus for now should not be on extracting maximum value from every transaction but on maximizing the amount of high-value activity on Ethereum and its Rollups. This will cement network effects and allow Ethereum to capture a dominant share of the expanding blockchain space market. The path to value accrual is clear.
Frequently Asked Questions
What is the primary driver of ETH's value?
ETH's value is a combination of its utility as a productive asset—capturing fees from network activity and securing the blockchain—and its monetary premium as a decentralized store of value. The long-term health of its value is tied to the growth of its underlying economic activity.
How did EIP-1559 change Ethereum's economics?
EIP-1559 introduced a fee-burning mechanism (the base fee). This means that during periods of high network congestion, more ETH is destroyed, reducing net issuance and potentially making ETH a deflationary asset, which strengthens its value accrual.
Are Layer 2 Rollups "parasitic" to Ethereum?
This is a mischaracterization. While Rollups handle execution off-chain, they rely entirely on Ethereum for security and data availability. Their growth expands the total Ethereum ecosystem, bringing in more users and applications, which ultimately benefits the entire network. The relationship is symbiotic.
What is Data Availability (DA) and why is it important?
Data Availability refers to the requirement that all data needed to verify a block is published and available to network participants. For Rollups, it means posting their compressed transaction data to Ethereum, so anyone can verify their state and ensure security. It is the core service Ethereum provides to L2s.
How does Ethereum's strategy differ from Solana's?
Ethereum prioritizes security and decentralization above all else, scaling via Layer 2 Rollups. Solana prioritizes raw speed and low costs by scaling a single monolithic chain through advanced hardware. The trade-off is that Ethereum offers stronger security guarantees, while Solana has experienced more network instability.
What needs to happen for Ethereum's value to increase significantly?
Sustained value growth requires a material increase in on-chain economic activity (driving fee revenue) and/or broader adoption of ETH as a monetary asset. Key catalysts include the adoption of Rollups for mainstream applications, solving interoperability between L2s, and establishing a sustainable model for DA fee capture.