Ethereum’s identity crisis deepens as inflation returns, analyst warns

Q3 presented a challenging environment for the crypto market, characterized by low on-chain fees, an increase in Bitcoin dominance, and Ethereum’s struggles with inflation and underperformance.

As Ethereum shifts from a deflationary model to an inflationary one, concerns are growing about its role as a cryptocurrency, especially in the context of rising layer 2 solutions and Bitcoin’s increasing market share. In a post on X on October 4, Lucas Outumuro, head of research at IntoTheBlock, highlighted that while on-chain fees saw a minor rebound in September, Ethereum continues to face significant fee reductions that have impacted its performance.

“Although fees have bounced back slightly in September, the trend toward substantially lower fees is a key factor in ETH’s underperformance, as the market appears to reject the notion of ETH as money,” Outumuro stated.

Conversely, Bitcoin’s market share has reached its highest level since April 2021, despite a relatively stable price throughout the quarter. Outumuro noted that while Ethereum and altcoins are hitting new yearly lows, Bitcoin’s transaction fees plummeted by 86% over the quarter, yet the market seems unaffected by this drop.

“The disparity between BTC and ETH’s price movements—despite both experiencing a decline in fees—suggests that one is being valued as money while the other is more closely linked to its cash flows,” he explained.

The Dencun upgrade, which implemented EIP-4844, has significantly affected Ethereum’s economics. Although it has boosted transaction volumes on layer 2, mainnet fees have reached all-time lows, raising questions about Ethereum’s deflationary narrative. Lower fees result in less ETH being burned, pushing it back towards inflation after the community had focused on a deflationary path.

Furthermore, the ETH/BTC ratio has dropped nearly 30% since the Dencun upgrade, indicating an “identity crisis” for Ethereum, according to Outumuro. As of the latest update, Ethereum is trading at $2,390, more than 50% below its all-time high from three years ago.