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

Q3 revealed a challenging landscape for the crypto market, marked by low on-chain fees, rising Bitcoin dominance, and Ethereum’s struggle with inflation and underperformance.

Ethereum’s (ETH) identity is shifting as it moves from a deflationary model to inflation, raising doubts about its role as a cryptocurrency amid the rise of layer 2 solutions and Bitcoin’s (BTC) dominance.

In an X article on Oct. 4, IntoTheBlock’s head of research Lucas Outumuro noted that although on-chain fees have seen a slight rebound in September, Ethereum continues to grapple with substantial fee reductions that have hindered its performance.

“While fees have bounced back slightly in September, Ethereum’s trend towards substantially lower fees is a key contributor to ETH’s underperformance as the market effectively rejects the thesis of ETH as money.”

Lucas Outumuro

Meanwhile, Bitcoin’s market share climbed to its highest level since April 2021, even as its price remained mostly stable throughout the quarter, Outumuro says, adding that Ethereum and altcoins keep reaching new yearly lows. In the meantime, Bitcoin’s fees plummeted by 86% over the quarter, reflecting a market that appears unfazed by this decline.

“The divergence between BTC and ETH’s price, while both of their fees plummeted, suggests one of them is being valued as money and the other one more closely tied to its cash flows.”

Lucas Outumuro

The Dencun upgrade, which introduced EIP-4844, has had a major impact on Ethereum’s economics. Though it spurred layer 2 transaction volumes, mainnet fees hit all-time lows, raising concerns about Ethereum’s deflationary narrative. Fewer fees mean less ETH is burnt, leading it to become “inflationary again after the Ethereum community consistently focused on its deflationary path before that,” Outumuro pointed out.

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