The Challenges and Opportunities of Ethereum in the Changing Landscape of Web3

After the Web3 craze subsided in 2021, Ethereum is facing severe challenges. The market's perception of Web3.0 has shifted, while emerging platforms like Solana are fiercely competing for remaining market share. Issues like Layer 2 fragmentation, declining value capture, dilution of ecological control, and lack of leadership are weakening Ethereum's user experience and economic value. As the discourse power of Layer 2 networks increases, Ethereum's influence is also being shaken. These factors have led to one of the most severe corrections in ETH prices in history.

Nevertheless, opportunities still exist. By promoting L2 interoperability, optimizing infrastructure centered around Ether, and adopting decisive performance-oriented leadership, Ethereum is expected to regain its glory. Its solid underlying architecture and vibrant developer ecosystem remain long-term advantages, but to restore ETH's excellence, strategic actions need to be taken swiftly.

The shift from the Web3.0 utopia to reality has prompted the market to reassess Ethereum's core value proposition. The once-promising ideal of a "user-governed decentralized internet" has now been replaced by a more ironic narrative: the cryptocurrency space is either a store of value game dominated by Bitcoin or has devolved into a digital casino. This reversal of sentiment has had a particularly significant impact on Ethereum, which has to confront the growing skepticism.

More critically, Ethereum is no longer the sole representative of the Web 3.0 vision. Regardless of the attitude towards the industry's prospects, other platforms are becoming new centers of crypto consumption activities. In this context, this article aims to analyze the most pressing strategic challenges currently facing Ethereum and propose feasible solutions to help it regain an advantage in the changing landscape.

Core Challenges

Ethereum faces many challenges, but the four most pressing issues are L2 network fragmentation, declining value capture ability, dilution of ecological control, and lack of strategic leadership.

L2 Network Fragmentation and User Experience Disconnection

The fragmentation of Layer 2 networks is the most significant crisis. Multiple competing execution layers have fragmented user experience and on-chain liquidity, eroding the composability advantages of the Ethereum mainnet, which remain evident in certain monolithic blockchains.

Users must deal with inconsistencies among various protocols, standards, and cross-chain bridges, making the initially promised seamless interaction of Ethereum difficult. Developers need to maintain multiple versions of protocols across multiple L2s, and startup teams also face the challenge of allocating limited resources in a decentralized ecosystem. As a result, many consumer-facing applications choose to turn to other platforms, where users and entrepreneurs can focus on entertainment and innovation without worrying about fragmented infrastructure.

Dilution of Ecological Control Rights: An Increasingly Serious Threat

Outsourcing the Ethereum scalability roadmap to L2 is weakening its control over the ecosystem. General-purpose L2 Rollups create strong network effects as they build their own ecosystems, gradually forming insurmountable moats. Over time, the voice of these execution layers is increasingly enhanced relative to the Ethereum settlement layer, and the community may gradually overlook the importance of the mainnet settlement layer. Once assets begin to exist natively on the execution layer, Ethereum's potential for value capture and influence will be significantly diminished, and the settlement layer may ultimately become a commoditized service.

Value Attribution Erosion: Structural Challenges

The rise of L2 has significantly affected the value capture of ETH, as these platforms increasingly dominate MEV and transaction fee revenue, greatly reducing the value flowing back to the Ethereum mainnet. This shift redirects economic benefits from ETH holders to L2 token holders, weakening the intrinsic motivation to hold ETH as an investment asset. Although this trend poses an inevitable challenge for any Layer 1 token, Ethereum experiences this phenomenon earlier and more noticeably due to its pioneering practice of the L2 centralized route.

It is foreseeable that when application layer-dominated MEV capture becomes the norm, not only individual blockchains will face similar dilemmas, but even L2 itself will encounter a value capture crisis. How to formulate precise strategies to address this structural challenge remains a core issue that urgently needs to be resolved.

Leadership Crisis: The Idealism Dilemma

Ethereum has exposed deep-seated strategic leadership flaws in responding to the aforementioned challenges. The community has long been mired in a repeated weighing of efficiency goals against egalitarian values, hindering critical progress. The adherence to a "trustworthy neutrality" governance commitment, while initially aimed at reducing regulatory and state crackdown risks, often becomes a constraint on strategic decision-making. Furthermore, ETH holders lack mechanisms to directly influence significant strategic choices, with their only means of expressing dissatisfaction often being the sale of tokens.

These issues may to some extent stem from considerations of regulatory pressure and national-level risks, rather than purely from deficiencies in governance and leadership.

Strategic Response: Challenges and Solutions

L2 Network Fragmentation: Self-Correcting Mechanism

There are two paths to resolve the L2 fragmentation crisis:

1. Rely on market mechanisms to achieve organic integration of the ecosystem, ultimately forming 2-3 general-purpose L2 dominant markets that occupy absolute activity. Other projects will either exit the competition or transform into Rollup service providers aimed at vertical scenarios.

2. By establishing strong interoperable standards, we can eliminate internal friction within the Rollup ecosystem and prevent a single execution layer from building a monopolistic moat.

Ethereum should seize the current window of influence that L2 still holds and promote the implementation of the second solution. It is important to recognize that this dominance is continuously diminishing on a daily basis; the slower the action, the weaker the strategic effectiveness. By constructing a unified L2 ecosystem, Ethereum is expected to regain the composability advantages of the mainnet era and compete directly with other single chains in terms of user experience.

Relying solely on market-driven integration will dim the future prospects of ETH. Once a power-law distribution emerges around 2-3 dominant execution layers, Ethereum's influence over these execution layers may significantly weaken. To avoid this situation, Ethereum must take decisive action to shape its own L2 ecosystem, ensuring that value and control are always tied to the mainnet and ETH.

Value Re-Capture Mechanism

Relying solely on the narrative of "productive assets" is not a sustainable long-term strategy for ETH (or any Layer1 token). The time window for Layer1 to dominate MEV capture is limited, and the trend of value capture levels continuously migrating upstream to the application stack has become established. At the same time, if ETH attempts to compete with BTC in the "store of value" space, it may be perceived by the market as the "poor man's Bitcoin." Even if ETH can demonstrate a significant advantage in value storage in the future, this transformation may take a long time. Therefore, Ethereum must carve out a unique narrative path to maintain its market relevance.

Positioning ETH as the "internet-native currency" and the highest quality on-chain collateral is the most promising direction for the next decade. Although stablecoins dominate as a payment medium in on-chain finance, they still rely on off-chain ledgers; the true internet-native and unstoppable currency role has yet to be substantively occupied, and ETH uniquely holds this first-mover advantage. However, to achieve this goal, Ethereum must regain control of the universal execution layer in the ecosystem and prioritize the promotion of ETH adoption.

Reclaim the Dominance of the Ecosystem

Re-establishing ecological ownership can be achieved through two key pathways:

1. Improve the performance of Ethereum L1 to reach a level comparable to centralized chains, ensuring that consumer applications and decentralized finance experiences are without delay.

2. Launch Ethereum native Rollup, focusing all business development and adoption efforts on this.

By focusing ecological activities on the infrastructure controlled by ETH, Ethereum can strengthen the core position of ETH in the ecosystem. This requires Ethereum to shift from the "ETH compatible" paradigm to an "ETH dominant" ecological model, prioritizing direct control over core resources and maximizing the value capture of ETH.

However, whether it is to regain ecological control or to strengthen ETH adoption rates, these are tricky decisions that may alienate certain key contributors. Ethereum needs to carefully weigh the balance between the demand for strengthened control and the risk of community division to ensure that ETH can successfully establish its new narrative as the cornerstone of the ecosystem.

Leadership Innovation

The leadership of Ethereum must innovate to address governance and strategic challenges. There is a need for a performance-oriented mindset, a stronger sense of urgency, and a pragmatic attitude to drive ecological development. This shift requires abandoning the previous excessive adherence to "trusted neutrality," especially when making decisive decisions regarding the product roadmap and ETH asset positioning.

The market has expressed dissatisfaction with Ethereum's practice of outsourcing key infrastructure to decentralized entities. To reverse this situation, Ethereum must bid farewell to the old model of "aligned with ETH" and shift to a new model of "led by ETH," ensuring that core infrastructure is unified under a single token system ($ETH). This move will further consolidate ETH's core position and restore market confidence in Ethereum's strategic direction.

The Core Advantages of Ethereum

Despite facing numerous challenges, Ethereum still possesses strong advantages that support its position in the cryptocurrency space:

Proven Infrastructure

Ethereum provides unparalleled decentralized security, meeting the stringent requirements of sovereign entities and large financial institutions. The security guarantees offered by its consensus mechanism far exceed those of other smart contract platforms, ensuring true resistance to censorship. The Ethereum DeFi ecosystem has accumulated massive value in guarantees, and significant security incidents are rare, with a time-tested security moat continuing to deepen.

Currently, the scale of stablecoins hosted on Ethereum has exceeded 120 billion dollars. With the regulatory environment gradually becoming clearer and institutional demand driving further growth of stablecoins, it is expected that the scale of stablecoins hosted on Ethereum will increase significantly over the next decade. This growth comes not only from new issuance demand but also from the market's trust in its security and composability, which may solidify its position as a cornerstone platform for global finance.

Forward-looking design

The architecture of Ethereum has significant foresight. It provides a more comprehensive transition plan against quantum attacks, and its continuously evolving technological culture drives innovation. Ethereum's flexible monetary policy allows it to adapt to market conditions while maintaining strong security incentives, ensuring long-term resilience.

Unparalleled Developer Ecosystem

Ethereum has the largest and most diverse developer community in the blockchain field, with nearly a decade of accumulated knowledge and best practices. This intellectual and social capital has built another layer of moat for the EVM ecosystem, allowing it to maintain a leading position in innovation speed and application scale.

Modular Path: The Only Solution for Scalable Decentralized Systems

The modular design of Ethereum has made significant progress in balancing decentralization, scalability, and security. This strategic choice is the only viable solution for achieving sustainable scalability while maintaining trust minimization and decentralization, and its correctness will become increasingly evident over time.

The most customizable technology stack

The L2 ecosystem of Ethereum offers unparalleled customizability, making it the preferred platform for vertical scenario applications and institutional adoption. Institutions can build dedicated L2s based on Ethereum L1, utilizing technologies such as fully homomorphic encryption for privacy protection; enterprises can replicate the traditional financial order flow payment mechanism on their own L2s through a "payment for ordering rights" model. These L2s are anchored to Ethereum L1, forming a unique security redundancy: even if a certain L2 fails, users can still revert to L1 for trustless settlement, and this "ultimate safety net" is a unique value proposition of the Ethereum ecosystem.

Market Signals and Future Outlook

The recent price trend of Ether