The Predicament of Ethereum: Analyzing Its Decline Through the Three-Pan Theory

Recently, the performance of Ethereum seems to be unsatisfactory, although it still maintains an advantage in terms of technology and developer base. Let us analyze this phenomenon in depth from the perspectives of supply and demand, using the three-tier theory.

Demand Side Analysis

The demand for Ethereum can be divided into two aspects: native and external.

The native demand mainly comes from new applications brought about by the development of Ethereum technology, such as the past ICO and DeFi waves. In this round of market, L2 and Restaking should have become the main driving forces, but the effects have not been significant. The L2 ecosystem overlaps heavily with the main chain, making it difficult to trigger explosive growth. Although Restaking projects have locked ETH, they have not created new ETH-denominated assets; instead, they are often priced in USDT on exchanges.

The burning mechanism introduced by EIP1559 was originally another support point for demand. However, as L2 has diverted a large number of transactions, the burning amount on the main chain has significantly decreased, weakening the demand for ETH.

In terms of external demand, the macro environment has shifted from a loose state in the previous cycle to a tight one in this cycle. At the same time, compared to the one-way purchases of the previous round of Grayscale Trust, the two-way operations of this round of ETFs have resulted in greater selling pressure on the market. Data shows that there has been a net outflow from ETH ETFs since their launch a month ago, in stark contrast to the continuous net inflow of Bitcoin ETFs.

Supply Side Analysis

Ethereum is essentially a dividend-type project, where the main selling pressure comes from new supply in both the POW and POS stages. However, after the transition to POS, the cost structure of supply has fundamentally changed.

In the POW era, miners face fixed costs (such as mining equipment investment) and incremental costs (such as electricity fees, hosting fees, etc.). These costs are denominated in fiat currency and are non-refundable, establishing a price floor for Ether.

In the era of POS, the cost structure for validators has changed. The costs for validation nodes can be diluted by an unlimited amount of staked Ether, and stakers have almost no actual expenses apart from opportunity costs. This has led to the absence of a clear "shutdown price," allowing stakers to sell the obtained Ether without restrictions.

Historical Lessons and Future Reflections

The root of Ethereum's current predicament can be traced back to the end of the ICO era in 2018. At that time, a large number of projects indiscriminately sold ETH, leading to a price crash. To prevent similar situations from happening again, the Ethereum community has strengthened its guidance and control over ecological development.

However, this approach has also brought new problems: the split rate is too low, resulting in fewer projects that can obtain substantial liquidity; "halal" projects receive high valuations, but their market beta performance is not as good as that of other public chains.

At the same time, the development of L2 has weakened the burning effect of the main chain, and the POS mechanism has brought about low-cost selling pressure. These factors combined have led to the current predicament of Ethereum.

Revelation

1. For dividend-type projects, establishing a reasonable cost structure is crucial. Ideally, fixed and incremental costs should be formed in fiat currency, and the cost line should be raised as asset liquidity improves to maintain the lower limit of asset prices.

2. Controlling sell pressure is only a short-term strategy. In the long run, the key is to transform the native currency into a priced asset, making holdings not solely reliant on the increase in the currency's price itself, thereby expanding the demand base and liquidity.