In recent months, ETH has lagged behind other cryptocurrencies as the Ethereum blockchain experiences heightened competition from alternative networks, according to a research report by JPMorgan. The Wall Street bank highlighted that unlike Bitcoin, which benefits from its status as a store of value and 'digital gold,' Ethereum lacks a similarly compelling narrative. The report suggests that despite Ethereum's upgrades, such as Dencun, substantial network activity has moved from its main blockchain to layer 2 solutions, posing challenges to its growth.
JPMorgan analysts, led by Nikolaos Panigirtzoglou, noted that competitive pressures are prompting some decentralized applications (dApps) to transition from Ethereum to chains optimized for specific applications.
This movement includes decentralized exchanges like Uniswap, dYdX, and Hyperliquid. Uniswap's anticipated shift to Unichain is particularly noteworthy, as it is among Ethereum's largest contributors to network fees. Its migration could, therefore, result in a marked decrease in Ethereum's fee revenue.
The report warns that this trend of dApps migrating to other layer 2s or alternative layer 1s could detrimentally impact Ethereum by reducing main network activity, thereby lowering transaction fees and validator income. Layer 2 solutions offer scaling efficiencies by operating on top of the base layer.
Consequently, fewer transactions could result in reduced token burning, possibly making Ether inflationary, the report explains.
While Ethereum continues to lead in areas such as stablecoins, decentralized finance (DeFi), and tokenization, it is falling behind in growth compared to competitors like Solana, which has recently witnessed a surge linked to memecoins. Nonetheless, the report suggests that Ethereum may experience increased institutional demand through tokenization initiatives, although competition is expected to remain fierce in the coming periods.