The future of Ethereum (ETH) is at a pivotal juncture, with the anticipated approval of a spot ETF poised to reshape market dynamics. According to Grayscale Research, while Ethereum stands to benefit significantly from increased institutional adoption, its price upside may be constrained by current valuations. Meanwhile, Solana (SOL) is emerging as the most formidable competitor, threatening to erode Ethereum’s dominance in the smart contract platform space.
This analysis dives into the structural shifts within Ethereum’s ecosystem, the implications of Layer 2 (L2) growth, tokenomics, ETF demand projections, and the growing competitive pressure from Solana—all based on comprehensive insights from Grayscale’s latest report.
Ethereum’s Transition to a Modular Architecture
Following the major Cancun upgrade in March 2024, Ethereum has accelerated its shift toward a modular blockchain architecture. This design philosophy separates core functions—execution, settlement, consensus, and data availability—into specialized layers that work in tandem.
Layer 2 networks now play a central role in this new paradigm. They process transactions off the mainnet (L1), then post compressed data back to Ethereum for finality. This approach retains Ethereum’s unmatched security and decentralization while drastically improving scalability and reducing costs for end users.
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The results are already evident: approximately two-thirds of Ethereum’s total on-chain activity now occurs on L2s. From DeFi trading to NFT minting and gaming, user adoption across Optimism, Arbitrum, Base, and zkSync has surged. This migration marks a maturation phase for Ethereum—one where scalability no longer hinges solely on L1 throughput.
Impact of L2 Growth on Ethereum’s Revenue Model
While L2 adoption boosts usability, it introduces challenges for Ethereum’s token economics. As transaction activity moves off-chain, fee revenue collected directly on the L1 has declined.
Ethereum relies on transaction fees to fuel its deflationary mechanism through EIP-1559, which burns a portion of every fee. When network demand is high, more ETH is burned than is issued as block rewards—leading to supply contraction. However, with fewer transactions occurring on L1, burn rates have slowed, and ETH supply has begun increasing again.
Although L2s still pay fees to publish data blobs on Ethereum (via EIP-4844), these costs are minimal compared to full on-chain execution. As a result, the economic footprint of L2 activity on the mainnet remains limited.
To sustain long-term value accrual, Ethereum needs either:
- A moderate rise in high-value L1 transactions (e.g., large settlements, institutional use cases), or
- Explosive growth in L2 volume that translates into meaningful blob fee income.
Without one of these drivers, ETH’s deflationary pressure could remain weak—potentially dampening investor sentiment despite strong ecosystem activity.
Revitalizing Ethereum’s On-Chain Revenue Streams
Grayscale emphasizes that sustainable ETH price appreciation requires stronger revenue generation at the base layer. The ideal scenario involves a balanced ecosystem where:
- L1 handles low-frequency, high-value operations, such as large asset transfers, institutional settlements, or critical smart contract interactions.
- L2s manage high-frequency, low-cost interactions, like retail payments, microtransactions, and social apps.
Certain asset classes already reflect this trend. For example:
- Over 70% of tokenized U.S. Treasury bonds are issued on Ethereum, drawn by its security and regulatory visibility.
- High-value NFTs continue to reside on L1 due to their infrequent trading and need for maximum trustlessness.
- Bitcoin ordinals and BRC-20 tokens also increasingly interact with Ethereum via bridges and wrapped assets.
This hybrid model could help stabilize and gradually grow Ethereum’s fee market—even as most users operate on L2s.
Spot ETF Outlook: Demand Potential vs. Supply Constraints
One of the biggest catalysts for ETH in 2025 is the potential approval of a spot Ethereum ETF in the United States. Grayscale expects such a product to significantly boost demand by giving traditional investors easy access to ETH without custody risks.
Drawing parallels with existing crypto ETPs outside the U.S., Grayscale notes that ETH-based products typically capture 25–30% of the net inflows seen by Bitcoin ETPs. If applied to the U.S., this suggests Ethereum ETFs could see $3.4 billion to $4.1 billion in net inflows—assuming Bitcoin ETFs maintain their current pace (which surpassed $13.7 billion since January 2025).
Even though ETH futures currently represent only about 5% of BTC futures volume in U.S. markets, Grayscale argues this underrepresentation doesn’t reflect true underlying demand. Spot ETFs often attract different investor profiles than derivatives, particularly long-term holders and institutions.
Limited Float Amplifies Price Sensitivity
A key factor magnifying ETF impact is supply scarcity. Approximately 50% of circulating ETH is locked long-term, distributed as follows:
- 27% staked in the Beacon Chain
- 11% locked in smart contracts (e.g., liquidity pools, escrows)
- 6% untouched for over five years
- 3% held in ETPs
- 0.7% in foundation/governance treasuries
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This leaves just half the supply actively circulating—and available for ETF purchases. Any sustained buying pressure from ETFs will therefore concentrate on a much smaller pool of sell-side liquidity, potentially amplifying price movements.
Solana Emerges as Ethereum’s Primary Challenger
Despite Ethereum’s strengths, Grayscale identifies growing competition—particularly from Solana (SOL). The report highlights Solana as the most likely candidate to capture market share from Ethereum over time.
Unlike Ethereum’s modular approach, Solana employs an integrated (monolithic) architecture, where execution, settlement, consensus, and data availability all occur on a single Layer 1. This enables extremely fast and low-cost transactions—ideal for consumer-scale applications.
Market indicators support this shift:
- The SOL/ETH exchange rate has rebounded sharply and is nearing its previous cycle high.
- In 2024, Solana outperformed Ethereum across multiple metrics: daily active addresses, transaction volume, and DeFi TVL growth.
- Projects in gaming, social media, and meme coins have flocked to Solana due to lower barriers to entry.
Grayscale suggests that while short-term price action may be stabilized by the ETH ETF launch, long-term dominance will depend on each chain’s ability to grow on-chain revenue. If Solana continues expanding its developer base and economic activity at current rates, it could challenge Ethereum’s position as the leading smart contract platform.
Frequently Asked Questions (FAQ)
Q: Will an Ethereum spot ETF definitely be approved?
A: While not guaranteed, regulatory momentum has strengthened in 2025. Several major asset managers have filed amendments with the SEC, and industry observers expect a decision within the year.
Q: Why does L2 growth reduce Ethereum’s revenue?
A: Because most transaction fees are collected on L2s and only minimal “blob fees” are paid to post data on Ethereum L1. This shifts value away from the base layer.
Q: How does staking affect ETH supply?
A: Over 27% of ETH is staked and currently illiquid under proof-of-stake rules. While withdrawals are possible, most stakers hold long-term, reducing available supply.
Q: Is Solana safer than Ethereum?
A: Ethereum remains more decentralized and battle-tested over time. Solana prioritizes speed and cost-efficiency but has experienced past network outages during peak load.
Q: What drives the SOL/ETH price ratio?
A: Investor sentiment, relative ecosystem growth, developer activity, and differences in on-chain revenue generation all influence this cross-chain valuation metric.
Q: Can both Ethereum and Solana coexist successfully?
A: Yes—many analysts believe in a multi-chain future where different platforms serve distinct use cases based on their technical trade-offs.
Final Thoughts: A New Era of Competition and Innovation
Ethereum stands at a crossroads. The arrival of a spot ETF could unlock massive institutional demand—but only if supply constraints and revenue challenges are managed effectively. Meanwhile, Solana’s rapid ascent underscores a broader trend: innovation in blockchain is accelerating, and leadership is no longer guaranteed by first-mover advantage.
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