Challenges and Opportunities Facing Ethereum: Reshaping Web3 Leadership

As the Web3 craze fades, Ethereum is undergoing unprecedented challenges. The market's perception of Web3 has shifted, and emerging platforms are fiercely competing for market share. Issues such as the fragmentation of Layer 2 networks, a decline in value capture capabilities, decentralized control of the ecosystem, and a lack of leadership are eroding Ethereum's user experience and economic value. These factors have led to a sharp correction in ETH prices.

However, opportunities and challenges coexist. By promoting Layer 2 interoperability, improving infrastructure centered around Ether, and adopting a pragmatic leadership approach, Ethereum is still expected to regain its former glory. Its solid underlying architecture and active developer ecosystem remain lasting advantages, but to restore ETH's position, strategic action must be taken swiftly.

The idealism of Web3 has shifted to realism, forcing the market to reassess Ethereum's value proposition. The once hopeful vision of a decentralized internet has now been replaced by a more ironic narrative: the cryptocurrency space is either a store of value game dominated by Bitcoin or has devolved into a digital casino.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 change in sentiment has had a particularly significant impact on Ethereum, which must confront growing skepticism.

More seriously, Ethereum is no longer the sole representative of the Web3 vision. Regardless of the attitude towards the industry's prospects, it is evident that platforms like Solana are becoming new centers of crypto activity. Against this backdrop, this article aims to analyze the key challenges currently faced by Ethereum and propose feasible solutions to help it regain its leading position.

Core Challenges

Ethereum faces multiple challenges, but the most pressing issues include the fragmentation of Layer 2 networks, a decline in value capture capability, decentralization of ecosystem control, and a lack of strategic leadership.

The fragmentation of Layer 2 networks severely affects user experience. Multiple competing execution layers have disrupted on-chain liquidity, weakening the composability advantages of the Ethereum mainnet. Users have to deal with the differences in various protocols and standards, while developers need to maintain multiple versions across different Layer 2s, and startup teams face complex market strategies. This has led many user-facing applications to turn to integrated blockchains like Solana.

Worse still, Ethereum is outsourcing its scaling route to Layer 2, weakening its control over the ecosystem. Over time, the influence of Layer 2 relative to the Ethereum settlement layer continues to grow, which may lead the community to overlook the importance of the mainnet. Once assets begin to exist natively on the execution layer, Ethereum's value capture and influence will be significantly diminished.

The rise of Layer 2 has also significantly impacted the value capture of ETH. These platforms are increasingly taking up MEV and transaction fee revenue, leading to a substantial reduction in the value flowing back to the Ethereum mainnet. While this is a challenge faced by any Layer 1 token, Ethereum feels this impact earlier due to its pioneering practice of the Layer 2 approach.

In addressing these challenges, Ethereum has also exposed issues of insufficient strategic leadership. The community has repeatedly weighed efficiency against egalitarianism, delaying critical progress. The insistence on "trustworthy neutrality" in governance has often become an impediment to decision-making. ETH holders lack mechanisms to directly influence significant decisions and can only express dissatisfaction by selling their tokens.

Strategic Response

To address the fragmentation of Layer 2, Ethereum should seize the current influential window period to promote the establishment of strong interoperability standards. This will help eliminate internal friction within the ecosystem and prevent a single execution layer from forming a monopoly. By building a unified Layer 2 ecosystem, Ethereum is expected to regain the composability advantage of the mainnet era and compete with standalone chains in terms of user experience.

In terms of value recapture, positioning ETH as the "internet-native currency" and the highest quality on-chain collateral is the most promising direction for the next decade. To achieve this goal, Ethereum must regain control of the universal execution layer in the ecosystem and prioritize the promotion of ETH adoption.

Re-establishing the dominance of the ecosystem can be achieved through two avenues: first, by enhancing the performance of Ethereum Layer 1 to reach a level comparable to centralized chains; second, by launching Ethereum-native Rollups, focusing all business development and adoption efforts on this. This requires a shift from the "ETH compatibility" paradigm to an "ETH dominance" ecosystem model, prioritizing direct control over core resources.

In terms of leadership, Ethereum needs a performance-oriented mindset, a stronger sense of urgency, and a pragmatic attitude to drive ecological development. This requires abandoning excessive adherence to "trustworthy neutrality" and being more decisive when determining the product roadmap and ETH asset positioning. At the same time, it should bid farewell to the old model of "aligning with ETH" and shift to a new model of "led by ETH," ensuring that core infrastructure is unified under a single token system ($ETH).

The Core Advantages of Ethereum

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

1. Time-tested infrastructure: Provides unparalleled decentralized security, meeting the stringent requirements of sovereign entities and large financial institutions.

2. Forward-looking design: with a more comprehensive transition plan against quantum attacks, a flexible monetary policy ensures long-term resilience.

3. A massive developer ecosystem: possessing the largest and most diverse developer community in the blockchain field, with nearly a decade of accumulated knowledge systems and best practices.

4. Modular Path: Significant progress has been made in balancing decentralization, scalability, and security, making it a viable solution for sustainable expansion.

5. Highly customizable tech stack: The Layer 2 ecosystem offers unparalleled customizability, making it the preferred platform for vertical scenario applications and institutional adoption.

Market Signals and Future Outlook

The recent price trend of ETH reflects a lack of investor confidence. This sharp decline has only occurred six times in the ten-year history of ETH, with five of those instances happening in the early stages. Historical data shows that after the first five similar pullbacks, there was a strong rebound within six months, which injects hope into the current predicament.

To reshape its industry leadership and restore market confidence, Ethereum must take immediate action:

1. Enforce sound Layer 2 interoperability standards to alleviate fragmentation while maintaining seamless composability.

2. Shift from an "ETH-aligned" ecological model to an "ETH-led" one, prioritizing Layer 1 scalability and Ethereum native Rollups.

3. The leadership is evolving towards a performance-driven decision-making approach, unifying critical infrastructure under the $ETH token system.

If decisive action can be taken, Ethereum is expected to regain its glory; otherwise, it will face the risk of being eroded by competitors and becoming a commoditized settlement layer.