Ethereum’s (ETH) underperformance is expected to continue as the second largest digital asset by market cap continues to suffer structural decline, says Standard Chartered’s head of digital assets, Geoff Kendrick.
This is mainly due to the expectation that Coinbase’s layer 2 blockchain, Base, will continue to erode away Ethereum's market cap.
Layer 2 blockchains were meant to improve scalability on the Ethereum blockchain but Standard Chartered estimates that Base has reduced Ethereum’s market cap so far by about US$50 billion ($66.6 billion).
In his Mar 17 report, Kendrick states that ETH is “at a crossroads” despite still being dominant across several metrics. As such, Kendrick has downgraded his end-2025 target price for Ethereum from US$10,000 to US$4,000.
The Dencun upgrade
Fees play a big part in Ethereum’s market cap and the Cancun-Deneb (Dencun) upgrade to the Ethereum network has negatively impacted the tokenomics of Ethereum due to the lower fee take from this upgrade.
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The Dencun upgrade, which was introduced back in Mar 2024, enabled rollup providers to store data more cost-effectively with the addition of ‘data blobs’ helping increase the overall data capacity of the Ethereum ecosystem. This reduced congestion and fees on the Ethereum mainnet by pushing more activity onto layer 2s.
Layer 2s: Positive or not?
Kendrick notes that at the time of the Dencun upgrade, reduced congestion on Ethereum’s mainnet would promote higher net issuance, which would lower net fees and this was beneficial to Ethereum in preventing users from choosing other blockchains due to excessively high fees.
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While Kendrick still thinks this sustainability point is valid, he is no longer of the view that layer 2s are a direct positive for ETH but rather more of a “best of a bad bunch” option.
Base is one of three main layer 2 blockchains operating on the Ethereum mainnet but unlike the two other layer 2 blockchains (Arbitrium and OP Mainnet), total value does not remain within the Ethereum ecosystem. This is the case as Coinbase, who is the owner of Base, takes for themselves about 80% of Base’s profits out of the Ethereum ecosystem.
The only value that remains within the ecosystem is the cost of revenue of around 20% of Base’s revenue which goes towards layer 1 settlement fees and payments to OP Mainnet in the form of Superchain fees.
Therefore, while the longer-term goal of improving scalability and making fees more competitive could lead to a more sustainable market share for Ethereum, Kendrick believes that Base’s dominating success as a layer 2 blockchain compared to Arbitrium and OP Mainnet could be fundamentally detrimental as it suggests that the market cap drain from Ethereum will continue.
Hope for a turnaround?
Market forces could help stop this structural decline eventually “especially if tokenisation of real-world assets (RWAs) can grow significantly over time,” says Kendrick.
Ethereum still holds dominance in terms of market share of tokenised assets of about 80% as it remains one of the most secure smart contract platforms.
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“Security is a top priority for traditional finance (TradFi) bringing RWAs on-chain,” Kendrick writes. With a dominant market share, Ethereum could capitalise on possible growth in tokenisation of RWAs as this sector could be willing to pay higher fees on the Ethereum mainnet to achieve security.
Another option would be for the Ethereum Foundation to take a more “commercial approach” and tax layer 2s operating in the Ethereum ecosystem which Kendrick believes remains an unlikely approach.
He maintains his view that ETH will rise from the current levels of US$1,900 as Bitcoin gains are expected to lift all large digital assets this year.
However, he also believes that Ethereum will underperform and that the Ethereum to Bitcoin ratio will drop from the current level of 0.0023 to 0.0015 by end-2027, the lowest level since early 2017.
