Ethereum faces numerous challenges, but still holds long-term investment value

The upcoming Cancun/Deneb upgrade of Ethereum is expected to significantly reduce the block space costs for Rollup operators, which may negatively impact Ethereum's revenue in the short term. As Rollup projects enhance their interoperability with other more powerful and cost-effective settlement and data availability chains, the performance of ETH may be affected.

In the long run, if the modular theory of blockchain is validated, the main network cost drivers of a layer-one public chain like Ethereum will be the second-layer Rollup service providers, rather than end users. Furthermore, as more second-layer public chains increasingly adopt account abstraction, the primary group holding Ether to pay for block space in the future may be Rollup operators, rather than ordinary users.

Since the beginning of 2023, transaction activity on Ethereum Layer 2 has more than doubled. Major Layer 2 sequencers such as Optimism, Base, and Arbitrum have generated $140 million in revenue from user fees. Looking ahead to 2024, the activation of the Cancun/Deneb upgrade will significantly reduce the cost of processing user transactions and completing transactions on Ethereum, which will improve the profit margins of Rollup sequencers while lowering Ethereum's fee revenue.

In the short term, Ethereum's revenue will still mainly come from transactions initiated directly by end users on L1. As L2 transaction costs continue to decrease, and with improvements in the decentralization and interoperability of Rollups, user adoption of L2 will increase. In addition, some cryptocurrency companies may choose to use alternative decentralized layers such as Celestia to reduce costs.

In the long term, as blockchain-based applications and services are widely adopted, Ethereum's revenue may increase, with the usage rate of Layer 2 expected to be 10 times or even higher than that of Ethereum. The lower L2 fees can bring new use cases for blockchain applications in various industries such as gaming, social media, entertainment, and sports. This will increase the overall demand for Ethereum's block space, thereby raising Ethereum's total revenue. At that time, Ethereum's main source of income will be providing services for Rollup as a settlement and data availability layer.

Despite the challenges, Ethereum's competitive advantage as the world's most decentralized general-purpose public blockchain may continue to attract new users. Some users may choose to execute transactions directly on Ethereum to take advantage of its unparalleled decentralization and security.

In the future, the development of re-staking protocols like EigenLayer may bring new revenue opportunities for Ethereum. This could increase the demand for ETH, not only from Rollup operators but also from DeFi applications and foundations.

Overall, despite facing some challenges in the short term, Ethereum's value positioning as an infrastructure layer remains solid in the long run. With the maturation of the Layer 2 ecosystem and the enhancement of Ethereum's own capabilities, it is likely that Ethereum will continue to maintain its dominant position in the cryptocurrency space.