Ethereum Faces Price Pressure as Layer 2 Networks Expand Influence

Ethereum (ETH) has experienced significant price fluctuations in 2025, with its value declining from a peak of $4,953 in August to approximately $3,446 by November. This decline has been partly attributed to the rise of Layer 2 networks, which have reduced the Ethereum mainnet’s fee revenue and decreased the token burn rate. Following the Dencun upgrade, Ethereum’s daily gas fee revenue plummeted from over $30 million to around $500,000, as transaction costs on Layer 2 solutions fell by more than 90%.

The influence of Layer 2 networks on Ethereum has been profound. These solutions, designed to enhance transaction speed and lower costs, have also raised concerns about Ethereum’s long-term value proposition. As activities shift off the main chain, the reduction in fee revenues and token burns presents a challenging dynamic for Ethereum’s price stability and growth trajectory. Nevertheless, upcoming institutional upgrades, such as Fusaka and Pectra, may offer new avenues for recovery.

Understanding Ethereum’s Recent Price Trends

The past six months have been marked by volatility for Ethereum. Starting May 2025 at around $3,600, ETH surged to $4,953 by late August, only to see a sharp correction as traders capitalized on profits. By early November, the price had dropped to $3,064, reflecting a loss of nearly 39% from its summer high. This downturn underscores a shift in investor sentiment, balancing optimism about Layer 2 scalability with fears that these networks might be siphoning value away from the Ethereum mainnet.

Layer 2 networks like Arbitrum, Optimism, Base, and zkSync have transformed user engagement within the Ethereum ecosystem. Arbitrum leads with about 3.4 million daily transactions, while Base, operated by Coinbase, dominates retail activity with approximately 8 million daily transactions. Although these networks have significantly reduced congestion on the mainnet and enhanced transaction speed, they have also restricted the fee returns to ETH holders, raising crucial questions about the sustainability of Ethereum’s economic model.

The Dual Impact of Layer 2 Networks on Ethereum

Layer 2 networks have emerged as a critical growth engine for Ethereum, driving down transaction costs and expanding access to new users and business models. The Dencun upgrade in 2024 drove transaction costs to as low as $0.01 to $0.10, fostering a surge in decentralized finance (DeFi), non-fungible tokens (NFTs), and gaming. Platforms like Uniswap and Aave have reported increased liquidity and user engagement, demonstrating Ethereum’s capacity to evolve into a fast-paced financial ecosystem.

Furthermore, the influx of developers into Ethereum’s Layer 2 ecosystem has created a reinforcing cycle of innovation. Arbitrum, for instance, has attracted thousands of active users and retains over $7 billion locked across various projects. This growth not only bolsters Ethereum’s network effects but also lays the groundwork for ongoing advancements in DeFi and enterprise applications.

Despite these advancements, the rapid adoption of Layer 2 networks has introduced new economic challenges for Ethereum. Following the Dencun upgrade, mainnet revenues have dropped dramatically, with gas fees declining by nearly 99%. This has shifted Ethereum’s annual inflation rate from negative to slightly positive, raising concerns among investors who view ETH as a yield-bearing asset closely tied to network demand.

The value dynamics are shifting as Layer 2 networks retain a larger portion of the revenue generated. For instance, Coinbase’s Base chain reported profits exceeding $94 million but contributed only $4.9 million to Ethereum in the form of blob fees. This disparity prompts questions about whether Layer 2 networks are truly creating value or merely reallocating it away from the Ethereum mainnet.

The success of Layer 2 networks has paradoxically decreased demand for block space on the Ethereum mainnet. As more transactions occur off-chain, the associated fee burns diminish, undermining Ethereum’s scarcity narrative. Analysts from institutions like Standard Chartered have even revised their price projections for ETH, citing diminished fee burn as a significant risk.

Concerns about centralization have also emerged, as many Layer 2 solutions rely on centralized sequencers, which process and batch transactions, potentially conflicting with Ethereum’s foundational principles of decentralization. This has led to a cooling of institutional sentiment, evidenced by significant ETH outflows in October, notably from firms such as BlackRock.

Future Price Projections for Ethereum

Looking ahead to 2026, Ethereum faces a complex landscape characterized by both opportunities and challenges. The outcomes hinge on successful upgrades, institutional interest, and the evolving role of Layer 2 networks.

In a bullish scenario, Ethereum could see its price soar between $7,320 and $7,609 by late 2026. This outlook assumes that the Fusaka upgrade effectively enhances scalability and transaction speed, reigniting demand across both Layer 1 and Layer 2. Additionally, further institutional adoption through exchange-traded funds (ETFs) could drive steady capital inflows, bolstering Ethereum’s status as the leading platform for smart contracts.

Conversely, the base case anticipates moderate growth, with ETH potentially trading between $5,000 and $5,500 by late 2026. This projection assumes continued Layer 2 adoption but limited revenue return to the mainnet, keeping Ethereum as the preferred network for DeFi and tokenization, albeit with tempered investor enthusiasm.

The bearish outlook sees Ethereum potentially declining to $2,500 to $3,000 if Layer 2 adoption accelerates without new mechanisms to return value to ETH holders. Ongoing institutional outflows and decreased fee burns could further intensify selling pressure, indicating that while the ecosystem itself may remain robust, the token’s value could lag behind due to structural weaknesses in investor confidence.

Ethereum’s journey through these dynamics will be closely watched as it navigates its path in a rapidly evolving landscape, balancing the benefits of innovation against the complexities of its economic model.