Ethereum’s Market Dominance Drops to 2020 Lows - What’s Behind the Decline?

Analysts Weigh In on ETH’s Struggles as Layer-2 Growth, Regulatory Concerns, and Technical Issues Take Center Stage

Ethereum (ETH), the second-largest cryptocurrency by market capitalization, is going through a rough patch, marking what could be its worst quarter on record. Despite broader market stagnation, Ethereum's performance stands out as particularly weak, raising serious concerns among analysts and investors.

Ethereum Faces Heavy Sell-Offs

Ethereum’s price has taken a severe hit, losing over 44% of its value in the first quarter of 2025. Data also reveals an unprecedented wave of sell-offs over the past three months, with CryptoQuant CEO Ki Young Ju attributing this downturn to intense selling pressure.

As a result, Ethereum's market dominance has plummeted. According to CoinMarketCap, ETH now holds just 8.5% of the crypto market - its lowest level since 2020. This sharp decline has sparked widespread discussion, with Tron founder and Huobi Global advisor Justin Sun bluntly asking, “What exactly happened to Ethereum?”

Layer-2 Growth - A Double-Edged Sword?

One key factor contributing to Ethereum’s struggles is the rise of Layer-2 (L2) scaling solutions. While L2 networks reduce congestion and improve scalability on Ethereum’s mainnet, they don’t seem to be benefiting ETH’s price performance.

Crypto analyst Camila Russo highlighted this issue, stating, “There’s a path to fix Ethereum L2 fragmentation and horrible UX. But I still don’t see how all this L2 activity gets reflected on the Ethereum mainnet. Layer 2s are getting Ethereum security for free right now, only paying for block space, which they will pay even less for with larger blobs.”

Essentially, while Ethereum remains the backbone for many blockchain applications, its value capture mechanisms appear weak. This means that even with growing adoption, ETH’s price continues to decline.

Technical Concerns and Ethereum’s Long-Term Viability

Beyond Layer-2 scaling issues, some developers are questioning Ethereum’s fundamental technical structure. A prominent developer, known as Uncle Rockstar Developer, harshly criticized the network, calling it “an absolute garbage dumpster fire.”

He argued that Ethereum has strayed far from its original vision as a decentralized world computer. “To mask foundational failings, pointless complexity kept being added on top… which now and then rears its ugly head in hacks like the one that cost Bybit 400,000 ETH (~$1.5 billion),” he stated.

The developer also took a jab at Ethereum’s governance, claiming it has become centralized, primarily benefiting co-founder Vitalik Buterin.

The Missing Narrative - Has Ethereum Run Out of Steam?

Another key issue weighing on Ethereum is the lack of a compelling narrative. Blockstream advisor Tuur Demeester bluntly put it: “It ran out of stories.”

He referenced a warning he gave back in 2017, suggesting that cryptocurrencies reliant on hype rather than utility would eventually struggle. According to Demeester, Ethereum’s challenge is that new market narratives emerge faster than ETH can adapt, leaving it behind in the crypto space.

Regulatory Uncertainty and Institutional Hesitation

Adding to Ethereum’s woes is its uncertain regulatory standing. Unlike Bitcoin, which is widely accepted as a commodity, Ethereum’s staking and yield-generating features put it at risk of being classified as a security.

Fund manager Francisco Quartin de Macedo pointed out that since Ethereum’s Merge upgrade, its monetary policy has become unclear. Instead of ushering in a deflationary trend, lower network activity has led to inflationary pressures.

Macedo also noted that Ethereum lacks the strong institutional backing that Bitcoin enjoys. Bitcoin ETFs have brought a surge of interest in BTC, while Ethereum struggles to position itself as a go-to institutional asset.

“TBH [to be honest] still feels like the institutional choice, just not clear what that means for the price,” Macedo remarked.

Ethereum’s fragmented Layer-2 ecosystem and regulatory uncertainty have discouraged some investors from making long-term bets on ETH, further dampening its outlook.

Can Ethereum Bounce Back?

Despite Ethereum’s struggles, there are some glimmers of hope. While ETH’s price has been underperforming, staking activity is on the rise, signaling confidence among long-term holders. However, without clear catalysts or structural changes, Ethereum may continue to lag behind other major cryptocurrencies in the near future.

For now, all eyes are on whether Ethereum can address its scaling challenges, regulatory concerns, and lack of a strong narrative - or if its market dominance will continue to erode.