Q3 revealed a challenging landscape for the crypto market, marked by low on-chain fees, rising Bitcoin dominance, and Ethereum’s struggle with inflation and underperformance.

Ethereum’s Identity Shift

Ethereum’s identity is shifting as it moves from a deflationary model to inflation, raising doubts about its role as a cryptocurrency amid the rise of layer 2 solutions and Bitcoin’s increasing market share. In a recent analysis, Lucas Outumuro, head of research at IntoTheBlock, noted that although on-chain fees have seen a slight rebound in September, Ethereum continues to grapple with substantial fee reductions that have hindered its performance.

“While fees have bounced back slightly in September, Ethereum’s trend towards substantially lower fees is a key contributor to ETH’s underperformance as the market effectively rejects the thesis of ETH as money.”

Bitcoin’s Steady Climb

Meanwhile, Bitcoin’s market share climbed to its highest level since April 2021, even as its price remained mostly stable throughout the quarter. As Ethereum and altcoins continue to reach new yearly lows, Bitcoin’s dominance becomes more apparent. Notably, Bitcoin’s fees plummeted by 86% over the quarter, reflecting a market that appears unfazed by this decline.

“The divergence between BTC and ETH’s price, while both of their fees plummeted, suggests one of them is being valued as money and the other one more closely tied to its cash flows.”

Impact of the Dencun Upgrade

The Dencun upgrade, which introduced EIP-4844, has had a significant impact on Ethereum’s economics. Although it spurred layer 2 transaction volumes, mainnet fees hit all-time lows, raising concerns about Ethereum’s deflationary narrative. Fewer fees mean less ETH is burnt, leading it to become inflationary again after the Ethereum community consistently focused on its deflationary path before that, Outumuro pointed out.

Ethereum’s Identity Crisis

Additionally, the ETH/BTC ratio has fallen nearly 30% since the Dencun upgrade, signaling an “identity crisis” for Ethereum, according to Outumuro. As of now, Ethereum is trading at $2,390, more than 50% below its all-time high from three years ago.

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