Ethereum experienced a 45% drop from $4,950 in August to around $2,900 by December due to Layer 2 networks drawing mainnet activity. Ethereum ETFs saw $1.4B in outflows in November 2025, the largest monthly exit since their launch. Layer 2 networks now handle most Ethereum transactions, diverting sequencer revenue away from ETH holders.

The decline in Ethereum reflects deeper issues beyond market cycles, with activity shifting to Layer 2 networks and weaker institutional interest. Lower fees and burn pressure on the mainnet impact Ethereum’s value capture. Institutional money flows have slowed, with ETH facing challenges in reclaiming relevance in Web3 growth.

Ethereum’s recovery hinges on attracting economic value back to the mainnet through changes in Layer 2 design, user behavior, and market conditions. Revenue-sharing proposals from Layer 2 networks to ETH validators could boost staking yields. Large settlements and institutional operations moving back to Layer 1 would increase fees and burn rates.

Ethereum faces risks from technology adoption, liquidity conditions, and external competition, impacting its recovery path. Layer 2 dominance weakens Ethereum’s fee revenue and burning power. Higher interest rates and continued ETF outflows could trigger forced selling and drive ETH closer to support levels. Competition from high-speed chains poses a threat to Ethereum’s dominance.

Ethereum’s performance in 2026 will be shaped by Layer 2 growth, institutional capital flows, and on-chain economics. A bullish rally is possible if Layer 2 networks adopt revenue-sharing proposals, pushing ETH to $5,200-$6,420. However, stability between $2,500 and $2,800 may persist, with challenges in capturing value from Layer 2 ecosystems. Analysts expect slow recovery or deeper declines based on market conditions.

Read more at Yahoo Finance: Why Layer 2s Are Killing ETH’s Value