Ethereum's Eroding Value Capture in a Layer 2-Dominated Ecosystem: Capital Reallocation and Structural Market Rotation in 2025

The Ethereum ecosystem in 2025 is undergoing a profound transformation. What began as a strategic pivot to Layer-2 (L2) scaling solutions has evolved into a systemic reallocation of value, reshaping the network's economic dynamics and challenging its long-term value accrual. As L2s like Base, Arbitrum, and Optimism capture a disproportionate share of transaction fees and user activity, Ethereum's mainnet is increasingly relegated to a settlement layer, with cascading implications for its inflationary pressures, capital flows, and competitive positioning against Bitcoin.

The L2 Surge: A New Economic Paradigm

Ethereum's transition to a Layer-2-centric model has been catalyzed by the Dencun and Fusaka upgrades, which introduced blobspace and PeerDAS to reduce data availability costs. These innovations have enabled L2s to process transactions at near-zero marginal costs, with Base alone generating $98 million in user fees in 2025 while paying just $4.9 million in settlement costs to Ethereum. This stark profit margin-over 94%-highlights the extractive potential of L2s, which now dominate 80% of Ethereum's transaction volume.

The economic consequences for Ethereum's mainnet are dire. Total on-chain fees have plummeted from over $30 million post-Dencun to $500,000 by late 2025, reducing the rate of ETH burn to ~100 ETH/day and pushing the network's annualized inflation rate to +0.78%. This inversion-where Ethereum's base layer generates less revenue than its L2s-marks a structural shift in value capture. While L2s expand Ethereum's utility, they also siphon economic value away from the mainnet, creating a tension between scalability and native token economics.

Structural Rotation: Ethereum vs. Bitcoin

The erosion of Ethereum's on-chain value capture is occurring against a backdrop of broader market rotation. Bitcoin, by contrast, has maintained resilience in its value accrual, with on-chain transaction costs dropping 90% in 2025 due to network optimizations. Despite a decline in market cap dominance from 64% to 56%, Bitcoin's role as a store of value remains unchallenged, while Ethereum's ecosystem has fragmented into a hybrid model where L2s compete for user attention and capital.

This divergence is evident in the ETH/BTC price ratio, which surged 62% in Q3 2025 as Ethereum-based DeFi and DEXs captured $6.1 billion in revenue-a 113% year-over-year increase. However, this growth is concentrated in L2s, not Ethereum's mainnet. For instance, Ethereum's dominance in decentralized exchange volume (87%) persists, but this is largely driven by L2s like Arbitrum and Optimism, which handle the bulk of trading activity. Meanwhile, Bitcoin's simplicity and security continue to attract institutional capital, with Ethereum ETFs amassing $28.6 billion in assets under management by Q3 2025.

Divergent Sector Performance and Long-Term Implications

The sectoral split between Ethereum and Bitcoin underscores a deeper structural reallocation. Ethereum's strength lies in programmability and composability, with DeFi and NFTs generating $74.28 million in monthly fees in July 2025. However, these high-value use cases are increasingly decoupled from the mainnet's fee economics. For example, while Ethereum retains 87% of DEX trading volume, the actual transaction execution occurs on L2s, leaving the mainnet to serve as a final settlement layer with minimal revenue.

Bitcoin, by contrast, benefits from a more straightforward value capture model. Its block rewards and fixed supply create a deflationary tailwind, while its role as a global reserve asset insulates it from the volatility of application-layer competition. Ethereum's Pectra upgrade-aimed at doubling blob capacity and reigniting demand-may temporarily stabilize its value accrual, but it cannot reverse the fundamental tension between L2 efficiency and mainnet economics.

Conclusion: A Fork in the Road

Ethereum's 2025 landscape is defined by a paradox: a thriving ecosystem built on its own infrastructure, yet a mainnet struggling to retain economic value. The rise of L2s has democratized access to Ethereum's security and composability, but it has also fragmented the network's revenue streams. For investors, this raises critical questions about the sustainability of ETH's long-term value accrual. While Ethereum's dominance in DeFi and NFTs remains intact, its ability to compete with Bitcoin's resilience will depend on whether the mainnet can reassert itself as a value sink-or if it will continue to cede ground to a proliferating array of L2s.

In the end, the 2025 market rotation reflects a broader truth: capital flows to efficiency. Ethereum's L2s have proven themselves as scalable, cost-effective solutions, but their success may come at the expense of the very network that birthed them.