From Changi Prison to Resurrection: How Ethereum Escaped the 2025 Income Paradox

In the early 1960s, a revolutionary prison reform experiment began on a small island south of Singapore. The warden, Daniel Dutton, firmly believed in the inherent goodness of human nature. He dismantled the “economic walls”—removing physical barriers, armed guards, and oppressive structures—replacing them with trust and freedom. Prisoners worked voluntarily, earned dignity through labor, and the recidivism rate dropped to just 5%. It seemed the impossible had been achieved. Yet on July 12, 1963, the dream turned to ash. Prisoners who had been granted unprecedented freedom revolted, burning the structures they had built and killing the idealist who had trusted them. The Changi Prison authorities learned a brutal lesson: removing all constraints doesn’t guarantee gratitude; it often invites exploitation.

Ethereum in 2025 lived through its own Changi moment.

In March 2024, Ethereum’s core developers launched the Dencun upgrade (EIP-4844), designed to be the network’s salvation. Like the prison reformers before them, they dismantled Ethereum’s expensive “economic walls”—the prohibitively high gas fees that had limited Layer 2 adoption. Their vision was utopian: flood Layer 2 networks with nearly free data storage (Blobs), and a thriving L2 ecosystem would reciprocate by flowing value back to Ethereum L1, creating a mutually beneficial economy.

But history rhymed. By 2025, L2 networks chose extraction over gratitude. Instead of feeding the mainnet, they silently “starved” it of revenue.

The Crisis: Ethereum Trapped Between Two Worlds

For much of 2025, Ethereum occupied an uncomfortable middle ground that left investors baffled and analysts questioning its future. The capital markets had already sorted cryptocurrencies into two clean categories: at one extreme were “digital commodities” like Bitcoin—narrative-driven stores of value with fixed supplies and macro appeal. At the other extreme were “tech stocks” like Solana—high-growth platforms monetizing user activity through transaction throughput. Ethereum attempted to occupy both simultaneously. It wasn’t Bitcoin; its supply dynamics were too complex, its staking mechanism too nuanced, and conservative institutions couldn’t comfortably classify it as “digital gold.” Yet it wasn’t Solana either.

The Ambiguity Ceiling: On technical metrics, Ethereum’s core measure—protocol revenue—collapsed. In Q3 2025, despite ETH touching near all-time highs, network protocol revenue plummeted 75% year-on-year to just $39.2 million. For institutional investors accustomed to valuing companies via price-to-earnings ratios or DCF models, this looked like a sign of business model failure. The narrative that had sustained ETH for years—“deflationary asset”—also crumbled. The large-scale migration of transactions from L1 to L2, combined with negligible ETH burning through Blobs, caused Ethereum’s annualized supply growth to rebound to +0.22%, stripping away its deflationary mystique.

Squeezed from Both Sides: Competitive pressure compounded the crisis. Bitcoin’s strategic reserve narrative, amplified by sovereign nation adoption and massive ETF inflows, further solidified BTC’s macro asset status. Meanwhile, Solana captured virtually all growth in payments, DePIN, AI agents, and memes through its monolithic architecture and negligible transaction costs. Data showed Solana’s stablecoin velocity and ecosystem revenue even surpassed Ethereum’s mainnet in certain months. Hyperliquid, dominant in the Perp DEX market, attracted whales with superior fee capture—leaving ETH in the dust. The market’s question became inevitable: If Ethereum’s value storage couldn’t match Bitcoin, its performance couldn’t match Solana, and its fee capture couldn’t match Hyperliquid, where exactly was Ethereum’s moat?

The Regulatory Breakout: From Ambiguity to Commodity Status

The identity crisis might have spiraled indefinitely, except regulatory clarity arrived unexpectedly. On November 12, 2025, SEC Chairman Paul Atkins delivered a watershed speech introducing “Project Crypto,” signaling an end to years of regulatory ambiguity.

Project Crypto’s Paradigm Shift: Atkins explicitly rejected the doctrine that “once a security, always a security”—a direct rebuke to his predecessors’ enforcement-by-ambiguity approach. His framework introduced “token taxonomy,” acknowledging that digital assets exist on a spectrum and can change categories as network conditions evolve. When a blockchain achieves sufficient decentralization such that token holders no longer depend on a centralized entity’s “essential managerial efforts” to generate returns, that asset escapes the Howey Test. Ethereum, with 1.1 million validators and the world’s most distributed node infrastructure, clearly qualified.

The Clarity Act Codification: In July 2025, Congress passed the Clarity Act for Digital Asset Markets. This legislation did what no amount of Ethereum Foundation lobbying could achieve—it legally reclassified digital assets. The act explicitly placed assets “originating from decentralized blockchain protocols,” specifically naming Bitcoin and Ethereum, under CFTC jurisdiction rather than SEC authority. This wasn’t semantic wordplay; it fundamentally restructured Ethereum’s regulatory treatment. Banks could now register as “digital commodity brokers,” offering custody and trading services for ETH to institutional clients. On bank balance sheets, ETH transitioned from “speculative, high-risk asset” to “commodity asset” comparable to gold or foreign exchange.

Staking Rewards and the Commodity Paradox: A critical tension remained: How could an asset generating staking returns still qualify as a “commodity”? Commodities like crude oil or wheat produce no yield—they incur storage costs. The 2025 regulatory framework resolved this through elegant layering:

• Asset Layer: ETH itself is a commodity, providing utility (network gas) and scarcity value.
• Protocol Layer: Native protocol-level staking constitutes “labor” or “service provision.” Validators earn rewards for securing the network, not from passive investment returns.
• Service Layer: Only custodial staking services offered by centralized institutions (exchanges, funds) that promise specific returns constitute investment contracts.

This distinction allowed ETH to retain “interest-bearing” characteristics while enjoying commodity regulatory exemptions. Fidelity’s research team coined the term “internet bond”—a productive asset possessing both inflation-hedge properties of commodities and bond-like yields. Institutional capital finally had permission to buy.

The Income Paradox: How Dencun Created Ethereum’s Changi Moment

With regulatory clarity achieved, Ethereum’s economic crisis came into sharper focus. The Dencun upgrade—initially heralded as salvation—had inadvertently sown the seeds of extraction.

The Blob Market Failure: EIP-4844 introduced Blob data transactions to reduce L2 costs exponentially. Technically, it succeeded spectacularly—L2 gas fees collapsed from several dollars to a few cents. Economically, it was disastrous. The Blob market pricing mechanism relied entirely on supply and demand. Because reserved Blob space vastly exceeded early L2 demand, the Blob Base Fee remained stuck at 1 wei (0.000000001 Gwei) for extended periods. This created an absurd disparity: Layer 2 networks like Base and Arbitrum captured hundreds of thousands of dollars in daily revenue but paid negligible “rent” to Ethereum L1—sometimes just a few dollars. Base, generating $300,000+ in revenue on peak days, paid Ethereum perhaps $2.

The Death of Deflation: As transaction volume migrated from L1 to L2, and as L2 networks failed to burn sufficient ETH through Blob usage, Ethereum’s deflationary mechanism effectively broke. The EIP-1559 burn mechanism became impotent. By Q3 2025, Ethereum’s supply growth rebounded to +0.22% annualized—a stunning reversal from previous deflationary years. This wasn’t merely a financial metric; it was the erosion of ETH’s core narrative. The market’s faith that ETH would become “ultra sound money” evaporated.

The Parasite Effect: The community coined an apt metaphor: the “parasite effect.” L2 networks fed on Ethereum’s security and settlement capabilities without providing proportionate economic sustenance. Like prisoners in the Changi reform experiment, given near-total freedom and resources, they chose extraction over reciprocity.

The Fusaka Salvation: Rebuilding the Value Chain

As 2025 progressed, doubt intensified around Ethereum’s sustainability. But the developer community—often characterized as aloof and ideologically rigid—surprised observers by pragmatically pivoting. On December 3, 2025, the long-anticipated Fusaka upgrade activated, introducing mechanisms specifically designed to rebuild L1’s value capture.

EIP-7918: Tying Blob Costs to Execution Layer Activity: The commercial centerpiece of Fusaka was EIP-7918, which fundamentally restructured Blob pricing. The upgrade introduced a “minimum price floor” mechanism—the Blob Base Fee could no longer collapse toward 1 wei. Instead, the minimum Blob fee was linked directly to Ethereum L1’s execution layer gas price, specifically at a ratio of 1/15.258 of the L1 base fee.

The implications were immediate and dramatic. As long as Ethereum mainnet remained active (driven by token offerings, DeFi transactions, NFT minting, or staking rewards), L1 gas prices would rise, automatically increasing the “floor price” for L2 networks to purchase Blob space. L2 users could no longer access Ethereum’s security and finality at near-zero cost. Post-upgrade, the Blob Base Fee skyrocketed approximately 15 million-fold, from 1 wei to the 0.01-0.5 Gwei range. While individual L2 transactions remained cheap (~$0.01), Ethereum’s protocol revenue increased roughly 1,000-fold. L2’s boom directly translated into L1’s revival.

PeerDAS (EIP-7594): Supply-Side Expansion: To prevent fee increases from strangling L2 growth, Fusaka simultaneously introduced Peer Data Availability Sampling. PeerDAS allowed nodes to verify data availability through random sampling of data fragments rather than downloading entire Blobs, reducing bandwidth and storage demands by ~85%. This breakthrough enabled Ethereum to dramatically expand Blob supply. The target Blob count per block would increase in stages from 6 to 14 or higher. By simultaneously raising the unit price floor (EIP-7918) and expanding total volume through technological innovation (PeerDAS), Ethereum created what analysts termed a “volume-and-price multiplication model.”

The B2B Business Model: Fusaka activated what can be termed Ethereum’s “B2B tax model based on security services”:

• Upstream (L2 Networks): Base, Optimism, Arbitrum, and others function as “distributors,” capturing end-user volume and processing high-frequency, low-value transactions.

• Core Products: Ethereum L1 sells two essential services:

  • High-value execution space: Settlement proofs for L2 transactions, complex DeFi atomic swaps, and validator coordination
  • Blob data space: Historical transaction data storage for L2 networks

• Revenue Flow: Through EIP-7918’s price floor mechanism, L2 networks now pay “rent” commensurate with the economic value they extract. The vast majority of this rent (denominated in ETH) is burned, compounding value for all ETH holders. A portion flows to validators as staking rewards.

• Virtuous Cycle: Increasing L2 prosperity drives greater Blob demand. Even if per-unit prices are modest, total volume is substantial, creating accelerating ETH burning, enhanced scarcity, improved network security, and attraction of high-value assets.

Renowned analysts estimate the upgrade will increase Ethereum’s ETH burn rate by approximately 8-fold in 2026.

Revaluation: Pricing a Multi-Dimensional Asset

With business model sustainability restored, Wall Street analysts faced a novel challenge: How does one value an asset that is simultaneously a commodity, a capital asset yielding cash flows, and a core DeFi collateral?

The DCF Perspective: Despite regulatory classification as a commodity, ETH generates measurable cash flows, enabling traditional Discounted Cash Flow analysis. 21Shares’ Q1 2025 research deployed a three-stage growth model extrapolating fee revenues and burning mechanics. Under conservative assumptions (15.96% discount rate), their DCF-derived fair value reached $3,998. Under optimistic scenarios (11.02% discount rate), valuations climbed to $7,249. Fusaka’s EIP-7918 mechanism provided empirical support for the “future revenue growth” assumptions in DCF models. Rather than fearing that L2 drainage would reduce L1 revenue to zero, analysts could now linearly project L1 income based on expected L2 ecosystem expansion.

The Currency Premium: Beyond cash flows, ETH commanded valuations that pure DCF couldn’t capture—the currency premium derived from its settlement and collateral roles.

• ETH serves as core collateral across DeFi (TVL exceeding $100 billion), anchoring minting of synthetic assets like DAI, enabling lending, and securing derivatives markets.
• ETH denominated transaction fees across L2 networks and NFT ecosystems.
• With $27.6 billion locked in spot ETFs as of Q3 2025, plus corporate accumulation (mining firms holding millions of ETH), the circulating supply tightened. This supply-demand tension generated premiums analogous to physical gold.

Trustware Valuation: Consensys introduced the “Trustware” concept in 2025 reports—assets whose value derives from their ability to provide immutable, decentralized finality. Ethereum doesn’t sell computing power (AWS does that); it sells “decentralized settlement certainty.” As Real-World Assets migrate on-chain, Ethereum’s role shifts from “processing transactions” to “protecting assets.” Its value capture depends not on transactions-per-second but on the scale of assets it secures. If Ethereum protects $10 trillion in global financial assets and charges a 0.01% annual security tax, its market capitalization must be sized appropriately to withstand 51% attacks and remain credibly secure. This “security budget” logic ties Ethereum’s market cap directly to the scale of the digital economy it protects.

Competitive Positioning: Ethereum’s Fortress in the RWA Era

By late 2025, blockchain market structure clarified into distinct segments.

Wholesale vs. Retail Division: Solana, optimized for extreme throughput and latency, captured high-frequency consumer applications—payments, DePIN, AI agents, meme tokens. Ethereum evolved into something different: a wholesale settlement layer analogous to SWIFT or the Federal Reserve’s FedWire system. Rather than processing individual coffee transactions at subsecond speeds, Ethereum processes “settlement packets” containing tens of thousands of transactions batched by L2 networks. This division mirrors mature market structures where high-frequency, low-value flows route to high-speed systems (Nasdaq for equities, Visa for payments), while high-value, lower-frequency transactions route to more robust settlement layers (NYSE for large block trades, FedWire for critical banking transactions).

RWA Dominance: In the Real-World Assets sector—widely projected as a trillion-dollar market—Ethereum demonstrated near-complete dominance. Despite Solana’s rapid growth, institutional benchmark projects like BlackRock’s BUIDL fund and Franklin Templeton’s on-chain fund chose Ethereum exclusively. The institutional logic was transparent: for assets worth hundreds of millions or billions, security and proven reliability outweighed transaction speed. Ethereum’s decade-long operational track record without downtime constituted its deepest competitive moat.

Epilogue: Escape from the Prison

In 2025, Ethereum walked to the brink of irrelevance. It was trapped like prisoners in a Changi-like system—constrained by identity ambiguity, suffocated by an income paradox, and attacked from both directions by competitors. The Dencun upgrade, intended as liberation, had instead become a tool of extraction.

Yet through regulatory clarity and technological repair, Ethereum executed an escape. The Fusaka upgrade reestablished the value chain between L1 and L2, transforming Ethereum from a victim of its own generosity into a sustainable, rent-capturing settlement layer. New valuation frameworks—combining DCF analysis, currency premiums, and security budgets—provided institutional investors a coherent way to assess its value.

Whether this escape will prove permanent remains to be seen. The experiment continues. But unlike the idealists of Pulau Senang who learned too late that freedom without incentive structures breeds exploitation, Ethereum’s developers learned from Dencun’s failure and built corrective mechanisms into Fusaka. The lesson from Changi—that systems require checks on free extraction—has finally been applied.