From Changi Prison to L1 Settlement Layer: How Ethereum Escaped Its 2025 Predicament

In the early 1960s, Singapore’s Lee Kuan Yew faced a prison crisis that mirrors the predicament Ethereum found itself in during 2025. Changi Prison was overflowing, so a radical experiment began on a small island—removing walls, weapons, and guards, betting that freedom and trust could reform even the most hardened criminals. For a brief moment, it worked. The recidivism rate plummeted to just 5%. But greed, resentment, and unmet expectations quietly festered. On July 12, 1963, that utopian dream burned to ashes as rioting prisoners killed the warden who believed in them.

Ethereum’s 2025 journey echoed this tragedy. The March 2024 Dencun upgrade had dismantled the expensive “economic walls” between Layer 1 and Layer 2 networks, believing that cheap data blob space would create a thriving L2 ecosystem that would feed value back to the mainnet. But like the prisoners on that island, L2 networks chose extraction over gratitude, draining L1 revenue while paying almost nothing in return.

By December 2025, though, Ethereum found its escape route.

The Prison Without Walls: Ethereum’s Identity Crisis

For much of 2025, Ethereum occupied an uncomfortable middle ground that threatened its entire value proposition. Investors had begun sorting crypto assets into two clean categories: Bitcoin as “digital gold”—a pure store of value with fixed supply and macro credibility—and high-performance chains like Solana as “tech stocks” offering explosive growth through bleeding-edge throughput and minimal fees.

Ethereum tried to be both and ended up being neither.

The commodity problem: While ETH served as collateral for over $100 billion in DeFi value, its dynamic supply mechanics and staking rewards made it impossible to pitch as “digital gold.” Bitcoin’s fixed 21 million supply and energy peg created an irrefutable commodity narrative. Ethereum’s complexity left institutional investors confused. How could something “deflationary” also generate staking yields? The cognitive dissonance was real.

The technology problem: If you viewed Ethereum as a platform, its core metric—revenue—was in freefall. By August 2025, despite ETH price hovering near all-time highs, network protocol revenue had collapsed 75% year-over-year to just $39.2 million. For investors accustomed to price-to-earnings ratios, this screamed “broken business model.” One data point tells the story: Base, an L2 network, was generating hundreds of thousands of dollars daily in user fees, but paying only dollars to Ethereum L1.

The competitive squeeze: Bitcoin’s ETF inflows solidified its macro asset status. Solana absolutely dominated payments, DePIN, AI agents, and memes with its monolithic architecture and subsecond finality. Hyperliquid became the clearinghouse for perpetual derivatives. Ethereum looked increasingly like a network searching for a mission.

This awkward position bred existential questions: Did Ethereum even have a future? What category did it belong to? Could it sustain a profitable business model?

Breaking Free: When Regulators Opened the Prison Doors

The regulatory breakthrough of 2025 didn’t just happen—it required a fundamental shift in how authorities thought about digital assets.

The SEC’s About-Face: On November 12, 2025, SEC Chairman Paul Atkins unveiled “Project Crypto,” explicitly rejecting his predecessor’s “regulation by enforcement” approach. In a speech at the Federal Reserve Bank of Philadelphia, Atkins introduced the concept of “token taxonomy,” pointing out that digital assets weren’t permanently fixed categories. A token sold as part of an investment contract at launch didn’t remain a security forever—it could evolve.

The crucial insight: once a blockchain reaches sufficient decentralization, such that no single entity’s “essential managerial effort” drives returns, that asset escapes the Howey Test. Ethereum’s 1.1 million validators and globally distributed node network proved the point. ETH wasn’t a security.

Congressional Clarity: In July 2025, the House of Representatives passed the Clarity Act for Digital Asset Markets, legally enshrining what Atkins had proposed. The act explicitly placed “assets originating from decentralized blockchain protocols”—naming Bitcoin and Ethereum directly—under CFTC commodity jurisdiction. Banks could now register as “digital commodity brokers,” offering custody and trading services without regulatory fear.

On institutional balance sheets, ETH transformed from a speculative, legally ambiguous asset to a commodity alongside gold and foreign exchange.

The Staking Paradox Solved: How could an interest-bearing asset still be a “commodity”? Traditional commodities don’t pay yields. The regulatory framework elegantly split the distinction:

• Asset layer: ETH itself is a commodity, functioning as network gas and a security deposit
• Protocol layer: Native staking is “service provision”—validators earn payment for maintaining network security, not passive investment returns
• Service layer: Only custodial staking promises from centralized intermediaries constitute investment contracts

This tri-layer framework let ETH retain its yield characteristics while enjoying commodity exemptions. Fidelity, in its Q1 2025 analysis, called ETH an “internet bond”—a productive commodity with both inflation-hedging properties and bond-like returns.

The Riot Within: Why L2 Networks Turned Against L1

The Dencun upgrade solved a technical problem but created an economic catastrophe.

The Income Paradox: EIP-4844 dramatically reduced L2 transaction costs by introducing cheap “blob” data space. Technically brilliant—L2 gas fees dropped from dollars to cents. But economically devastating: L2 networks like Base and Arbitrum now generated enormous revenue while paying L1 almost nothing.

The cause was the blob pricing mechanism. Initially based purely on supply and demand, with blob supply vastly exceeding L2 demand, the base fee lingered at 1 wei (0.000000001 Gwei) for months. Meanwhile, Base could earn $500,000 in a day while remitting $3 to Ethereum.

As massive transaction volume migrated from L1 to L2, the EIP-1559 burning mechanism collapsed. By Q3 2025, Ethereum’s annualized supply growth rebounded to +0.22%—no longer deflationary, no longer scarce. The community called it the “parasite effect”: L2 got all benefits; L1 got nothing.

It was as though prisoners on that island discovered they could thrive without ever thanking the warden.

The Great Escape: Fusaka’s Answer to the Revenue Problem

On December 3, 2025, the Fusaka upgrade arrived to repair the broken value chain between L1 and L2.

EIP-7918: The Minimum Price Floor: The cornerstone was brutally simple. The blob base fee could no longer fall indefinitely to 1 wei. Instead, the minimum blob price was tied to L1’s execution-layer gas price, specifically set at 1/15.258 of the L1 base fee.

This meant that whenever Ethereum L1 became congested—token launches, DeFi interactions, NFT minting—the automatic floor price for L2 blob space would rise. L2 users could no longer access Ethereum’s security at near-zero cost.

The numbers were staggering: blob base fees skyrocketed by 15 million times, jumping from 1 wei to the 0.01-0.5 Gwei range. For L2 users, transaction costs remained cheap (around $0.01). For Ethereum’s protocol, this translated to thousand-fold revenue increases.

PeerDAS: The Supply Response: Without a corresponding supply increase, rising prices would have strangled L2 growth. So Fusaka simultaneously introduced PeerDAS (EIP-7594), which allows validators to confirm data availability by sampling random data fragments rather than downloading entire blobs. This cut bandwidth and storage requirements by ~85%.

The result: Ethereum could scale blob supply from 6 blobs per block to 14 or more—raising the floor while expanding capacity.

The B2B Tax Model: Suddenly, Ethereum’s business model became crystalline. L2 networks acted as “customer acquisition layers,” capturing end users and high-frequency, low-value transactions. Ethereum L1 sold two products to these L2 partners:

1. High-value execution space: settlement proofs from L2, complex DeFi atomic transactions
2. Data space (blobs): transaction history storage

L2 networks now had to pay “rent” proportional to the economic value they were extracting. Most of that rent (paid in ETH) burned away, increasing scarcity for all holders. A portion flowed to validators as staking rewards.

This created a virtuous spiral: more L2 demand → higher blob prices → more ETH burning → greater scarcity and security → attraction of larger asset pools. Renowned analyst Yi estimated that 2026 would see ETH burning rates increase by 8 times.

Reimagining Value in a Liberated Network

With the business model repaired, Wall Street turned to valuation.

The Discounted Cash Flow Case: Despite being classified as a commodity, ETH has measurable cash flows, enabling traditional financial models. 21Shares’ Q1 2025 research projected Ethereum’s fair value at $3,998 under conservative assumptions (15.96% discount rate) and as high as $7,249 under optimistic scenarios (11.02% discount rate).

The Fusaka upgrade fundamentally strengthened these models. The guaranteed L1 revenue floor eliminated fears of income dropping to zero. Analysts could now confidently project fee growth based on L2 ecosystem scaling.

The Currency Premium: Beyond cash flows, Ethereum possessed immeasurable value as settlement currency and collateral. With ETH serving as the bedrock of $100+ billion in DeFi lending and derivatives, it functioned as trust’s underlying anchor. NFT markets and L2 fees denominated in ETH. By Q3 2025, ETF holdings of $27.6 billion combined with corporate accumulation (some mining firms held 3.66 million ETH) created supply constraints similar to precious metals.

Trustware Valuation: Consensys introduced a novel framing: Ethereum doesn’t sell computing power like AWS. It sells “decentralized, immutable finality.” As Real-World Assets (RWA) moved on-chain, Ethereum L1 shifted from “processing transactions” to “protecting assets.” Its value became directly correlated to the assets it secured.

If Ethereum protected $10 trillion in global assets and captured just 0.01% annually in security fees, its market capitalization would need to be enormous to withstand a 51% attack. The security budget logic made Ethereum’s valuation inseparable from the economy it protected.

The New Pecking Order: Winners and Losers in the Modular Era

By late 2025, the market had essentially bifurcated.

Solana: The Retail Specialist: With extreme TPS and minimal latency, Solana monopolized high-frequency, low-value transactions—payments, trading, DePIN, memes. It functioned like Visa or Nasdaq: fast, cheap, built for volume. Stablecoin velocity and ecosystem revenue occasionally exceeded Ethereum mainnet by single months.

Ethereum: The Institutional Settlement Layer: Ethereum evolved into SWIFT or the Federal Reserve’s FedWire—a wholesale clearing system for high-value, lower-frequency transactions. It didn’t focus on processing each coffee purchase in milliseconds; rather, it batched tens of thousands of transactions from L2 networks into settlement packets.

This division wasn’t competitive failure—it was market maturity. High-value, low-frequency assets (tokenized government bonds, cross-border settlements, institutional derivatives) demanded Ethereum’s superior security and decentralization. Ethereum’s decade of perfect uptime constituted its deepest moat.

The RWA Battlefield: In the Real-World Assets sector—the multi-trillion-dollar future—Ethereum’s dominance was absolute. Despite Solana’s explosive growth, benchmark projects like BlackRock’s BUIDL fund and Franklin Templeton’s on-chain fund chose Ethereum. The institutional calculus was simple: for hundred-million-dollar or billion-dollar assets, security outweighed speed every time.

Ethereum’s 2025 journey paralleled that island prison’s arc—from utopian ambition to crisis to revolutionary repair. The question that haunted 2025 now had an answer: No longer would Ethereum be trapped in an identity limbo. By embracing its role as the settlement layer for high-value transactions and institutional assets, by repairing its revenue model, and by securing regulatory clarity as a productive commodity, Ethereum had found its escape route.

The 2026 data showed the market believed it: ETH trading at $3.01K with $362.93B market cap, having navigated the worst existential crisis in its history. Whether this redemption arc would hold remained the final test—but the prison walls had finally come down.