Ethereum DeFi Weakens: Why Its Losing Its Dominance to Other Chains

Ethereum has long been the backbone of decentralized finance (DeFi), pioneering smart contracts and hosting the largest DeFi ecosystem. Since its launch in 2015, it has been the go-to platform for decentralized exchanges, lending protocols, and stablecoins. However, recent trends indicate that Ethereum’s dominance in DeFi is weakening. 

Despite its early lead, Ethereum faces growing pressure from competing blockchains like Solana, which offer faster transactions and lower fees. This shift is reshaping the DeFi landscape and raising questions about Ethereum’s future role in decentralized finance. In this article, we explore the reasons behind Ethereum’s DeFi decline, the rise of alternative chains, and what this means for the broader crypto ecosystem.

Ethereum’s DeFi Decline: The Numbers Behind the Shift

Ethereum’s total value locked (TVL) in DeFi peaked at around $109 billion in November 2021 but has since fallen significantly. By the end of 2024, TVL had dropped to $77 billion and further declined below $50 billion in early 2025. This represents a substantial contraction, signaling reduced user engagement and liquidity within Ethereum-based DeFi protocols. While Ethereum still holds a majority share of the DeFi market-about 52%-its grip is loosening as other blockchains gain traction.

One notable competitor, Solana, reached an all-time high TVL of nearly $12 billion at the end of 2024 before experiencing a decline to about $6.6 billion in 2025. Despite this drop, Solana’s TVL remains significantly higher than a year ago, indicating growing adoption and market share at Ethereum’s expense. This gradual erosion of Ethereum’s DeFi dominance reflects broader challenges the network faces, including scalability bottlenecks and high transaction costs.

Scalability and High Fees: Ethereum’s Persistent Challenges

A core issue undermining Ethereum’s DeFi leadership is its scalability problem. Ethereum’s base layer processes roughly 15 to 30 transactions per second, which pales compared to Solana’s capacity of up to 65,000 transactions per second. During periods of high demand, Ethereum’s network congestion leads to soaring gas fees, sometimes reaching $20 or more per transaction. These costs deter smaller investors and everyday users from participating in DeFi activities on Ethereum.

Although Ethereum transitioned to a Proof of Stake consensus mechanism in 2022, improving energy efficiency, it did not directly solve scalability. Instead, Ethereum relies heavily on Layer 2 solutions-rollups and sidechains-to increase throughput and reduce fees. However, these Layer 2 networks have created fragmented liquidity pools and introduced complexity for users, who face challenges such as bridging errors and inconsistent user experiences. This fragmentation dilutes Ethereum’s once cohesive DeFi ecosystem and frustrates developers and users alike.

The Rise of Solana and Other Competitors

In contrast to Ethereum’s struggles, Solana has emerged as a compelling alternative for DeFi projects seeking speed and low costs. Solana’s architecture enables near-instant finality and minimal fees, making it attractive for decentralized exchanges, lending platforms, and liquid staking protocols. Its DeFi ecosystem, though smaller than Ethereum’s, is rapidly growing with projects like Jupiter and Marinade gaining traction.

However, Solana’s growth is not without concerns. Its network has faced outages and security questions, and its validator set is far smaller than Ethereum’s, raising decentralization issues. Additionally, some of Solana’s recent DeFi activity has been driven by speculative trading and meme coin hype rather than organic demand. Nonetheless, Solana’s technological advantages and expanding developer community position it as a strong competitor challenging Ethereum’s DeFi dominance.

Other blockchains such as Avalanche, Binance Smart Chain, and Terra have also chipped away at Ethereum’s market share by offering faster and cheaper alternatives. These “Ethereum killers” have attracted users and liquidity, further fragmenting the DeFi landscape. The competition is intensifying as Ethereum’s scaling solutions remain in development and have yet to fully materialize.

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What the Future Holds for Ethereum DeFi

Ethereum is actively working on improvements beyond the Merge, including upgrades like Pectra that aim to enhance network functionality. However, true scalability gains depend on Layer 2 adoption and future sharding implementations, which are still in progress. Ethereum’s strength lies in its mature ecosystem, extensive developer base, and robust security record, which continue to attract projects and users despite current setbacks.

The DeFi sector in 2025 is likely to be multi-chain, with Ethereum retaining a leading role but sharing dominance with faster, lower-cost blockchains like Solana. Users and developers will choose platforms based on their priorities-security and decentralization on Ethereum versus speed and cost efficiency on Solana. The competition may spur innovation, leading to better cross-chain interoperability and improved user experiences.

Ultimately, Ethereum’s ability to maintain its DeFi leadership will depend on how effectively it addresses scalability and user experience challenges while leveraging its ecosystem advantages. The “DeFi summer” spirit of open, accessible finance is evolving, and Ethereum must adapt to remain relevant in a changing landscape.

Conclusion

Ethereum’s DeFi ecosystem is experiencing a notable decline in total value locked and user activity, driven largely by scalability constraints and high transaction fees. While Ethereum remains the dominant DeFi platform, its market share is eroding as competitors like Solana offer faster, cheaper alternatives. The fragmentation caused by Layer 2 solutions and the rise of new blockchains is reshaping the DeFi landscape into a more diverse and competitive environment.

Ethereum’s future in DeFi depends on successful scaling upgrades and maintaining its strong developer community and security standards. The DeFi sector is moving towards a multi-chain reality where no single blockchain holds absolute dominance. For users and developers, this means more choices but also greater complexity. Ethereum’s challenge is to innovate and evolve without losing the core values that made it the foundation of decentralized finance.

FAQ

Why is Ethereum losing its dominance in DeFi?
Ethereum struggles with scalability and high gas fees, which limit user participation and liquidity. Layer 2 solutions have helped but also fragmented the ecosystem. Meanwhile, faster and cheaper blockchains like Solana are gaining market share.

How does Solana compare to Ethereum for DeFi?
Solana offers much higher transaction speeds and lower fees, making it attractive for DeFi applications requiring fast execution. However, it faces challenges in decentralization and network stability, while Ethereum offers stronger security and a larger ecosystem.

Is Ethereum’s DeFi ecosystem still growing?
Ethereum’s DeFi TVL has declined from its 2021 peak but remains the largest in the space. Ongoing upgrades and Layer 2 solutions aim to improve scalability and user experience, which could support future growth.

What are Layer 2 solutions and how do they affect Ethereum?
Layer 2 solutions are secondary protocols built on top of Ethereum to increase transaction throughput and reduce fees. They help scalability but create fragmented liquidity pools and can complicate the user experience.

Will Ethereum regain its DeFi dominance?
Ethereum’s future dominance depends on the success of scaling upgrades and maintaining its security and developer support. It is likely to remain a major player but will share the DeFi market with other blockchains in a multi-chain ecosystem.