Bitcoin’s grip tightens in 2025 as Layer 1 tokens lose ground and users exit
Layer 1 and Layer 2 tokens entered 2025 with ambitious roadmaps and active developer communities, but ended the year deeply out of favor with investors. According to a year-end analysis by OAK Research, many of the flagship non-Bitcoin blockchains saw their native assets shed a large portion of their value, even as development activity stayed robust. Capital and users instead gravitated toward Bitcoin, Ethereum, BNB Chain and a small set of protocols with clear, proven revenue streams.
While Bitcoin preserved relative strength and even gained market share, a broad swath of alternative Layer 1 tokens endured aggressive sell-offs. The report argues that these drawdowns exposed structural flaws in token design and market positioning, particularly for chains whose tokens lacked a compelling reason to hold beyond speculation. As the market shifted focus from narratives to measurable value creation, protocols that could not demonstrate real economic activity or sustainable business models were heavily discounted.
On-chain usage metrics mirrored this shift. Across major smart contract platforms, Total Monthly Active Users dropped by 25.15% in 2025. Solana suffered the most dramatic decline, losing nearly 94 million users — a contraction of more than 60%. In stark contrast, BNB Chain almost tripled its user base by successfully attracting users from other ecosystems, underscoring the winner-takes-most dynamics emerging among general-purpose blockchains.
Layer 2 scaling networks experienced the same kind of divergence. Base, helped by its distribution and integration advantages from Coinbase, logged the strongest growth in Total Value Locked (TVL) and cemented itself as a leading Ethereum L2. Optimism, on the other hand, saw its TVL shrink as both capital and attention rotated toward competitors with clearer value propositions or better incentives.
Price performance told a similarly polarized story. Most major Layer 1 tokens ended the year in the red, while many newer entrants suffered especially steep declines as early hype faded. Layer 2 tokens – despite often delivering real technical progress – followed the same pattern. Optimism and zkSync Era logged severe drawdowns; Polygon and Arbitrum also fell sharply. Only Mantle (MNT) finished with a modest gain, which the report attributes not to strong fundamentals but to tight supply control and concentrated ownership that dampened sell pressure.
OAK Research identifies three core drivers behind the sector-wide downturn. First, many tokens operated under overleveraged tokenomics, with aggressive, ongoing unlock schedules flooding the market with new supply. Second, a large number of networks lacked credible value-capture mechanisms that tie actual network usage to token demand or cash flows. Third, institutional investors increasingly favored Bitcoin and, to a lesser extent, Ethereum, viewing smaller-cap infrastructure tokens as higher-risk assets with unclear long-term roles.
Despite crumbling token prices, developer activity did not collapse. Data from Electric Capital cited in the report shows that the EVM ecosystem still commands the largest pool of developers, with thousands of contributors and a substantial cohort working full-time. Bitcoin, traditionally seen as conservative from a development standpoint, actually posted the strongest two-year growth in full-time developers among major ecosystems, reflecting renewed interest in Bitcoin-native innovation such as Layer 2s and new asset standards. Solana and the broader SVM stack also expanded their developer base significantly over the past two years, signaling that engineering effort is not necessarily correlated with short-term token performance.
This growing mismatch between developer momentum and token prices is framed as a sign of market maturation rather than a paradox. Teams continued to ship upgrades, expand tooling and build new applications throughout the downturn, but speculative capital has become less tolerant of “infrastructure for infrastructure’s sake.” Networks without clear revenue paths, unique value propositions or defensible moats no longer receive the same premium valuations they once enjoyed during earlier bull cycles.
When it comes to actual revenue, the sector has become highly concentrated. Stablecoin issuers dominate the income leaderboard, with entities behind the largest dollar-pegged assets capturing the bulk of protocol-level earnings. Together, issuers like Tether and Circle pulled in significant annual revenue from interest on reserves and associated services. Alongside them, derivatives platforms and perpetual futures exchanges generated meaningful fee-based income with business models that look increasingly similar to traditional financial market infrastructure.
Generic Layer 1 and Layer 2 networks that failed to differentiate themselves on speed, cost, security, compliance, or ecosystem depth struggled to justify their existence. The report emphasizes that, in an environment of tighter capital and more risk-aware investors, simply being “another smart contract chain” is not enough. To sustain a standalone token, a network must offer material improvements or niche specialization that can’t be easily replicated on existing, more established chains.
Looking ahead to 2026, the outlook for infrastructure tokens remains challenging, even as regulatory frameworks stabilize in several important jurisdictions. Many tokens still face high inflation schedules and continuous unlocks that place persistent sell pressure on the market. Governance rights have proven insufficient as a source of demand; tokenholders increasingly question why they should own governance tokens that do not entitle them to any share of network revenue or cash flows. At the same time, value capture is consolidating at the base layers and among a small number of application protocols, leaving little room for mid-tier chains.
Under these conditions, OAK Research expects further consolidation. Protocols that already generate meaningful revenue, such as leading stablecoin issuers, major exchanges, and a few high-volume DeFi platforms, may find relative stability. Even they, however, remain exposed to broader crypto market volatility and continuous unlocks from early investors and insiders. For many smaller Layer 1s and Layer 2s, survival will depend on forging deep integrations with dominant ecosystems, redefining their tokenomics, or pivoting to serve narrowly defined use cases where they can become indispensable.
The report’s conclusion is blunt: legacy Layer 1 tokens that cannot demonstrate economic value will gradually drift toward irrelevance, regardless of how advanced their technology appears on paper. Capital is concentrating in protocols that show tangible, repeatable cash flows or clear cost and performance advantages. Token designs that rely solely on governance narratives or vague “future utility” are increasingly being priced as speculative lottery tickets, not as durable digital assets.
For investors, this environment demands a different framework than in earlier cycles. Simple metrics like “transactions per second” or “total addresses” are no longer sufficient justifications for premium valuations. Instead, market participants are paying closer attention to revenue, fee structures, real user retention, and whether a token is actually required for the service being provided. Many are asking a basic question: if the token disappeared tomorrow, would the protocol or business still function? If the answer is yes, the token’s long-term value proposition is likely weak.
For developers and project teams, the shift away from speculation-first markets means that technical innovation must now be paired with go-to-market discipline and business model clarity. Building a fast, cheap chain is no longer enough if there is no distinctive reason for users, liquidity providers, or applications to stay. Teams are being pushed to rethink tokenomics — from inflation schedules and vesting to fee distribution and staking mechanics — to create credible links between usage and token demand, without running afoul of regulators.
Users and retail traders, meanwhile, are gradually learning to distinguish between infrastructure as a public good and tokens as investable assets. Many have realized that they can benefit from the services of a chain — cheap transfers, fast confirmations, rich app ecosystems — without needing to hold large amounts of its native token. This dynamic has been especially visible on Ethereum Layer 2s, where users increasingly think in terms of stablecoins or ETH balances rather than the individual L2 governance tokens.
The rise in Bitcoin’s dominance throughout 2025 crystallizes these shifts. For many institutions, Bitcoin has become the default macro bet on digital scarcity and crypto’s long-term survival, while Ethereum occupies the role of foundational settlement layer for programmable finance and tokenized assets. Chains launching today are not only competing against each other; they are competing against a market structure that increasingly routes most value to a small number of base assets and revenue-generating protocols.
Nonetheless, the report leaves room for a more nuanced outcome than a simple “Bitcoin and Ethereum only” future. Niche Layer 1s with clear specialization — for example, those optimized for gaming, high-frequency trading, privacy, or regulated environments — may carve out durable positions if they can demonstrate user loyalty, recurring fee income, and integrations that are hard to replicate elsewhere. Similarly, Layer 2s that deeply align with major exchanges or wallets can still gain meaningful traction by leveraging distribution and brand trust.
In that sense, the pain of 2025 may serve as a reset rather than a death sentence for the broader Layer 1 and Layer 2 landscape. By forcing projects to confront overinflated expectations, unsustainable tokenomics and vague narratives, the market is pushing the ecosystem toward more grounded, economically coherent designs. Those chains that adapt — by tightening supply, sharing revenue, specializing their tech stack, and proving real-world demand — may yet emerge stronger in the next cycle.
What seems increasingly clear is that the age of easy capital for undifferentiated infrastructure is over. As the industry moves into 2026, success will be defined less by whitepapers and testnet benchmarks, and more by who can convert blockspace, liquidity and user attention into enduring economic value. In that race, Bitcoin’s growing dominance is not just a price chart story; it is a signal that the market is rewarding simplicity, clarity of purpose and proven resilience over grand but unproven visions.