Ethereum, the largest cryptocurrency after Bitcoin, is having a moment of reckoning. The popular discourse continues to be dominated by Bitcoin’s coming of age as “digital gold,” fueled by strong price action and growing interest from institutional investors in the Bitcoin ETF. However, beyond Bitcoin, the “Ethereum vs. Solana” debate is only heating up within the crypto community with Ethereum’s relatively underwhelming price action and ETF inflows despite being the most decentralized utilitarian blockchain in the ecosystem. Ethereum, which launched at about 31 cents for a token in 2014, now offers over $445B in market capitalization as crypto economic security for anyone looking to build decentralized web3 applications. It is little surprise then that more developers have flocked to the Ethereum ecosystem compared with any other layer one blockchain by far, and the phenomenon continues to this day. Solana, launched in 2020, has since relentlessly focussed on much higher throughput and lower transaction fees, the many network outages notwithstanding. Solana has continued optimizing for superior user experience while Ethereum has maintained “sufficient decentralization” as a north star. Ethereum began to decentralize aggressively at its inception, while other blockchains focussed on solving the scalability and security vectors of the trilemma. Ethereum’s layer-two or horizontal scaling roadmap has meant that the base layer continues to be constrained regarding block size and transaction (gas) limits. Questions have emerged about whether all the ballooning layer twos align with Ethereum's decentralized ethos. And yet, here is why I continue to be bullish.
If I had to answer in one word (make that double), I’d unequivocally say I am long-term bullish due to Ethereum’s “network effects.” Eth, the ecosystem, has by far sustained the most robust developer activity and on-chain economy through many cycles and resulting price actions on Eth, the token or the asset. I believe Eth, the asset, will eventually come to represent the value accrued by the entire ecosystem, including the countless layer-2s. My thoughts below are not exhaustive and are always evolving.
- Developer activity: Web3 developers love the Eth ecosystem, and their numbers in the ecosystem, if we account for all the roll-ups and side chains, surpass any other L1 by far, according to the latest report by Electric Capital. For this to be sustainable through the cycles, we must view developer traction in the absence of any incentives being doled out by other L1s. Take a look at the sheet number of AVSes or actively validated services being built within the Eigen Layer ecosystem as a case in point. Network effects all the way down, to the L1.
- Value accrual: Eth’s switch to PoS from PoW in September ’23 was an unprecedented human feat in decentralized consensus-driven engineering. Eth L1 is analogous to a web2 marketplace, much like iOS or Android, and the 52 L2s with live mainnets and as many coming online in the next 6-12 months are akin to apps building on the operating system entwined with a marketplace. Coinbase’s Base chain is a prime example of strong network effects, even if the fees accruing to the L1 were to fall in the short term. The Ethereum network is burning a substantial amount of ether, indicating high demand for L1 block space despite the migration to L2s. This burn mechanism serves as a market-driven response to transaction volume.
- Net deflationary: Eth’s burn rate continues to be healthy despite the recent inflation due to the evolution in the blob fee market. Eth’s current inflation is arguably still less than that of most other L1 tokens. And there are no VC unlocks to be had whatsoever. No airdrops. And staked ETH is less than 30% of the total supply. Even if that ratio were to expand, there is enough headroom to manage strong monetary foundations.
- Permissionless money: While the “ultrasound money” narrative may have been a bit too optimistic, let’s look at Eth’s moneyness through another lens. Just as Bitcoin has proven to be an excellent store of value, Eth will continue to meet the other two properties of sound money: a medium of exchange and a unit of account, more so with the proliferation of L2s. Eth, as both a bridge asset and a collateral, will have strong demand with the growth of the onchain economy. L2 governance tokens may come to be denominated in Eth just as NFTs used to be priced in Eth. Ether is utilized as a gas token and in decentralized finance (DeFi) applications, enabling seamless transactions on the Ethereum mainnet. This dual functionality illustrates its importance in the ecosystem. The recent privacy-preserving ruling in the Tornado Cash case further strengthens the case for preserving the solo stakers and not going MegaEth in terms of hardware and bandwidth requirements to run an Eth node.
- The bedrock of onchain M2 money supply: US$-denominated stablecoins aren’t permissionless in the way Eth is. According to ParaFi and VanEck, stablecoins as a percentage of the M2 money supply will grow from the current $170B in volume to about 10% of the M2 money supply over the next ten years. Even at a more conservative 5%, that would be over $1T in volumes in the next 5-7 years. Over 50% of the current volumes use Eth L1 as the settlement layer, with USDT on TRON as the second. Extrapolate the numbers, and Eth’s network effects continue to compound.
- Only one sufficiently decentralized? We are all super optimistic about the new incoming guard at the US SEC. A digital asset must be “sufficiently decentralized” to be deemed a commodity, not a security. Look at Eth's sheer number of validators and nodes and compare it with any other ecosystem. And with next year’s Pectra update, the number will only balloon as network participation becomes more democratised, as we wouldn’t necessarily need 32 Eth to be able to do so.
- Rollup concentric roadmaps: Different approaches to scaling the L1 are underway, including parallelizing the EVM, decoupling block space and block state from data availability, and even using brute hardware and bandwidth to scale execution. (Disclaimer: I’ve tried hard to be non-technical and have not named any projects deliberately.) Regardless of the flavor of the month (or cycle), many of these approaches will find congruence and utility; others may not. They will all, however, contribute to the vibrance of the Eth L1, which will continue to be the most decentralized bedrock of the entire Eth ecosystem. Arguably, if more of the new L2s are based, i.e., use L1 for sequencing, the L1 will accrue more value even if it were diminishing in the short term, as we see onchain transaction volumes explode. Sonieum, from Sony, alone can bring millions of web2 gamers onchain almost overnight and throw a new yen-denominated stablecoin in the mix (yeah, Sony owns a bank in Japan!)
- Institutions arrived yesterday: JPM and Blackrock aside, many banks and capital markets’ incumbents have been flirting with blockchains for a long time, running proofs-of-concept and sandboxes to secure buy-in within and without. As we see with the trends in the RWA space (still paltry in terms of size), the time to scale these pilots beyond private permissioned blockchains is around the bend. While we still don’t have a single winner as that public network of choice, Eth L1’s strong network effects and traction make a compelling case for driving scaled institutional participation over the long term. With companies like Chainlink building the infrastructure that will enable both value and data to move seamlessly between blockchains and traditional financial systems, tokenization of real-world assets (RWAs) may arguably become the single most compelling use case of blockchains, and hopefully of Ethereum as the chain of choice.
Agreed, Ethereum’s execution and UX isn’t at par with Solana’s. Agreed Ethereum’s moneyness isn’t at par with Bitcoin’s. Agreed, Ethereum’s data availability isn’t at par with Celestia’s. But I think that is okay. Ethereum is the most profound planetary-scale project that is decentralized to the degree it is. Coordination takes time and is often chaotic. Bitcoin went through a similar phase with the blocksize wars, and “moneyness” tribe won over the “utility” tribe. Vitalik Buterin may be a philosophical figurehead at best. While he tries to persuade the ecosystem towards a certain path to prioritization gently, he deliberately chooses not to influence the way forward directly. And I think that is commendable, even beautiful, in this world driven by centralized systems. It epitomizes the idea of a network state if there is one. For someone in web3 for the technology and not the speculation, my conviction is driven by first principles and never by price actions, bull-bear cycles, or favors of the season. Let’s watch this space together. It's still early days. Slowly, then suddenly…
Building the best performing network at the Sei Foundation
2 个月Great overview! What I disagree with is a rollup centric economy will help solve the throughput issues. Rollups and L2s make it more expensive for ETH to operate and in the end may have users/providers fitting the bill for the activity. What we need is to restructure ETH to have a performant chain for use cases that don't need over decentralization for them to be successful. Part of the reason I am very bullish on building on the Sei Network.