The Waffle: The End of Ethereum?

At Uphold Institutional, we do have a lot of clients heavily invested in Ethereum, so I’m being bombarded with questions about the future of the original smart contract network – especially in the face of strong competition from the likes of Solana and other L1.?

These days it does seem like Ethereum has lost its way. The price is struggling, big players are exciting or switching to Solana; the Ethereum weekly meetings are a squabble-fest of diverging proposals, and the Hannibal is definitely ad portas: there have never been more L1 chains competing directly not with just with Ethereum, but with Ethereum’s vision and business model.?

Make no mistake: Ethereum has become a business. Income comes from transactions, even though we are repeatedly assured that low transaction costs are in everyone’s interest. They are not. Those who own ETH want high fees. They are dismayed by the predictable effects of letting parasitic L2s – ostensibly created to solve the scalability problem – eat into their margins. Fees go up, ETH price goes up. Fees go down, ETH goes down. More than 90% of all the foundations budget depends on Ethereum fees. There is consensus that blockchain networks need fees? – although there are many examples of fairer modes of incentivisation. Ethereum is stuck in an outdated business model from which it cannot easily escape.?

It’s not just fees – Ethereum has betrayed its own, and crypto purists’ original vision, far too many times. The community was shocked when MEV - maximum extractable value – achieved by reordering transactions in a block arrived on the scene, but later embraced it in the name of greed. Pure, unadulterated greed that has nothing to do with what a decentralized network was initially intended for. Greed, augmented by the stakeholders in Ethereum – big financial behemoths who have billions of dollars betting on the success of the “world computer” with zero stake in supporting the ideals of decentralized finance.?

Going through Vitalik’s? – still the ‘leader’ of Ethereum in every sense of the word – roadmap for the next few years, one cannot help but notice a sense of urgency to reform, mixed with a reluctance to actually do something about the many flaws and inconsistencies in the network. In private conversations one hears him sigh more and more often. He is caught between his lofty ideas and the demands from “the board”? and investors.?

The most obvious technical issue is that Ethereum is no longer decentralized. Solana certainly isn’t, so decentralization has little to do with what investor’s want. This ideal of blockchain has long gone out the window for those who care about the dollar value of everything and ignore the ideals of everyone. Three block builders now produce 90% of all the blocks on Ethereum. In an article by Sen Yang and Fan Zhang? (Computer Science, Yale) and? Kartik Nayak (Duke), the authors ask the question “Why does the builder market centralize, given that it is permissionless and anyone can join?”?

Of course there is the old adage in computer science that any decentralized system with any sort of incentive? model will decentralize over time (and without it, will whither, catch-22). But the real reason is that block building makes sense at scale, in cheap data centers, and makes less sense for individuals. The bigger the network and the more influential the stakeholders, the stronger the drive towards centralized control. Just like Bitcoin mining has become centralized it’s hardly worth the effort for single computers to join the race. Ethereum has been usurped by big corporate interests. Neither coin is now the people’s coin, and that’s the reason we are seeing so much great competition – Kaspa for Bitcoin, SpaceMesh as a true people’s coin, Alephium as a far safer and fairer smart contract platform, etc.?

Allegedly to combat MEV, Ethereum introduced MEV-Boost auctions, when it was supposed to come up with ideas to mitigate and ban the nefarious practice of “on-chain frontrunning”. The idea was, as often in the history of Ethereum, to introduce competition. The result was even greater dominance from the big 3.?

Ethereum has become uninteresting for the wider, decentralized audience. It costs around 1.5 ETH to participate in private order flow MEV. That is a barrier to entry new players shy away from, and the incumbents welcome. As a result, Vitalik introduced Proposer-Builder Separation, which turned out to be another flop.?

At the core of the debate is sequencing. Most L2s for example rely on a single sequencer. That is contrary to the idea of decentralization. ETH insiders want to create “shared sequencers”, but that is no go: It is the single sequencer that makes L2 profitable at the expense of Ethereum. It would ultimately require composability in real time, or “synchronous composability”, which is, many researchers think, an impossibility with linear blockchains. You’d need a directed acyclic graph or lattice for that.?

There are chains out there which do not suffer from any of the issues with Ethereum. Take MultiversX for example. While Ethereum keeps putting “band-aids on a cancer patient,” others have started from scratch avoiding the “blockchain trilemma” (actually the “Ethereum trilemma”) altogether.?

And yet, people getting into blockchain now learn about the big 2 first of all, where all the genius of the Bitcoin consensus is attributed to one Satoshi Nakamoto – a team of seven people in reality – and the genius of smart contrat platforms to Vitalik. That’s unfair in both cases. For Ethereum, there were many co-founders, all of which have moved on — for a reason! Yet in schools new blockchain fans are being presented an outdated blockchain landscape that leads them to believe that Ethereum’s Solidity smart contracts and the EVM are the greatest inventions since sliced bread. Innovation moves fast, yet Ethereum benefits from the inertia of education.?

One other problem is with the Ethereum ecosystem itself. Being so big makes Ethereum inflexible and often unwilling to support its own ecosystem. And because it is so well established, there is an inherent alignment problem when integrating decentralization with cooperation. The challenge – from the Ethereum team’s perspective is to ensure diverse projects contribute to a unified vision. The concept has historically been poorly defined, and this creates risk of social layer capture. In order to “stay in control,” Vitalik has repeatedly argued that the concept of alignment should be made more legible, decomposed into specific properties, which can be represented by specific metrics

Source: https://vitalik.eth.limo/general/2024/09/28/alignment.html

The discussion about alignment shows how entrenched the “Ethereum first” mentality has become. Its own success is the reason for this dead end of ideas on how to position it. To join the “multichain future” would mean to relinquish its claim to dominance, which isn’t in the interest of investors. It is better to slug it out in meaningless Solana vs Ethereum discussions than to admit that Ethereum will never be, can never be, and should never be the “one for all” settlement layer of all blockchains, let alone the world computer.?

Vitalik is well aware of the cul-de-sac in which he is trying to turn the mega truck of ETH around. The problem is that staying there, in a rent-seeking paradise, suits the big investors in Ethereum very much. And Ethereum is working, it is by no means dead. Last week, three big tradfi players announced the launch of what is now redundantly called “real-world assets” on Ethereum. It’s not dead, but it's in the cancer ward for sure.?

Yet even cancer can be cured. Far more efficient EVMs are on the way. Thousands of people are working on Ethereum. This is the beauty of decentralization and a global workforce: there is hope for a cure. Innovations are now coming in fast and furious, and to write off Ethereum just because the problems are mounting and the competition is strong would be a mistake.?

So no, this is not the end of Ethereum.? This is the search for cure. In particular we need to?

1. Eliminate the rent-seeking of L2s and concentrate on making the main chain scalable. That’s a U-turn in thinking, but Ethereum has had many reforms and revolutions. Bring on another one.?
2. Accept that Ethereum will not be the “world computer” or the “global settlement layer” but simply one of hundreds of chains that together build the resilient future of on-chain computing.? Ethereum must be “one of many” many blockchains in a multi-chain world, where digital networks work together seamlessly across borders, protocols, and blocks. Just like diversity brings power to a human workforce, diverse networks bring safety and redundancy to blockchain
3. Open Ethereum development in a more democratic manner. Embrace the DAO and ditch the developer cabal. Too few people have too much influence, not just in block production.?
4. Reduce the influence of big ticket investors. Perhaps there should be a limit to the number of ETH anyone can own.?
5. Create incentives for block builders and turn the 3 into 300. That means making Ethereum cheaper and fairer, and less profitable. It also means the price of ETH would suffer. So be it. If, in order to save the network, the rich earn less, then make it so. Tax them for holdings over 10000 ETH.?

It will be hard to put anything into effect. On the one hand there are too many cooks in the ETH kitchen, yet on the other hand, too few who decide almost everything. There is a toxic “us against them” mentality in the developer community, where if you don’t subscribe to one team’s vision, you are immediately ‘blacklisted’ by the decision makers. Like many organizations, Ethereum governance? has become a cabal of influential individuals who call all the shots.?

I have a long list of other proposals, yet I’m not convinced that Ethereum will be able to implement any meaningless reforms at all. . Pressure will mount when every other L1 outperforms ETH in the next bull run. It will evaporate, when the price of ETH goes up again. Such are the vagaries of capitalism. Incentives are rarely aligned.?

So no, despite what the Solana fanbois want you to believe, this isn’t a conflict between two titans, nor is it the end of Ethereum. This must be the beginning of a renewal, a reform period – the same painful reform most linear blockchains must go through as new technologies like sophisticated sharding and BlockDAG take hold. It’s not the end of Ethereum. But before the Phoenix can rise, we’re going to see some ashes first.