The Holy Grail of Decentralization: Ethereum’s Long-term Value and Challenges

Author: Revc, Golden Finance

Foreword

The current development status of Ethereum is a microcosm of the entire crypto industry. As the most valuable asset in the industry, it is also a good thing to be Fud at the end of the interest rate hike cycle. Ethereum also has profound problems that lead to poor performance, that is, the control over L2 is weakened, and it is unable to condense value economically with the influence of decentralized infrastructure. When the market is in an upward cycle, it can expand its influence through L2. After all, the market in 2021 is mainly concerned with cross-chain and expansion, but now the market has changed. Here we think about two questions:

• Balance between decentralization and commercial interests: How can decentralized projects achieve commercialization without violating the principle of decentralization?

• Driving force of ETH value growth: In addition to decentralization, what other factors can drive the growth of ETH value?

From the perspective of the development of the entire crypto industry, especially in the L2 economic system, the value of Ethereum is decreasing, and there is no trend of easing at present. Ethereum may even be replaced one day. First, replace it economically, which has already happened, followed by technology and security, and finally, decentralized political correctness. The main force driving all this is that the market is changing. This round of interest rate hike cycle is coming to an end. Most of the naked swimmers and bubble assets have been cleared. This cycle has a profound impact on the crypto industry. For Ethereum, the industry's attention has shifted from decentralized construction to short-term Meme hype profit. In the cycle of liquidity tightening, the market rarely gives builders positive feedback.

At present, the construction of the entire crypto industry revolves around one expectation, that is, the Fed's interest rate cut. The strong inertia of this expectation is generated against the background of the release of $3 trillion in liquidity from the new crown in 2021. Now the entire industry is running wildly in violation of business laws and common sense. Assuming that as long as the Fed releases water, the cost of crypto infrastructure can be shared among users, and the VC tokens issued will skyrocket, the leeks and big players think so, but is history really like this? It may be like this in the latitude of a ten-year cycle, but if you use a microscope to observe carefully from a quarterly time or even a shorter interval, there are too many losers who are deeply trapped in this swamp of investment. Back to this article, if the Fed's rate cut is less than expected and global liquidity continues to be tight, then projects that rely on luck (rate cuts) will starve to death, and projects with endogenous motivation will gradually develop vitality to adapt to the environment and get rid of the Fed's monetary policy cycle. The endogenous motivation of crypto projects comes from the persistence of decentralized beliefs and the most basic business common sense. Ethereum currently maintains an advantage in the former.

Summary and Thinking of Ethereum Foundation AMA

The Ethereum Foundation recently held an AMA to deal with Fud, which triggered discussions and feedback from the industry. We extend our thinking on the Foundation's views.

1. As L2 solutions mature, will Ethereum continue to expand L1? What are the feasible expansion solutions?

• Justin Drake: In the long run, the Ethereum team plans to use SNARKs technology to significantly improve the processing power of L1 and achieve almost unlimited expansion. Through SNARKs, heavy computing tasks can be moved off-chain, thereby reducing the burden on nodes.

• Vitalik Buterin: In the short term, EIP-4444 is the most feasible solution, which can effectively increase the Gas limit. In the long run, the client needs to be optimized in terms of execution, state reading and writing, data bandwidth and other aspects.

• Dankrad Feist: L1 expansion and L2 development are parallel and do not conflict. The expansion of L1 is limited by data availability and single thread, but through zkEVM and parallelization, the processing power of L1 can be greatly improved.

Extended thinking: The Ethereum Foundation currently adheres to the purest decentralized development route, but commercial considerations are insufficient. Although the host asked technical questions about the direction of expansion, the main problem of Ethereum at present is not expansion. If Gas is used as a quantitative indicator of income from providing services, then the service does not have good bargaining power and rigid demand performance in the near future. We can briefly sort out several links of Ethereum service output, including Pos consensus maintenance, security base, Web 3 developer platform, middleware, financial settlement layer, application layer. If there is no developed application layer, other service links can eventually be replaced,Restake or start an L1, because people's belief in or demand for decentralization is met. However, in the face of L2, there is no strong means to upgrade technology and enhance value cohesion. The application layer is in the highest strategic position for all public chains. The application layer should be upstream of the public chain and provide traffic and users, rather than downstream as the recipient of public chain services. To think about this issue clearly, the token economic system of the public chain should be redesigned until there are enough application layer dApps to form a prosperous ecology and market, and then adjust the premium service mode. Similar to Pumpfun and Friendtech, neither of them happened directly in the Ethereum ecosystem. Compared with the old-fashioned infrastructure Lego puzzle of the Ethereum ecosystem, no matter how the two are evaluated, they have created income and attracted users.

If Layer2 is compared to a middleware infrastructure that provides users with greater flexibility and composability, then any commercial service link that cannot be touched by the Ethereum mechanism may cause the related local infrastructure to be separated from the Ethereum ecosystem, because the law of the market is to reduce infrastructure costs and seize profits in this sector. To put it bluntly, it means issuing coins whenever possible.

A rule is gradually emerging in the blockchain world.Decentralized public chains that only focus on infrastructure,due to the lack of market fit,that is,the official-led application layer,will lose their voice in a short period of timeto the middleware infrastructure that is closer to users and has commercial rationality.In the long run,the latter will build their own ecosystem.dydx's migration out of Ethereum has given the industry inspiration.Whoever is closer to userswill have the strongest voice.

2. Max Resnick believes that the relationship between L2 and L1 is parasitic, and L2 is unwilling to decentralize the sorter. What does the Ethereum Foundation think about this?

Justin Drake: L2 does not want to gain more revenue through centralized sorters. The concept of "sorter fees" itself is misleading. L2's main income comes from executing congestion fees, not sorting. L2 is actually motivated to decentralize the sorter because it helps maximize fee income. Shared sorters help improve composability across L2, but achieving shared sorters requires the joint efforts of the community. Sorter decentralization faces challenges in security, MEV, and performance.

Extended thinking:Currently, L2 solutions have problems such as sorter centralization and user and capital separation. In essence, the initial development of L2 may be parasitic on Ethereum, but in the later stage, it will strive for more independence. If L2 is strong enough to get rid of the constraints of Ethereum, the most important thing is the political correctness of self-building decentralization. It is also a natural trend for L2 to reduce its value contribution to ETH.

3. If a prosperous Rollup ecosystem is developed on Ethereum L1, but the value growth of ETH is limited, does it mean that the roadmap of Ethereum has failed?

• Dankrad Feist:The success of the Ethereum ecosystem should not be measured only by the value growth of ETH. If Ethereum can provide diversified applications and bring value to users, then even if the value growth of ETH is limited, it can be regarded as a success. L1 and L2 are symbiotic, L1 provides infrastructure, and L2 provides diversified applications, jointly expanding the scale of the ecosystem.

• Justin Drake:ETH's value accumulation depends on transaction volume and use as a collateral asset. Even if the fee for each transaction is low, but the transaction volume is large enough, it can also bring considerable income. The more ETH is used as a collateral asset, the more stable its value.

• Anders Elowsson:ETH's value accumulation is closely related to the long-term sustainable development of the Ethereum ecosystem. Excessive focus on short-term value accumulation may affect the long-term development of the ecosystem. Although ETH's value growth may not be the most important metric, it is still an important indicator.

Extended thinking:As Dankrad Feist said, Ethereum is building a financial platform, which will be the most neutral platform to date, allowing the issuance and trading of financial assets, and also allowing the creation of new financial products such as derivatives on its basis.The current core of Ethereum's construction is to make the crypto natives realize thatEthereum is the purest decentralized smart contract platform,andthe infrastructure Lego and applications built on itinherit its related characteristics.So this is a long-term process,andshould not only focus on the short-term value distribution related to L2.

However, "L1 provides infrastructure, and L2 provides diversified applications". This positioning has defects. First of all, how to bind the value and prevent it from changing in a direction that is not conducive to L1, and how to ensure that L1 has the right to speak and constrain L2. It is not enough to rely on the political correctness of decentralization, and the technical dependence is also fragile. L2 began to need the political correctness of Ethereum to attract TVL and issue coins, and then the dependence became lower and lower.

Factors required for Ethereum to explode

Let's briefly analyze the factors required for Ethereum to explode. Like the fragment of the cool article, Ethereum is still placed with a lot of industry hopes.

1. Sufficient liquidity under the Fed's interest rate cut cycle, it is best to have a wave of liquidity flooding, so that the crypto market can enjoy the flood while Fud's traditional currency.

2. Strengthen the centralized means other than decentralized political correctness, specifically the means of condensing value in the technical links. The official can refuse to recognize the unrestrained packaging asset behavior of VC on each L2.

3. Give enough respect and attention to the application layer, especially the SocialFi track, instead of only supporting Farcaster and ENS, put down the high profile of decentralized developers, listen more to the opinions of product managers and demand analysts, and allocate part of the discourse power from decentralized governance and development to the construction of the application layer, and strive to fit the market.

Summary 

Economic relations between market organizations are easy to establish,political correctness is difficult to establish and maintain for a long time. So Ethereum is still the most valuable asset in the blockchain industry. With the efforts of the foundation and the ecosystem, it maintains its industry status as the holy grail of decentralization.

However, decentralization does not mean that there is a reasonable business logic to capture cash flow in the market. Non-financial users do not have such high faith and service needs in decentralization, especially before the large-scale popularization of Web3. This discomfort is very obvious. Decentralized construction is not as sexy as the story of Meme making money, and it is not as strong as the wealth effect of the application layer. This is a problem we see in the short term. The developer incentives at the application layer involve the adjustment of the execution layer, consensus layer and economic system. Whether Ethereum can maintain its leading position in the future, we hope to see more innovations in addition to decentralization.

In addition, from the perspective of liquidity, Ethereum ecological funds have also been overly diluted by VC coins. Only the top ten product protocols in the ecosystem will have nearly 3 billion US dollars in tokens unlocked in the next six months. The author can't help but think of a photo. On the way back to the hotel after the meeting, Vitalik was wearing a 200-yuan Uniqlo suit and was followed by a group of traditional VC elites in suits. Decentralization is a battle, and we need this holy grail to resist the hunting of the traditional elites who are sophisticated and selfish.