Commenting on Multicoin’s interview: “Why is ETH Down so bad?”

Original author: @Web3 Mario (https://x.com/web3_mario)

Last Sunday, I read an interview with Bankless and Multicoin titled Why is ETH Down so bad? and found it very interesting and profound. I recommend that you read it. Ryan fully demonstrated the difference between Web3 pragmatism and fundamentalism in the interview, but I have already discussed this in detail in previous articles. In addition, the views in the interview also triggered a lot of inspiration and thinking for me. Indeed, in recent times, Ethereum has begun to suffer a certain degree of FUD. I think the direct reason is that the passage of the ETH ETF did not trigger a similar market as the passage of the BTC ETF, which triggered some people to rethink the vision and development direction of Ethereum. I also have some thoughts on these issues and hope to share them with you. In general, I recognize Ethereum as a social experiment, hoping to create a decentralized, authoritative and even trustless cyber immigrant country vision, as well as its expansion direction based on Rollups L2. Ethereum is facing two real problems. The first is that the competition between Restaking and L2 expansion solutions dilutes the resources for ecological development and reduces ETHs value capture ability. The second is that the key opinion leaders of Ethereum are becoming aristocratic, and because they are too concerned about their reputation, they lack enthusiasm for ecological construction.

Evaluating Ethereum’s success or failure from the perspective of market capitalization alone is one-sided

First of all, I would like to talk about the difference in vision between Ethereum and Solana from the perspective of values, and comment on why it is one-sided to evaluate Ethereum from the perspective of market value alone. I don’t know how many of you are clear about the background of the birth of Ethereum and Solana, so let’s first make a brief review here. In fact, Ethereum did not have the fundamentalism it has today when it was first born. In 2013, Vitalik, one of the core contributors to the Bitcoin ecosystem, released the Ethereum white paper, which also marked the birth of Ethereum. The main narrative of the industry at the time was Blockchain 2.0. I don’t know how many of you still remember this concept. In fact, it specifically refers to the establishment of a programmable execution environment based on the decentralized features provided by the blockchain to expand potential application scenarios. In addition to Vitalik, the Ethereum core team at the time had 5 other core members:

• Mihai Alisie: He co-founded Bitcoin Magazine with Vitalik.

• Anthony Di Iorio: An early Bitcoin investor and advocate who assisted in the early promotion and financing of Ethereum.

• Charles Hoskinson: One of the early core developers who later founded Cardano.

• Gavin Wood: The author of the Ethereum Yellow Paper (technical white paper), designed Ethereums programming language Solidity, and later founded Polkadot.

• Joseph Lubin: He provided important financial support for Ethereum and later founded ConsenSys, a well-known company in the Ethereum ecosystem.

Ethereum was publicly funded through an ICO in mid-2014. This fundraising activity raised approximately 31,000 Bitcoins in 42 days, which was worth approximately $18 million at the time. This was one of the largest crowdfunding campaigns at the time, and the core vision of Ethereum was to create a decentralized global computer platform that could run smart contracts and decentralized applications (DApps) of any complexity. This platform aims to provide developers with a universal, borderless programming environment that is not controlled by a single entity or government. However, in the subsequent development, the core team had a divergence of values on how to build Ethereum:

• Differences in governance model: There are different opinions on Ethereums governance model within the team. Vitalik Buterin prefers a decentralized governance structure, while members such as Charles Hoskinson (who later founded Cardano) advocate a more commercial and centralized governance model. They hope that Ethereum can introduce more corporate management experience and business models, rather than relying solely on the self-governance of the open source community.

• Differences in technical direction: Team members also have differences in the direction of technical development. For example, in the process of developing Ethereum, Gavin Wood proposed his own ideas on technical architecture and programming language, and wrote the Yellow Paper (technical white paper) of Ethereum. But over time, Gavin had different views on the technical development direction of Ethereum, and eventually he chose to leave Ethereum and founded Polkadot, a blockchain project that focuses more on interoperability and on-chain governance.

• Differences in commercialization paths: Team members also have differences on how to commercialize Ethereum. Some members believe that Ethereum should focus more on enterprise-level applications and partnerships, while others insist that Ethereum should remain an open, borderless and decentralized developer platform.

After a political struggle, the cryptocurrency fundamentalists represented by Vitalik won, while the pragmatists who valued utilizing the technical characteristics of blockchain to promote integration and commercialization with traditional industries left Ethereum and established their own products. The disagreement at that time is actually the difference in values between Ethereum and Solana reflected in this interview, except that the protagonist of the story has changed to Solana, which is better integrated with traditional finance.

Since then, Vitalik has become the actual guide of the Ethereum industry. The so-called fundamentalism refers to creating a censorship-resistant cyber immigrant society by providing a decentralized online execution environment as a distributed cyber parliament. Users can meet all their network life needs through various DAPPs built on the Ethereum ecosystem, thereby getting rid of their dependence on authoritative organizations, including oligopolistic technology companies and even sovereign countries.

Under this vision, we can see that Vitalik’s subsequent efforts will focus on two aspects:

• Application: Think about and encourage more non-financial use cases, so that this decentralized system can accumulate more dimensional user data, and then promote the creation of richer and more sticky products, so as to achieve the goal of increasing the penetration of Ethereum in the online life of ordinary people. Among them, it is not difficult to find some well-known topics, such as DAOs aimed at distributed collaboration, NFTs with cultural value, SBTs aimed at accumulating more diverse non-financial user data, and prediction markets that serve as social cognition tools in the real world.

• Technical aspects: Under the premise of ensuring decentralization and trustlessness, the networks execution efficiency is improved as much as possible through cryptography and other means. This is the expansion direction from Sharding to Rollup-L2 that Vitalik advocates in technology. By offloading the execution process of heavy calculation to L2 or even L3, L1 is only responsible for handling important consensus tasks, thereby reducing the users usage cost and improving execution efficiency.

For projects like Solana that focus more on expanding traditional financial business with the practicality of blockchain, what needs to be considered is simple and focused, that is, as a listed company with the purpose of profit, how to improve its price-to-earnings ratio. As for whether to adhere to values such as trustlessness, it depends on the potential profit behind this narrative. Therefore, Solana will not have too much burden and resistance in promoting the integration with CeFi products, and will hold a more open and inclusive attitude. With the entry of Wall Street capital, the influence of traditional finance on the crypto world has increased dramatically, and Solana is one of the core beneficiaries of this trend, or it is not an exaggeration to say that Solana is the evangelist behind it. As a profitable company, it is natural to have a customer-oriented mindset, which is why Solana pays more attention to user experience.

After sorting out these threads, lets think about an interesting question: Are Ethereum and Solana competitors? In some ways, the answer is yes, specifically in terms of providing cryptocurrency-based financial services that are not restricted by region and are available around the clock. In this regard, Ethereums security and system robustness are better than Solanas, at least there will not be frequent downtime, but user experience has indeed become a problem at this stage. The numerous L2 side chains confuse many new users, and they face considerable financial risks and psychological pressure when using the capital bridge.

However, in terms of the cultural attributes of being a cyber immigrant society, Ethereum is unique. For such a non-profit, public welfare, and humanistic public good, it is somewhat one-sided to evaluate its value simply from the perspective of market value. This process can be understood as a subculture community enriching its governance function through some technical means, and then forming a sovereign state that relies on the existence of the Internet. The core of the entire construction process is to firmly establish a universal value, that is, to bring anti-censorship characteristics by ensuring decentralization. This is an idea, a belief. This is why Ryan said that the Ethereum community has a human advantage. It is precisely because as the cultural product with the highest added value in human history, it can fully mobilize peoples enthusiasm. It is not only from a utilitarian perspective that we can achieve this kind of cold start success, which is consistent with the process of any political revolution. Imagine if you only evaluate the United States at the beginning of its independence by output value, it would be ridiculous. The time required to establish a country is obviously much longer than that of a company, and the difficulties encountered are much greater, but the benefits after it is achieved are far from being measured by a company.

L2 and L1 are not in a competitive relationship but a master-slave relationship, which will not dilute Ethereums value capture ability because the legitimacy of L2 comes from L1

The second point I want to refute is that the core point of Ryan’s doubts about Ethereum is that he believes that L2 is an execution outsourcing strategy that will dilute the value capture ability of Ethereum L1. At the same time, when L2 develops to a certain extent, it will form a competitive relationship with L1 and lead to a breakdown in cooperation.

On the contrary, I think the current development path of Ethereum based on Roll-Up L2 is a completely correct choice. As a low-cost and high-efficiency technical solution, L2 can not only effectively expand the potential application scenarios of the Ethereum ecosystem, but also reduce data redundancy in the network without sacrificing the degree of decentralization. To a certain extent, this is also a more environmentally friendly technical solution. It can also help Ethereum actively explore some boundary scenarios in an environment with reduced single-point risks. For example, cooperation with CeFi or innovation in anonymous projects can be operated with the help of L2, which also has the effect of risk isolation.

First of all, I think the description of L2 as outsourcing execution is not very appropriate. In traditional business training, we have easily understood the pros and cons of outsourcing execution. By separating some low-profit businesses from the main business and outsourcing them to third-party companies, the company can focus more on high-value-added businesses and reduce corporate management costs. However, the disadvantage is the loss of the iteration capability of related technologies, and the outsourcing costs will be raised in an uncontrolled manner. TSMCs relative development history with the semiconductor industry in the United States and Japan can well illustrate this point.

However, L2 cannot be understood so simply. In fact, I think it is more reasonable to compare L2 to the colony system of Ethereum L1. The biggest difference between the two lies in the content of the contractual relationship between the two parties and the binding force of their contracts, that is, the different sources of legitimacy behind them. First of all, we know that L2 does not undertake the consensus task of transactions. It relies on L1 to give finality through technical means such as optimistic solutions or ZK solutions. L2 plays more of the role of executor or agent of L1 in certain segments. This is a subordinate relationship similar to the colonial system.

You can think of it as the British India system established by the British Empire in the Indian subcontinent, which was responsible for the taxation and management of the colonial regions by appointing a bureaucratic system such as the Governor-General and supporting local natives as full agents. We know that there are two ways for the mother country to make profits from the colonies. The first is to control the international trade of the colonies and influence their economic structure through exclusive trade laws. For example, the tobacco and other raw material industries were promoted in the North American colonies, and trade was only allowed between the colonies and the mother country. In this way, profits were made through the difference in added value with the help of industrial capacity. The second is relatively simple, which is to establish a tax system in the colonies, levy taxes directly and transfer part of it to the mother country, which usually relies on a strong mother country garrison to maintain the stability of the rule.

L2 acts as the value capture agent of Ethereum in various fields. Ethereum also benefits from this system in two ways. One is that in order to obtain security, L2 needs to make final confirmation on L1, and this process requires ETH as the payment target, which creates a use scenario for ETH. This is similar to a final tax levied by L1 from L2, or it can also be understood as a reward for L1 to bring security guarantees to L2. The second is that due to the master-slave relationship between the two parties, ETH is more likely to be used as a value storage target by users in L2 than other assets, thereby obtaining an effect similar to seigniorage. Imagine that in a lending agreement in L2, you will find that the highest value of collateral must be ETH.

The reason why this master-slave relationship is not easy to break, that is, why L2 will not form a competitive relationship with L1 and cause the breakdown of cooperation, is that the source of L2s legitimacy is the finality provided by L1, just like the legitimacy of the colonial system comes from the military support of the sovereign country. Leaving this cooperative relationship will make L2 lose its legitimacy, and then lead to the collapse of the overall business logic, because the reason why most of your users use you is because you are legitimized by L1.

Ethereum is currently facing two problems: ReStaking’s vampire attack on the L2 development route and the aristocracy of Ethereum’s key opinion leaders.

After discussing the above two arguments, I would like to talk about the real problems currently encountered in the development of Ethereum. I think there are two core problems:

• ReStaking’s vampire attack on the L2 development path;

• Ethereum key opinion leaders are becoming aristocrats;

In my previous article, I have introduced the vision and development direction of EigenLayer in detail. I have a high opinion of EigenLayer, but when I look at this project from the perspective of the Ethereum ecosystem, I find that this is simply a vampire attack, which has squeezed a large amount of resources that should have been directed to L2 construction and diluted them to the ReStaking track. But at the same time, ReStaking has fundamentally deprived ETH of its value capture ability.

How to understand it? I have just talked about how Ethereum benefits from L2. You will find that the same logic cannot be reused in the Restaking track. As another expansion plan, ReStaking and L2 are in principle in a competitive relationship. However, ReStaking simply reuses the consensus capability of Ethereum, but it cannot establish a sufficient incentive model to stimulate ReStaking builders to actively explore more usage scenarios. The core reason is that it costs L2 operators to use L1 consensus, and this cost is a fixed cost and is not affected by the activity of L2. Since ETH is required as the final payment target, L2 operators need to actively build and explore in order to maintain a balance between income and expenditure and seek higher profits. However, for ReStaking, reusing L1 consensus is cost-free, because they only need to pay a simple bribe to the Staker on L1, and this bribe can even be a future expectation. Recall the Point farce, which has been analyzed in detail in my previous article. In addition, ReStaking capitalizes consensus capabilities, which means that you can flexibly choose the cost of purchasing consensus services based on current needs. This allows potential buyers to use Ethereums consensus services in a targeted manner. This is a good thing for buyers, but for Ethereum, it also loses the mandatory nature of L2.

As ReStaking and its derivative tracks attracted a lot of capital and resources, the development of L2 has stagnated. This has wasted resources in the ecosystem in the work of reinventing the wheel, or reinventing the wheel. No one thinks about how to create richer applications and capture more revenue, but just indulges in the capital game brought by storytelling. This is really a mistake. Of course, from the perspective of EigenLayer, the mentality will take a 180-degree turn. I still admire the teams clever capture of the value of the commons!

In addition, another issue that worries me more is that the key opinion leaders of Ethereum are becoming aristocrats. You can find a phenomenon that the Ethereum ecosystem lacks active opinion leaders like Solana, AVAX, and even the Luna ecosystem at that time. Even if they seem to be the creators of FOMO, there is no doubt that this is a good thing for community cohesion and the confidence of entrepreneurial teams. I do not agree with Ryans view of history, but I do admit that the opportunity for historical advancement is inseparable from the efforts of individual geniuses. However, in the Ethereum ecosystem, except for Vitalik, it is basically difficult to think of other opinion leaders. This is naturally related to the split of the original founding team. But it is also related to the lack of liquidity of the ecological class. A large amount of ecological growth benefits are monopolized by early participants. Yes, imagine that you have completed a fundraising of 31,000 BTC, which is worth more than 2 billion US dollars according to the current market value. Even if you do nothing, it is OK, not to mention that the success on Ethereum has created wealth that has long exceeded this number. So for those early participants who should be the most important opinion leaders, it is more attractive to start transforming to a conservative strategy to maintain the status quo than to expand. In order to avoid risks, they have begun to cherish their feathers and tend to adopt conservative strategies in promoting ecological construction, which is understandable. The simplest way is that as long as you can guarantee the status of AAVE and then lend the large amount of ETH you hold to leveraged demanders, you can earn a considerable and stable income, so why do you need to incentivize other new products?

I think the current situation has a lot to do with Vitaliks style. For Vitalik, I think he is better at being a religious leader. He will have very constructive designs on metaphysical issues such as the design of values. But as a manager, he doesnt seem to be keen on this. This is why Ethereums development efficiency is so slow. A funny joke is that when the Ethereum community just started to design the technical solution of Sharding, the domestic public chains had already been sharded. This is naturally related to Vitaliks management style. You may say that this is a problem that must be faced due to the pursuit of decentralization and non-profitability. But I think for this ecosystem, Vitalik has the obligation to actively solve this problem.

But no matter what, I am full of confidence in the development of Ethereum, because I recognize the public welfare and revolutionary vision behind this group of people. It is Ethereum and the group of people behind it that allowed me to enter this industry, establish my own industry cognition, and even have the current values. Even if I encounter some resistance now, as an older youth, I think it doesn’t seem so bad to pursue some ideals other than money!