Ethereum Crisis: Modularity, Human Nature, Competition and Leadership

Ethereum Crisis: Modularity, Human Nature, Competition and LeadershipEthereum, once the King of Altcoins, is now in crisis. Its halving rules are beginning to shake, and many altcoins are also in a slump

Ethereum Crisis: Modularity, Human Nature, Competition and Leadership

Ethereum, once the King of Altcoins, is now in crisis. Its halving rules are beginning to shake, and many altcoins are also in a slump. Speculators are exiting, and believers are starting to doubt themselves. The despair in the industry stems not only from the plummeting prices in the secondary market, but also from the uncertainty about the future direction. Criticism has become the main theme in the field, ranging from lack of applications to financial reporting details of major blockchains. Now, attention is focused on Ethereum, once the promised land of crypto. So, what is the internal struggle of the King of Altcoins"?

1. Mainchain Horizontal Expansion, Vertical Layering

Between 2018 and 2019, Vitalik set out a vision for Ethereum's ultimate goal: achieving fractal scalability through complete modularity. The idea is to optimize the underlying layer around data availability, while infinitely scaling the upper layers, thus bypassing the blockchain trilemma and positioning Ethereum as a settlement layer for countless chains, ultimately realizing the ultimate goal of blockchain scalability.

Once the feasibility of this vision was confirmed, Ethereum's roadmap rapidly progressed in both horizontal and vertical dimensions. In 2023, as the mainchain successfully merged with BeaconChain during the Shanghai upgrade, modularity became the driving theme of the Ethereum ecosystem. Now, with the Cancun upgrade taking the first step of EIP4844, the mainchain is approaching Vitalik's early vision. The upper layers are also booming, with steady improvements in gas, TPS, and diversity surpassing previous competitors.

Apart from the fragmentation issues, the narrative of Ethereum killers from heterogeneous chains should now be considered finished. But the harsh reality is that TON and Solana are on the rise, and many projects replicating the modularity narrative are outperforming Ethereum, the modular pioneer, in the secondary market even with ETF pushes. What's the reason for this?

Recently, Ethereum has been criticized for its shift to PoS and Layer2 development. But in my opinion, neither Vitalik nor Ethereum developers are wrong for pushing modularity forward. If anything, the process might have been too fast and too idealistic. I mentioned something similar in an article I wrote earlier this year: If blockchains truly have significant use cases beyond the financial realm and are eventually adopted on a large scale, then Ethereum's shift to modularity makes sense.

Clearly, Ethereum has been too idealistic in this regard, as there are no signs of these two conditions being met. The same goes for the pricing curve of DA. Given the current state of Layer2, the expected application layer explosion has not materialized. Moreover, many general-purpose chains have shrunk, with only ARB, OP, and Base remaining active. DA revenue alone is far from enough to sustain Ethereum's positive cycle.

There are other unresolved issues as well. For example, gas consumption has decreased by tens or even hundreds of times; what used to require 0.1 ETH now only needs 0.001 ETH, but user activity has not increased at the same rate, resulting in a supply far exceeding demand.

However, pushing for mass adoption of public chains while maintaining the highest level of decentralization and security does not seem wrong. Ethereum has successfully turned most of its promises from eight years ago into reality, which is rare in the crypto world. Unfortunately, the market is driven by pragmatism, not idealism. In the absence of applications and liquidity, the conflict between Ethereum's technology-driven idealism and investor needs will continue to deepen.

2. Human Nature

Ethereum's idealism is reflected not only in its vision for the future of the application layer, but also in its understanding of human nature. Currently, the two most discussed issues about Layer2 are: 1) centralized sequencers and 2) tokens.

From a technical perspective, Layer2 has the potential to be decentralized. However, from the perspective of human nature, it is unlikely that top Layer2 projects will give up the huge profits generated by sequencers, unless decentralization somehow enhances token value and generates greater returns. For example, leading Layer2 projects certainly have the capacity to decentralize their sequencers, but they choose not to.

This is because they are top-down projects driven by massive funding, and their operating model is very reminiscent of Web2. The relationship between community members and Layer2 is more like that of consumers and cloud service providers. Just as frequent users of Amazon AWS servers may receive discounts or cashback offers, Layer2 projects offer airdrops.

However, for Layer2 projects, income from sequencers is their lifeline. Design, funding, development, operation, and hardware purchases don't require community support. In their view, user contributions are minimal, which also explains the often indifferent attitude of many Layer2 projects towards users.

Therefore, the likelihood of sequencer decentralization is low, as simply appealing to a sense of morality is not enough. For sequencer decentralization to occur, new designs must align with the interests of Layer2 project teams, but such proposals are sure to be controversial. A better approach might be to remove or indefinitely postpone any roadmap items related to decentralized sequencers.

Currently, Layer2 projects are moving in the opposite direction of Ethereum's initial modularity goals; most of them simply transfer concepts and siphon away anything valuable from Ethereum.

Let's continue our discussion about tokens. Layer2 in its current form is still a relatively new concept in the crypto space, and tokens pose significant dilemmas from the perspectives of Ethereum, Layer2 project teams, and the broader community.

Let's start from Ethereum's perspective: From Ethereum's point of view, Layer2 should not issue tokens. In Ethereum's ecosystem, Layer2 is akin to a high-performance expansion server, which simply uses cross-chain and charges fees for services. This is a healthy model for both Ethereum and Layer2, as it maximizes the stability and value of ETH.

More specifically, if we compare the entire Layer2 ecosystem to the European Union, it is crucial to maintain the stability of the Euro. If many member states start issuing their own currencies, undermining the Euro, the EU and the Euro may eventually collapse.

Interestingly, Ethereum does not restrict Layer2 from issuing tokens, nor does it mandate the use of ETH for gas fees. This open attitude towards rules is typical of crypto.

However, as ETH continues to weaken, the "EU members" are also showing signs of unease. Among the primary tools used by top Layer2 projects for issuing new chains, it is explicitly stated that projects can use any token for gas fees and choose any integrated DA (data availability) solution. Additionally, one-click chain creation is likely to lead to the formation of smaller alliances within the Layer2 ecosystem.

Now let's consider this issue from the perspectives of Layer2 and the community. Even if ETH experiences a strong rebound in the future, tokens face a dilemma. In fact, major Layer2 projects were initially hesitant to issue tokens. In addition to Ethereum's opposition mentioned earlier, there are several reasons: regulatory risks, sufficient funding without the need for additional financing, difficulty in determining the scope of token use, and the faster growth of TVL (TotalValueLocked) and ecosystems through the direct use of ETH.

Issuing its own token may conflict with this goal, and liquidity can never surpass ETH. Again, human nature prevails; who can resist printing billions of dollars out of thin air?

Moreover, from the perspectives of community members and ecosystem development, tokens seem necessary. Besides charging fixed service fees, they also provide a readily withdrawable vault who wouldn't like that? But token design must also take into account the aforementioned issues, leading to minimal utility. This has resulted in a large number of "air tokens" that don't require either PoS staking or Pow mining. These tokens have only one use: voting, with a linear release each time, draining market liquidity. Over time, these tokens lacking true drivers will continue to decline after airdrops, leaving the community and investors dissatisfied.

So, should these tokens be given utility? Any meaningful utility would conflict with the aforementioned issues, resulting in a dilemma. The token situation of the "Big Four" Layer2 perfectly illustrates these problems.

In contrast, Base, which has not issued tokens, is in a much better position than Zks and Starknet, with its sequencer revenue even surpassing the creators of Superchain, OP. In a previous article on attention economics, I mentioned that leveraging social media influence, project operations, and pump-and-dump strategies to create wealth effects for meme tokens and various projects is an indirect way of performing multiple small airdrops. This approach is far healthier than directly issuing tokens and then airdropping them once. In addition to continually creating attraction, it also avoids many problems.

By allocating a portion of sequencer revenue monthly, Layer2 projects can maintain activity and build sustainable ecosystems. It is worth noting that the current points system in Web3 is merely a model of PDD