The Innovator's Dilemma of Ethereum: Valuation and Usage Have Reached Their Peak, What Will Retain New Applications Moving Forward?
Unless Ethereum undergoes fundamental changes in the way the community and organizations operate, its relative advantages in valuation and usage have peaked.Original Title: 《Ethereum and the innovator's dilemma》
Author: JAY
Translated by: Shenchao TechFlow
So, how will Ethereum develop next? In this article, I discuss modular blockchains, database design, and cite GCR's views in an attempt to answer this question.
The argument of the innovator's dilemma can be summarized as: "Successful companies often fail to adapt to shifts in the paradigm, especially in terms of technological innovation. The reason is that they over-focus on making their products successful rather than trying to update and embrace ideas they are unfamiliar with."
In the world of blockchain and smart contracts, we have made significant progress over the past few years. Now, a million-dollar or rather $250 billion question is: What is the fate of Ethereum going forward?
Through this article, I will argue that: Ethereum has reached its peak in 1) valuation relative to all crypto assets (ETH.D); 2) relative usage and adoption. I will start by exploring the concept of modular blockchains, comparing it with traditional database design principles, and then connect all of this back to Ethereum and its future.
Modular Blockchain
Now, there is a more principled way of thinking about what constitutes a well-functioning blockchain, as well as a reasonable approach to decoupling (and scaling) core components. This is the debate between monoliths and modules.
The core idea behind blockchain modularity is that there are four fundamental functions:
Execution. Determines the state "after" a transaction. If I send tokens to a specific wallet, the execution layer will decide the relevant balances before and after the transaction.
Settlement. Determines whether the submitted transaction is "valid." After sending tokens, the balance is xyz - settlement determines whether xyz is correct.
Consensus. Determines the final state after a bundle of transactions. This layer establishes 1) the correct order of a given series of transactions, and 2) the final state after processing those transactions.
Data Availability. For any of the above three functions to exist, there needs to be a prior state and an end state. The function of DA is to provide the execution layer with the state and update the state based on the final result of consensus.
Like any engineering problem, a "perfect" blockchain only makes sense when there is a clearly defined use case. The existence of this framework allows for more specialized blockchain designs, where a blockchain built for high-throughput gaming has vastly different requirements than one intended to be a global decentralized ledger. This way of thinking strongly reminds me of the principles of database design, particularly around the debate of SQL versus NoSQL.
Database Design
Databases have existed for decades longer than blockchains. The consensus on their design is that there is no perfect database. Like most engineering problems, everything requires trade-offs.
The framework for building scalable databases goes back to "What is the use case?" Before making decisions, I would ask several questions:
What is the rough ratio of reads to writes? In applications like Telegram or Slack, the read and write volumes are similar, while on Twitter, the read volume is several orders of magnitude higher than the write volume.
In a distributed system, there is the concept of consistency versus availability. In other words, this can be rephrased as: Are we more concerned about inaccurate data or application downtime? This again depends on the situation. For fintech applications, consistency (accurate data) is far more important.
How important is stale data versus fresh data? How does this relate to the read/write load? Does our database allow us to implement a strategy to handle concurrent writes and reads? For example, if my wife withdraws cash from my bank while I swipe my debit card, how do we prevent the classic double-spending problem?
What are the reading patterns? Do you need flexible access to data, or is data usually pre-defined? Are you performing many joins across different datasets?
In addition to technical considerations, it is also important to understand:
How many engineers are proficient in this technology? How many engineers genuinely want to use this technology to build?
If we want to fork the underlying code and make adjustments, is there a way to gain positive support?
The Future of Ethereum
Now to tie all of this together - there is no perfect blockchain. Good engineering is about trade-offs, and there is no one-size-fits-all solution. So, how did Ethereum become such a "dominant" platform? Why does Ethereum's pricing seem as if it is the perfect blockchain? Finally, how will Ethereum develop next?
How did Ethereum become such a "dominant" platform?
Four years ago, Ethereum was the preferred platform for building smart contracts. Compared to all other platforms, it had excellent developer tools like Hardhat, CryptoZombies, etc. Additionally, it had a loyal user base, and the chain and tokens were "decentralized." At that time, centralized blockchains were more likely to be scams. ETH as an asset was also cheaper, meaning gas fees were lower.
Today, developers have more smart contract platforms to choose from, each with unique trade-offs. Although scams still exist, this situation has significantly decreased compared to four years ago, as more talent and capital have entered the space.
The reasons for Ethereum's past success are also the reasons it will fail in the future. There was a time when Ethereum was the only viable smart contract platform for developers. Legitimate use cases (DeFi, NFTs) provided ETH with a significant lead. But at this stage, the focus has shifted to value accumulation (super stablecoins) and competing with Bitcoin to become the default value store of the internet (flippening).
The desire to be both a smart contract platform and a decentralized "super stablecoin" has added significant friction for marginal users and developers (higher gas costs, congested networks). As Confucius (and GCR) said: A person who chases two rabbits catches neither.
How will Ethereum develop next?
Users will flow to where applications exist and costs are reasonable, while application developers tend to be more cautious and long-term. Because their expenses are much larger compared to the users themselves. Developers will build on platforms where their applications have long-term growth and scaling potential.
Now looking at Ethereum, its average transaction speed is 15-20 TPS, and gas fees often soar to $200. The applications that can be built on Ethereum have very clear limitations, requiring very few interactions. For example, lending protocols are a good application on Ethereum because I might interact with it a few times a year.
But if I were an application developer intending to build an application that aims to scale to 100,000 or 1 million users and has a higher usage pattern, then building such an application on Ethereum is not feasible.
This is becoming increasingly evident as viable alternatives continue to emerge.
FriendTech is built on Base L2
The Pacman and Blur teams are considering launching their own L2
DYDX uses their own specific application chain
The modular blockchain framework provides a set of trade-offs that blockchains can choose from. We are now in a state where blockchain infrastructure supporting points along the trade-off curve is beginning to emerge.
Last but not least are the incentives.
As Charlie Munger has always said: "Show me the incentives, and I will show you the results." The incentive structure for building on Ethereum is poorer compared to other existing blockchains. Venture capital firms and new L1 teams are very interested in building a strong, thriving ecosystem. As an investor, I would think about why my team should still build on Ethereum when the tokens are so dispersed and the ecosystem is already so crowded? Why not promote application development on a blockchain where I have a stake, where L1 valuations are much lower?
The replies in this tweet make things very clear.
ETH is no longer at the efficient frontier of blockchain design. No matter where you want to be on the trade-off curve, there are better smart contract platforms to choose from, and the incentive structures are the same. Unless Ethereum undergoes fundamental changes in how the community and organizations operate, its relative advantages in valuation and usage have peaked.
