Should Ethereum abandon the concept of "ultrasound money"?
It is crucial for Ethereum to stop promoting the concept of "ultrasound money," but it is uncertain whether this is a good thing or a bad thing.Author: 0xBreadguy
Compiled by: Peisen, BlockBeats
Editor’s Note: Due to the Dencun upgrade, transaction fees on the Ethereum network have decreased, and the amount of ETH being burned has dropped to one of the lowest levels since the Merge. CryptoQuant analysts indicate that the Dencun upgrade has made Ethereum inflationary again, potentially undermining its characteristics as an "ultra-sound" currency. 0xBreadguy discussed on social media whether the concept of "ultra-sound currency" should be abandoned.
It is crucial for Ethereum to stop promoting the concept of "ultra-sound currency"—but I am not sure if this is a good or bad thing.
Why do I say this? Because users are now being asked to migrate away from the mainnet, and it is unlikely that we will see L2 reach the sustained ETH burn levels it had before Dencun (March 2024).
The current situation of L2 is:
Receiving execution rewards
Having user relationships
Expanding throughput while keeping costs to Ethereum relatively fixed (better when using Alt-DA)
Image source: @growthepie_eth
The Future We Envision
There has always been a gap in the modular roadmap regarding user migration, where on-chain activity declines as participants move to their preferred one or more L2 solutions, which is foreseeable.
The overall flow trend of users is roughly as follows:
Image source: @growthepie_eth
Activity will decline because a small portion of users will disperse across several early L2 solutions, the mainnet, and alternative L1s.
Then, these users will be replaced by a large number of newly launched L2 networks that will compete for the same block space we once used to mint monkey warrants.
The demand for ETH block space (driven by users who are less sensitive to costs (L2)) brings the burn mechanism back to the discussion table, with the ecosystem exhibiting both ultra-sound characteristics (ETH gradually becoming deflationary) and attracting the masses through scalable L2. Very impressive.
However, after Dencun, the situation is somewhat different.
The Situation We See
Now that blobspace has been introduced, L2 can handle most transactions at a 10x discount, and we are seeing another trend emerge:
A single L2 is processing an increasing number of transactions and throughput while keeping costs to Ethereum relatively stable.
Here are the metrics for Base over the past 90 days:
Transaction volume increased by about 75%
Throughput increased by about 100%
Payments to Ethereum remained unchanged
Image source: @growthepie_eth
What happens when a single L2 ecosystem grows infinitely without increasing additional ETH costs? These L2 ecosystems will absorb other L2 users without increasing the amount of ETH being burned.
They act like a black hole, absorbing users from the Ethereum ecosystem. This means you will (likely) end up with a situation like this:
Image source: @growthepie_eth
The power law effect begins to manifest, where the dominant L2 solution attracts a disproportionate number of users, while Ethereum's utilization remains low, as the cost of publishing data to Ethereum remains relatively unchanged despite growth.
This is why I believe it is time to abandon the concept of "ultra-sound currency": because for a long time (especially in the time scale of crypto), it may not become a significant factor.
I am also not sure if this is a bad thing. If you want ETH to be the chain used for settlement and security rather than a user chain, inflation may not be a bad thing; it helps enhance liquidity and spread across all these ecosystems.
Artificially making ETH scarce would hinder these characteristics (see: Bitcoin). However, this concept is indeed interesting, and that is important.
Other Thoughts
It should be noted that these are comments on the concept of "ultra-sound currency," not a forecast for the asset itself, which I still view optimistically.
I believe core developers should continue to push the modular roadmap rather than completely shift to scaling L1. They should try to scale L1 before conceding to L2, attempting earlier and for a longer time, but at this point, user education and further benefits of L2 economics will bring more advantages.
Optimize some aspects (block time) to reduce unnecessary complexity, such as pre-confirmation, while maintaining the overall direction.
The importance of ETFs for ETH cannot be overstated. They are structural game changers, and all these discussions will be irrelevant to them in the coming years.
Ironically, is the way L2 abuses ETH in this manner actually bullish? If I were a business entity looking to monetize my user base, Coinbase has already laid out the perfect blueprint for me. Therefore, I would still remain in the Ethereum ecosystem, continuing this concept, but from an extractive position. I am not sure which side of this pendulum is more important.
