Ethereum's New Predicament: The King of Public Chains, Stagnating, is Gradually Losing Respect

Author: Climber, Golden Finance

Recently, there has been an increasing amount of discussion and controversy surrounding Ethereum. Not only does Vitalik himself need to step in to explain his views, but even the Ethereum Foundation has to issue announcements to quell the community's doubts.

In this round of bull market cycle, Ethereum's performance has been rather mediocre. The approval of the U.S. Ethereum spot ETF has not led to the explosive price movement that investors expected; on the contrary, the price has continued to decline. This has inevitably caused Ethereum, which is renowned as the "King of All Chains," to gradually lose the respect of investors and the community, leading to questions about various aspects of Ethereum.

Ongoing Controversies: Ethereum Needs to Rebuild Authority

Recently, community members have raised varying degrees of doubt regarding Vitalik's statements, the Ethereum Foundation, and the construction of the Ethereum ecosystem, all of which have received responses and rebuttals.

On August 25, KOL @0xstrobe questioned Vitalik, publicly accusing him of poor communication on the topic of DeFi. The original content was:

"Vitalik, I think one reason people are confused or frustrated by your views on DeFi is poor communication------ To you, 'DeFi' seems to mean the Ponzi schemes of the 2021 mining craze. But for many others, 'DeFi' means saving and borrowing on money markets like Aave, CDPs like RAI (which you also mentioned!), and Synthetics. These are all healthy decentralized financial applications------ with yields coming from borrowers, transaction fees, etc. Many of the 'Ponzi economics' that have infiltrated the DeFi ecosystem can only bring temporary boosts to certain metrics, but that is not all of DeFi."

In response, Vitalik stated: What you refer to as yields from borrowers, transaction fees, etc., is precisely what I am concerned about. The value of crypto tokens lies in the fact that you can earn yields with them, and these yields are paid by those trading the crypto tokens.

The answer is clear; for example: the yields for those earning an 8% annual interest with dollars are paid by those who are going long on ETH with 2x leverage at an 8% annual interest, but this means that the DeFi market exists downstream of the ETH market. So while DeFi may be great, it is fundamentally constrained and cannot become a breakthrough innovation that pushes crypto technology to another 10-100x adoption.

However, Vitalik's response has drawn more questions and rebuttals. For instance, an Electric Capital partner stated that Vitalik's comments apply to all finance. KOL @PaperImperium indicated that Vitalik's statements reflect a misunderstanding of human economic history. The CEO of Alphaverse Capital stated that Vitalik's viewpoint is untenable.

Following this, the Ethereum Foundation's transfer of 35,000 ETH raised community concerns, primarily due to the lack of transparency in the organization's annual spending reports.

ETHGlobal member Josh Stark stated that the Ethereum Foundation is currently drafting an updated spending report that will cover expenditures for 2022 and 2023, which will be released before the Devcon SEA conference (in November). He also revealed an overview of the spending information in this report, including both internal and external expenditures, such as:

"L1 R&D" includes funding for external client teams as well as internal EF researchers. Over the past two years, internal spending accounted for about 38%, while external spending accounted for about 62%.

Internal spending includes EF teams such as:

• Geth;
• Privacy and Scaling Exploration (PSE);
• Solidity;
• Cryptography Research;
• Robust Incentives Group;
• Devcon, etc.;

All these teams work publicly and share their activity information on their websites, GitHub, and social channels.

External spending refers to grants. Over the past four years, we have regularly published reports on EF grant activities on blog.ethereum.org. In the chart I shared above, the largest new category is "New Organizations." A key goal of EF is to help establish new organizations that can strengthen and support the Ethereum ecosystem in the long term. This category includes grants provided to the following organizations:

• Nomic Foundation;
• Decentralized Research Center (@TheDRC_);
• L2Beat (@l2beat);
• 0xPARC Foundation (@0xPARC);
• and other Ethereum-related and adjacent organizations.

In addition to questioning Vitalik and the Ethereum Foundation, community members have raised concerns about the state of Ethereum's development.

Ethena Labs' risk officer @MacroMate8 stated that since 2021, almost no newcomers have entered the ETH ecosystem. On the other hand, SOL is filled with young developers who are continuously developing.

In response, Josh Stark refuted this by citing data from the Electric Capital developer report. Vitalik also replied that he likes this chart for underestimating Ethereum's success by listing L2 as a separate category, but even with this barrier, Ethereum still looks great.

Other criticisms include that neither Vitalik nor most core developers view ETH as a store of value or a meaningful programmable currency, to which Vitalik responded that if he didn't believe ETH is SOV, he wouldn't hold about 90% of his net worth in it.

Can Ethereum Still Explode?

Regarding the aforementioned controversies and the responses from Vitalik and the Ethereum officials, many institutions and celebrities have provided their insights and predictions for Ethereum's future.

The founder of Cyber Capital stated that Ethereum is in decline while L2 is "dancing on its grave." He pointed out that since the implementation of EIP-4844 (Proto-Danksharding), Ethereum's fee revenue has significantly decreased and cannot keep up with inflation. Meanwhile, the usage and fee revenue of L2 networks have reached new highs, lobbying to maintain Ethereum's low capacity. Bons believes this constitutes a "parasitic relationship."

Moreover, L2 networks are effectively stealing users and fee revenue from Ethereum by masquerading as "the same as Ethereum" to attract users. Bons predicts that L2 networks will eventually migrate or become independent L1 networks, while Ethereum will gradually decline. He criticized Ethereum's leadership for "selling out" its own interests for L2 networks, believing this exposes systemic issues in governance.

He warned that if Ethereum were to breakthrough scale L1 in the future, it could lead to a collapse in the token and equity prices of all L2 networks, thus L2 networks have an incentive to prevent Ethereum's expansion.

J.P. Morgan provided reasons for Ethereum's poor performance in a research report: since the launch of the Ethereum spot ETF last month, there has been a net outflow overall, while the spot Bitcoin ETF launched earlier this year has been more successful. The net outflow for the Ethereum fund is about $500 million, while the net inflow for the Bitcoin ETF exceeds $5 billion.

The bank also stated that the weak data for the Ethereum ETF was somewhat expected and pointed out that Bitcoin's "first-mover advantage," lack of staking, and lower liquidity mean less appeal to institutional investors.

Zhu Su believes that the problem with the Ethereum Foundation is not the premature sale of valuable tokens, but rather the inability to provide a coherent roadmap and effective leadership.

However, there are still optimistic views on Ethereum.

The CEO of CF Benchmarks believes that demand for Ethereum spot ETFs may continue to grow in the coming months, with more wealth management companies expected to offer such products to clients.

He also stated: "Once wealth managers and financial advisors complete the educational process regarding what Ethereum is, its utility, and why they should hold it alongside Bitcoin ETFs, the inflow of funds into Ethereum ETFs will continue to rise. The educational process will help investors understand the Ethereum economy and emphasize its key differences from Bitcoin, thus clarifying that the allocation drivers are different, and both belong to a balanced portfolio."

Arkham, in light of the Ethereum Foundation's recent large-scale sale of ETH, listed past data. In 2020, the Foundation sold 100,000 ETH, after which ETH rose sixfold. Arkham: The Ethereum Foundation sold 100,000 ETH in 2020, after which ETH rose sixfold.

The founder of 1confirmation believes that Ethereum's market cap may surpass Bitcoin's within the next five years. Currently, Bitcoin's market cap is four times that of Ethereum, and both will continue to grow, but Ethereum will ultimately surpass Bitcoin.

He explained that Bitcoin has a clear narrative (digital gold), and institutions have now accepted that narrative. Ethereum has been the most influential blockchain in the crypto space over the past five years, but (outsiders) know very little about Ethereum. Ethereum is scarce, generates yields, and has real use cases. Given its market cap is now significantly smaller than Bitcoin's, Wall Street can acquire more. It is expected that Wall Street will continue to buy in and vigorously promote Ethereum to the world in the coming years.

Steno Research's senior cryptocurrency analyst Mads Eberhardt provided suggestions for Ethereum's recovery, stating that interest rates are the most critical factor affecting DeFi's attractiveness, as they determine whether investors are more inclined to seek higher-risk opportunities in decentralized finance markets.

Conclusion

As a representative of blockchain technology, Ethereum is imbued with infinite expectations, and the number of L2s generated around it is also increasing. However, in this round of the crypto market cycle, Ethereum and its ecosystem seem to have stalled, lacking any highlights, which explains why it has been continuously criticized by the community.

However, the responses from Vitalik and the Ethereum officials to the community's doubts have been relatively sincere and timely. Moreover, Ethereum has previously experienced greater trust crises, so for this king of all chains, it may be worth exercising a bit more patience.