Opinion: From Decentralization to L2 Dependence, Ethereum is Gradually Straying from Its Original Intention

Author: Justin Bons, Cyber Capital Founder & CIO

Compiled by: Deep Tide TechFlow

Most L2s will always remain centralized because the incentive mechanisms themselves are distorted.

The "solutions" to these problems are overly optimistic and laughable.

Because profitable companies will not give up their revenue.

This is why ETH has deviated from its original intent and become a centralized service platform:

Competing L1s and L2s are consuming ETH's user base, while its leadership is pushing and celebrating ETH's decline. This is a sad state of affairs, as it betrays the founding principles they once claimed to cherish. Promoting centralized solutions while empowering companies that are forced to comply with government censorship.

Privacy has always been one of the cornerstones of the cypherpunk movement, as cryptography once promised the widespread application of privacy-enhancing technologies. However, ETH has pushed most users towards L2s that can monitor, freeze, steal, and censor funds, which is clearly a departure from the cypherpunk ideals of the past. It is heading down the same self-destructive path as BTC, choosing L2 over on-chain scaling. In fact, history is repeating itself:

The Centralization of L2s

Currently, all major L2s are completely centralized, capable of censoring and stealing user funds. Since the management keys controlled by multi-signature can change contract rules (including theft), centralized sequencers can also censor in real-time.

However, what is more concerning is the potential direction of change. In this regard, the situation is quite dire, as all solutions to L2 centralization appear overly optimistic, requiring profit-driven companies to give up substantial existing revenue…

This completely ignores human nature and history, which is a common mistake made by senior engineers and computer scientists. This also illustrates why blockchain research must be multidisciplinary, encompassing the humanities. Because the criticism of the proposed solutions for ETH is not technical; it reveals the inherent social coordination dilemmas within these proposals.

Decentralization requires powerful stakeholders to relinquish their power. Historically, this rarely happens, as it contradicts their incentives. Sometimes, outstanding individuals make the right choice. But overall, especially when observing large groups, we should always consider incentive mechanisms, as they are better predictors of mass behavior.

This is also why I believe most L2s will not decentralize. Because the incentive mechanisms clearly favor keeping L2s centralized, saying "trust me, bro" is not enough, especially when we should be verifying rather than blindly trusting.

Drake's Rebuttal

Shifting a portion of the revenue in the system is not an appropriate solution, as @drakefjustin recently attempted to place Base's revenue in the execution part rather than the sequencer part. This is because for Base to truly achieve "decentralization," it must give up all revenue; and what Drake implies about maintaining centralization in the execution part is clearly not a viable solution.

The harsh reality is that Coinbase may never decentralize, which is the true state of the so-called "L2 scaling" roadmap! Users are left with centralized and essentially custodial solutions, and under the heavy pressure of KYC, AML, and institutional-level scrutiny, the original vision has been thoroughly crushed.

Interoperability of L2s

L2s have consistently opposed adopting universal interoperability protocols, instead trying to get everyone to accept their respective solutions, even if it may harm their long-term development. This is akin to the tragedy of the commons in political science. Attempts at unified interoperability protocols have occurred over twenty times, which is essentially equivalent to not reaching a unified agreement!

L2s not only compete with each other but also with L1 itself, forming multiple competing ecosystems rather than a unified ecosystem, which differs from L1's scaling strategy. The free market will continue to spawn a variety of competitive L2s, representing different interest groups that do not always coexist harmoniously. This dynamic is beneficial in most cases, but for blockchain scaling, it only leads to massive fragmentation, ultimately harming user experience. The belief that everyone will use the same seamless interoperability protocol, while custodians will exit the market due to more advanced technology… is merely a fantasy and does not align with the actual workings of a free market, as custodians and centralized L2s will always exist in such an environment.

Ironically, while the ETH core team promotes L1-based sequencers, major L2s are developing their own "shared sequencers," such as Arbitrum's Superchain and Polygon's Agglayer. For "shared sequencing" to truly work, everyone must use the same one, which is clearly unrealistic. It is unrealistic to expect these major L2s to abandon their efforts in "solving interoperability." The same goes for Eigenlayer and other restaking platforms, as they also take on similar sequencer functions.

All of this makes a true shared sequencer an impossible goal, as most of these are driven by greed-fueled fantasies. Their idea is that if everyone uses the same L2 (their L2), the user experience issues can be resolved! Technically, this may hold, but practically it does not work. I think this is similar to the extremist views of BTC, believing that ultimately there will only be one…

This is why the fragmentation and composability issues between L2s remain unresolved. The same reasons have also led to the failure of interoperability between L1s to date. However, at least in this case, L1 has not been artificially constrained by this poor L2 narrative. Therefore, my concern is not with L2 itself, but rather with the lack of L1 scaling, even if this may be a result of L2 lobbying.

Economic Security

The trend away from actual ETH usage is the fundamental reason for its decline, as the survival of cryptocurrencies relies on economic security. Although @aeyakovenko mocked the ETH community, calling it a joke, revenue is always key. It is evident that blockchains capable of sustaining their own usage will, in the long run, always earn more revenue than those that outsource all usage. And ETH is heading towards the latter, which explains why, from every angle, this is an extremely unwise strategy!

Distorted Incentive Mechanisms

Now let's discuss an obvious issue: compared to the L1s of ETH and BTC, L2s have received funding by several orders of magnitude more. L2 tokens and venture capital have created billions of dollars in funding, while L1 development has only garnered millions. This leads to a clear conflict of interest, which could even trigger direct corruption. Due to the distortion of incentive mechanisms, developers may deliberately limit L1's capacity to support L2. They simply need to avoid pursuing or supporting L1 scaling technologies.

This is why L2 has become the largest corrupting force in the industry. In the short term, they profit by not scaling L1. L2 tokens and equity have made developers millionaires. This undoubtedly leads to a preference for L2 scaling over L1 scaling. Because by supporting narratives that limit L1 capacity, L2 can earn more through L2 scaling alone. This creates a clear conflict of interest between the long-term success and focus of L1 (ETH and BTC) and the short-term profits of companies focused on L2.

This is also because venture capital firms can extract rents through "L2 scaling," as these are typically profit-driven enterprises, while L1 scaling is a public good. Venture capital firms cannot extract a percentage of fees from well-designed L1s, but in the L2 space, this has become the norm. Scaling L1 does not benefit these venture capital firms in the short term, while the "L2 scaling" roadmap can bring benefits, even if this may lay the groundwork for ETH's self-destruction in the long run.

L1 Scalability

The foundation of these two viewpoints is a core assumption: the scalability of L1. ETH's position is that the trade-offs of L1 scalability are unacceptable. Therefore, they believe this technical limitation provides justification for the "L2 scaling" roadmap.

The idea of L1 scaling is more optimistic, as it recognizes that the current L1 can meet demand without compromising decentralization. Whether through pure parallelization, DAGs, or sharding technology, there are multiple ways to achieve this goal. The ETH community ideologically clings to an outdated technological framework, very similar to the Bitcoin community. ETH is rapidly becoming like Bitcoin, an outdated "dinosaur," accompanied by similar, harmful, almost cult-like ideological characteristics.

ETH Extremism

ETH supporters are gradually becoming indistinguishable from Bitcoin extremists, which is not coincidental, as they adopt the same philosophy and narrative as their coping mechanisms or belief systems.

All of this is due to the same systemic flaws present in the governance structures of both BTC and ETH. Thus, environmental pressures have given rise to a specific belief system, akin to convergent evolution in biology. I also firmly believe that if formal on-chain governance were implemented, not scaling L1 would never be seen as a viable option.

Governance

Ultimately, the crux of the issue lies in "who makes the decisions." The unfortunate reality is that the development of BTC and ETH is often determined by a relatively small number of people. This is the essence of "off-chain governance": a highly centralized decision-making process that is easily manipulated by small groups with malicious motives (such as profit-driven L2s) that directly benefit from short- and medium-term strategies of not scaling L1.

On-chain governance, on the other hand, allows all stakeholders to vote on proposals in a completely transparent process, resulting in vastly different outcomes. Most importantly, this governance model is more favorable to L1, rather than the interests of those who currently hold centralized governance power.

From the perspectives of political science and philosophy, off-chain governance processes are often susceptible to manipulation and distortion, as "GitHub-style dictatorship" is far less stable than a national system. In contrast, an on-chain governance process with a large number of stakeholders, combined with more complex checks and balances and separation of powers, has the potential to withstand the test of time and the worst challenges of human nature.

On-chain governance should be viewed as a mechanism to protect decentralization, rather than a repetition of traditional old governance. In fact, the opposite is true; off-chain governance is often a poor imitation of governance systems that existed before the advent of blockchain. On-chain governance is a completely new model that fully leverages the advantages of blockchain technology and combines it with L1 and collective decision-making. Therefore, it is not surprising that the leadership of BTC and ETH completely rejects this idea. Those with the most influence may suffer the greatest losses after the implementation of on-chain governance, which is why the existing incentive mechanisms will hinder its realization if not established soon.

The Real Solution

The solution lies in abandoning ETH and supporting its more scalable competitors through action. Because as stakeholders, we have no real say in the governance of ETH.

We can certainly appreciate the efforts to initiate comprehensive reforms within ETH, similar to the block size debate in BTC. However, as a veteran of that "civil war," standing on the "losing side" of "big blocks," I do not find the situation optimistic. Because at that time, the vast majority of businesses, miners, stakeholders, and users supported larger blocks, but the core developers still achieved their goals, and eight years later, the block size limit remains 1MB!

Perhaps it is theoretically impossible to find stronger evidence to prove that centralization effectively controls decentralized network rules. ETH has not gained widespread support for reform like BTC, so I do not see how it can succeed, especially in the absence of formal on-chain governance.

In the free market of cryptocurrencies, we must consider another significant demographic effect: those who support L1 scaling have left ETH, while those who do not support it have joined ETH. So, who is left to fight for L1 scaling now? The same situation has occurred in BTC, turning it into a single culture with no real potential for change. All these changes start from the top of the leadership, gradually steering the entire ecosystem away from its original goals.

We once believed in "fork governance," but this is problematic in two ways: first, the threshold for "agree or fork" is too high, thus effectively evolving into a form of disguised autocracy. Second, the market did not bypass the controversial chain through forks, but instead chose to upgrade to a new generation of chains. This also explains why the market did not bypass BTC through BCH, but instead chose to upgrade and fully shift to ETH at that time.

History Repeats Itself

I went from a die-hard supporter of Bitcoin in 2013 to sounding the alarm in 2015, and then becoming a critic in 2017.

I abandoned BTC and turned to believe in ETH's commitment to on-chain scaling and sharding, becoming a staunch supporter in 2015, but sounded the alarm again in 2022, ultimately becoming a full critic in 2024.

Regardless of how you view my position, one thing is clear: despite our constant protests, I have maintained a high degree of consistency, while BTC and ETH have changed under my scrutiny. To fundamentally alter the economics and goals of a blockchain by arbitrarily limiting its capacity is a radical approach that runs counter to conservative methods; we should not allow them to use "conservatism" or "social contract" as excuses, as these principles have been completely violated.

The real tragedy is that we have missed two opportunities for global adoption, which may have set us back decades. However, it is comforting that we can now clearly identify the problems and implement solutions in the latest generation of blockchains, ultimately breaking this painful vicious cycle.

Conclusion

This brings us back to the original solution and reveals why ETH is destined to fail. For the dream of decentralization and cypherpunk, we need to support ETH's competitors with concrete actions.

If you truly love Ethereum and Bitcoin, you must be able to let go for their original intentions. Because their original intentions are more important than the price of any three-letter code. Focusing on the big picture means focusing on the greatest goal: changing the world through achieving financial sovereignty, resisting censorship, and true monetary independence!