Ethereum's Dilemma: The number of users has been continuously decreasing since 2021, and it needs to regain pricing power in collaboration with L2
Ethereum's L2 roadmap has achieved success in scalability, but this is only half of the success.Author: 0xLouisT
Compiled by: ShenChao TechFlow
- "God laughs at those who cherish certain causes while complaining about the results they bring." - Bossuet
In recent months, there has been a loud discussion about the failure of ETH L2, but the direction is wrong. Many attribute ETH's poor performance to L2, believing that the scaling plan has failed. As ETH's value declines, holders are looking for scapegoats, but we overlook the real issue— we bear part of the responsibility for some of the fundamental causes.
Causal Analysis
Let's take a look at the consequences that everyone is complaining about, which are quite obvious:
1. ETH Revenue Plummets: Ethereum is responsible for this, the reason lies in its scaling roadmap. However, this does not mean failure. Ethereum's scaling plan aims to achieve a 100-fold increase in user numbers by reducing fees and increasing throughput. The plan is to reduce transaction fees on L2 by 100 times, and this goal has been achieved. However, even with a significant drop in fees, the number of users has not increased as expected, but has instead continued to decline since 2021. Even if fees are reduced by 100 times, if accompanied by a 100-fold increase in activity, revenue would stabilize, and ETH's income could return to previous levels. Therefore, we need to increase the number of ETH users by 100 times.
2. L2's Impact on L1: Indeed, L2 can set its own fees, and when fees are just a few cents or a few dollars, users are often insensitive to prices. This mechanism is flawed because it allows L2 to extract higher profits from user fees. -> Ethereum needs to regain pricing power.
3. L2 Fails to Attract Enough Users: L2 itself is not a means to achieve a 100-fold increase in user numbers; they are tools to facilitate growth, not the core driver. We need to reignite user interest in Web3. -> We need to increase the number of ETH users by 100 times.
How to Solve These Problems?
We have identified two key issues that have led to the ongoing debate about L2:
1. We need to increase the number of ETH users by 100 times
Simply lowering transaction fees will not restore demand for ETH block space. The key is: how do we achieve a 100-fold increase in user numbers? While there is no clear answer, the following factors may be crucial. My view is:
We need to attract users through new innovations and application scenarios.
A bull market will significantly boost demand for ETH block space: prices can influence market trends. Imagine if the price of ETH reaches $10,000; we wouldn't be having these discussions now.
2. Ethereum needs to regain pricing power
Although ETH still has pricing power, the current situation is like a car driving in low gear. If L2 is earning substantial profits from user fees, it indicates that Ethereum's pricing may be too low. The root of the problem lies in the overall fee settings of the network being too low. When fees are just a few dollars or cents, users are generally insensitive to prices. However, if all L2 activities increase, fees will gradually rise until they reach a critical point where users start to pay attention (as shown in the figure below).
Currently, the base fees of L2 are too low compared to priority fees (as shown in the figure below). Ideally, the ratio of base fees to priority fees should increase to levels similar to those seen on Ethereum L1 in recent years (see the figure below).
By then, L2 will need to engage in fierce price competition, maintaining competitiveness on fees by lowering profit margins. This is precisely when ETH will begin to regain pricing power (as shown in the figure below).
Ultimately, it can be seen that Ethereum's scaling plan did not anticipate operating under such low user numbers. To regain pricing power over L2, ETH needs to increase the user base to 100 times its current level. This network was not designed for such low usage rates.
Two Non-Contradictory Views
Finally, let's explore the two main visions often mentioned by Ethereum holders:
1. ETH as Sound Money: Since the implementation of EIP-1559, ETH has entered a deflationary state, aligning with its vision as sound money. However, the emergence of L2 leading to lower transaction fees makes this vision less persuasive and lacking consensus.
2. ETH as a Scalable Computing Network: The scalability plan shifts ETH's vision towards becoming a cheap and scalable computing network, prioritizing scalability over its deflationary and sound money characteristics.
At first glance, these two visions seem completely incompatible, but they are not. Both rely on demand: if activity surges to 100 times the current level, the increased fees will push ETH back into a deflationary state. Ethereum can simultaneously achieve sound money and scalability as a computing network. The key lies in increasing activity.
In short: Ethereum's L2 roadmap has succeeded in scaling, but this is only half of the success. Blaming ETH's revenue and price performance issues on L2, technology, or even Vitalik is incorrect. The real challenge is attracting 100 times the current users; without these users, ETH risks losing its influence.
