Where is the road? A brief analysis of the three major abstract issues currently facing the Ethereum ecosystem

Author: Wenser, Odaily Planet Daily

In the previous article "Counting the Seven Deadly Sins of Ethereum: Who Can Play the 'Rescue Anthem' for It?", we briefly explained the past actions of the Ethereum Foundation from the perspective of the "seven deadly sins." In short, all current disputes surrounding Ethereum stem from poor price performance, which is attributed to various operations by the official forces represented by the Ethereum Foundation. However, the issues raised are more superficial phenomena. This article further analyzes and points out the three major problems currently facing the Ethereum ecosystem, mainly involving organizational management, ecological landscape, and cyclical ailments.

The Primary Problem of the Ethereum Ecosystem: Centralized Decision-Making Ecosystem vs. Decentralized Technological Ecosystem

Unlike Bitcoin, whose founder has directly disappeared, Ethereum, which touts itself as a "programmable currency," was born, developed, and has become somewhat rigid under the promotion of official forces represented by the Foundation. Apart from Vitalik, the "key person," the prominent members of the Ethereum Foundation include Executive Director Aya Miyaguchi (who took office in early 2018) and board member Patrick Storchenegger.

Interface of the Ethereum Foundation official website

Other active official personnel include researcher Justin Drake, Dankrad Feist, Fredrik Svantes, Anders Elowsson, Carl Beekhuizen, Julianma, developer Hsiao-Wei Wang, project manager Rodrigo, protocol support team leader timbeiko, team leader Péter Szilágyi, core developer consensus layer leader Danny Ryan, among others. More technical personnel can refer to the article “Who is Responsible for Ethereum Development?”.

Nevertheless, during the recently concluded 12th AMA of the Ethereum Foundation, when asked "Is Ethereum's development facing a manpower shortage?", Ethereum co-founder Vitalik Buterin answered, "In the field of p2p networks, there is a clear shortage of personnel, and this issue is rarely discussed." The research department of the Ethereum Foundation also confirmed, "Core development work indeed requires more personnel, especially in important areas like fork choice. These areas urgently need more attention and contributors."

It can be said that although the decision-making process of the Ethereum Foundation has various decentralized designs, constrained by limited human resources and the high uncertainty of technological development, many times figures like Vitalik have actively or passively become the "centralized decision-making focus" of the Ethereum ecosystem. This is also why many people react quickly whenever there is any movement on Vitalik's personal blog, with many projects treating his words as gospel or even as a "startup guide." There have indeed been instances where an article has spawned several startup companies.

However, this is clearly an abnormal phenomenon, and the Ethereum Foundation had discussions about this as early as 2019:

At a roundtable discussion during the ETH Denver hackathon, Ethereum Foundation community relations manager Hudson Jameson, Ethereum Foundation researcher Vlad Zamfir, and Ethereum Foundation developer Piper Merriam discussed blockchain governance issues, and all agreed that the current hybrid decision-making process of the Ethereum protocol is not a long-term solution.

"I don't think blockchain governance will resemble any open-source governance we've seen before… Is Ethereum's structure sustainable? I think the answer is no," Vlad Zamfir said.

Piper Merriam, however, held an optimistic view of the current "opaque" governance form of Ethereum, adding that he has confidence in the core developers, who will continue to contribute and make reasonable decisions (about the blockchain protocol) for at least a while.

On this issue, Aya Miyaguchi believes that when it comes to a blockchain full of infinite possibilities (like Ethereum now), the path forward may not only include "one, two, or three voices," but many voices. She concluded, "Our job is to coordinate, but not to make actual decisions. Decisions can be made by our members, who can certainly also be part of the decision-making process, but not necessarily all of it."

------Excerpt from “The Gentle Push Behind the Second Largest Ethereum Blockchain by Market Value”

Fast forward to 2024, we can see that this issue has not significantly changed—one can glean some insights from the participants and content of the responses in the 12th AMA of the Ethereum Foundation.

It can be said that although the degree of decentralization at the technical level of the Ethereum ecosystem has not been significantly affected after the transition from POW to POS, the degree of centralization in the decision-making ecosystem remains unchanged.

This is also one of the reasons why many people have expressed dissatisfaction with the decisions made by personnel of the Ethereum Foundation. As mentioned in "Is Dissolving the Ethereum Foundation the Only Way Out?": "Ethereum Foundation researchers Justin Drake and Dankrad Feist choosing to become project advisors for Eigenlayer violates the Credible Neutrality Principle previously mentioned by Vitalik." This directly points to the chaotic management of Ethereum Foundation members, even suggesting that "either commit to dissolving the foundation at an opportune time or draft a constitution that stipulates certain principles the organization must adhere to and not violate. Allowing its key decision-makers to acquire large advisory shares is equivalent to Supreme Court judges holding significant equity in the companies they adjudicate."

Moreover, the issue of Ethereum Foundation's expenditure is also quite unsatisfactory— in the article "Expenditure Transparency Questioned: How Does the Ethereum Foundation Use Its ETH?", crypto KOL Ignas mentioned, "The Ethereum Foundation lacks a comprehensive and transparent total expenditure report. Who audits the Ethereum Foundation? Its latest report is from 2021, showing internal expenditures and external grants and bonuses totaling $48 million." Combined with the fact that in August this year, the issue of the Ethereum Foundation's financial expenditure transparency became a hot topic, Ethereum Foundation member Josh Stark stated, "EF will soon release the latest report covering 2022 and 2023, expected to be published before Devcon SEA (November 12-15)." It is hard to believe that this is not an attempt to "balance the books in the short term."

According to what Vitalik previously mentioned, "The current budget strategy of the Ethereum Foundation is to spend 15% of the remaining funds each year," combined with Justin Drake's mention that "EF's main Ethereum wallet is worth about $650 million" and "the Ethereum Foundation's annual spending budget is $100 million," can the sustainability of the Ethereum Foundation really be as stable as envisioned?

The Secondary Problem of the Ethereum Ecosystem: No New Growth Points in the Mainnet vs. L2 Networks Dominating, Too Big to Fail

Although Vitalik himself has "designated" the development route of L2, even stating in an August post that "I am very sure that EIP-4844 alone has saved users over $100 million in transaction fees," it appears that the numerous L2 networks have become "fiefdoms" and "territorial rulers" of a "segmented ecosystem."

This point was emphasized by Danny Ryan, a core member of the Ethereum Foundation (the core developer consensus layer leader mentioned earlier), in his article "Analyzing Key Issues for Ethereum in 2023" in February 2023. He mentioned:

"Given that all eggs are in the L2 basket, one thing I worry about is the alignment of L2, both in the short term and long term. There are two main issues—(1) L2 is parasitic and will eventually fork into L1; (2) L2 is the standard for Ethereum, where users interact but do not believe in Ethereum's values—decentralization, resistance to censorship, support for public goods, radical cooperation, etc. The former is more like an existential question—does being anchored in Ethereum's security zone really have value? This is basically the argument of the L2 roadmap—these scalable environments that inherit Ethereum's security and native bridging are valuable to users, and therefore valuable to the developers, companies, and communities building and maintaining them.

I believe this argument—achieving sufficient cryptoeconomic security is difficult, and in an increasingly competitive environment, most blockchains will inevitably fail to reach sufficient levels. Cryptoeconomic security is a limited resource, a function of the ongoing economic demands of these systems. Therefore, while I do expect some L2s to "abandon" Ethereum and attempt to leave—some may succeed, others may fail—I do not believe this will happen on a large scale, and the departure of a few L2s will not break the theory of cryptoeconomic security as a service.

As for (2), I have more concerns. L2 will inevitably become the primary touchpoint for the vast majority of users. In most cases, they will exist in L2, interact within L2, and bridge between L2s, as these L2s are both secure and affordable. Thus, L2 becomes the face of Ethereum. This may be safe, but is it decentralized, resistant to censorship, adherent to Ethereum's values, and does it encourage the world to continuously reimagine itself? On this point, the answers to these questions are clearly not affirmative.

Venture capital firms stepping into the L2 space, tokens being distributed haphazardly to insiders, and most governance models being oligarchic, with arbitrary upgrades without notice. Not to mention that most L2s sacrifice in their security models to go to market, hoping to iterate towards decentralization (e.g., no fraud proofs, single sequencer, unclear emergency exit mechanisms, etc.). There is an interesting balance here. L2 can and wants to invest more energy in advertising and business development, competing with alt-L1s that are very aggressive in this area. This keeps Ethereum L1 neutral in this regard, while the layers above attempt numerous customer acquisition and onboarding technologies.

But whether L2 will default to retaining Ethereum's brand, values, and soul is not clear. Managing a healthy L2 ecosystem is crucial and requires multifaceted efforts to achieve—researching and promoting secure structures, realizing the value of L2 (showing its essence rather than being depicted), and discussing governance risks, security trade-offs, poor token distribution, value adjustments, and other emerging issues for L2 where possible. Moreover, we cannot only focus on the negatives but also celebrate the positive, secure, and consistent aspects. Today's Ethereum community has tremendous power in setting norms that will define the development of the L2 movement for decades to come. We must ensure that L2 inherits not only Ethereum's security but also its legitimacy."

It can be said that everything Danny mentioned has hit the nail on the head regarding the current issues facing the Ethereum ecosystem's L2 networks.

At the same time, as analyzed by Open_Rug's crypto Weituo previously here, "L2 ecosystem projects overlap significantly with the main chain, failing to trigger explosive trading prosperity," leading Ethereum's ecosystem into a series of dead cycles of "staking-restaking-points-tokens-listing," with the final result being—"the ETH-based pricing system has thus lost completely."

Furthermore, now that the POS mechanism has been established, "obtaining ETH output incurs no fiat currency cost, and transaction fees are also in token-based costs. Therefore, there is no 'mining machine shutdown price,' and stakers will not maintain a price floor for ETH like miners but can infinitely mine, sell, and withdraw."

As mentioned in the article "The Great Debate on L2 Value Feedback: Can ETH Reverse the Inflation Trend?", "ETH has encountered significant supply growth without a noticeable change in demand, leading to an imbalance in supply and demand that caused a decline." In response, Doug Colkitt, founder of the DeFi protocol Ambient, also expressed his view that "the saturation of Blobs is unlikely to lead to any substantial increase in the amount of ETH destroyed," because "most marginal transactions on L2 are low-value 'garbage transactions.' If Blobs reach saturation and enter a bidding mode, transaction costs on L2 will inevitably rise significantly, and marginal transactions are often very sensitive to price, so the increase in Blob costs will indirectly lead to a sharp decrease in small transactions on L2." This further leads to "Ethereum being unable to accumulate value for the mainnet through DA (Blob fees) in the foreseeable future."

EIP-4844 is not without its drawbacks

If ETH is the "Son of Heaven" during the Spring and Autumn period, then L2 has already become the "feudal states" that are "showing their fangs"—after all, according to L2 Beat statistics, there are currently as many as 74 L2 projects, which, if placed in the pre-Qin period, would also be an era of "a hundred schools of thought contending."

The L2 networks also seem to be in a dilemma—on one hand, project parties need to maintain their token prices; on the other hand, they must "focus on building" (or creating a "false prosperity"?), which is undoubtedly a form of "sweet torment"—while they can sell tokens, they also need time, excuses, and even "market fluctuations" to cooperate.

The six-tier structure of the Ethereum ecosystem

Perhaps Vitalik has also recognized the relevant issues within the Ethereum ecosystem, as he has frequently published articles recently. Statistics show that his post count in August has already exceeded that of the previous 18 months. Not only that, he previously stated, "I do not plan to invest in L2 or other token projects in the future, only donating to valuable projects." Just the day before yesterday, he publicly declared, "Starting next year, I will only publicly mention L2s that are at Stage 1+ regardless of whether I invest."

Perhaps in the near future, the landscape of L2 networks will also welcome a "merger moment," or the official forces represented by the Ethereum Foundation will actively "dismantle the fiefdoms"? For this, we can only keep an eye on it and wait and see.

The Least Significant Problem of the Ethereum Ecosystem: Approval of Ethereum Spot ETF vs. Market Cyclical Liquidity Tightening

It should be noted that under the "four-year cycle paradigm" pioneered by Bitcoin, the cryptocurrency industry still exhibits a relatively regular pattern of bull-bear transitions. As the second-largest cryptocurrency by market capitalization, Ethereum is no exception to this "curse."

Ethereum has been embroiled in "controversial discussions" before. Moreover, former legal advisor and consultant to the Ethereum Foundation, Steven Nerayoff, even previously "exposed" that the Ethereum DAO hack incident was orchestrated by insiders, with the Ethereum Foundation and the DAO initiator Slock.it being the notorious masterminds. He even pointed out, "Ethereum has become a system influenced by a small number of developers, regulators, and investors, whose actions contradict the community's intentions."

Looking at it now, these accusations are certainly baseless, but they bear some resemblance to the current situation of the Ethereum ecosystem being "attacked from both sides"—externally, the Solana, TON ecosystems, and the Move language ecosystem, which is closely linked to EVM, are formidable; internally, there is a lack of innovative growth, with L2 networks rising in prominence, and the approval of the Ethereum spot ETF has not brought in massive liquidity, even triggering some outflows of liquidity.

According to data from Sosovalue, since the launch of the US Ethereum spot ETF, as of September 12, the outflow amount reached $582 million, with a daily net outflow of about $20.14 million.

Information from Sosovalue

It is no wonder that there have been views suggesting that "the four-year cycle theory is the biggest scam in the cryptocurrency industry"------

The concept of the "four-year cycle" in cryptocurrency needs to be completely dismantled; only then can cryptocurrency truly cross the chasm and become something entirely new.

As long as the concept of the "four-year cycle" exists, the default incentive mechanism is: 1) prioritize short-term behavior (whether builders or investors); 2) perpetuate the "fool theory," as people always believe the current cycle will eventually collapse. With readily available ideas being adopted, cryptocurrency is turning into a zero-sum game. Founders and communities celebrate large-scale financing without any products as victories. While many projects receive funding from various sources, they obscure the fact that they lack genuine technological innovation like the previous cycle (DeFi).

Besides foolishly hoping someone will take over, what else do we believe in? Do we believe in Crypto Twitter? It is merely an emotional amplifier, isn't it? Do we believe in alpha, or do we believe in self-deceptive narratives?

Look, this is all we have left… narratives. We force ourselves to believe in stories we don't believe in, just hoping others will believe. But without narratives, there can be no bull markets or adoption! Yes, but only when you don't treat them as narratives does the narrative effect work best.

------Excerpt from "Opinion: Destroying the 'Four-Year Cycle' Theory is the Only Way for Cryptocurrency to Truly Cross the Chasm"

Although this view may seem extreme, it indeed articulates the overall predicament faced by the cryptocurrency industry, including the Ethereum ecosystem— the industry is no longer marginal, but the so-called "positive externalities" that countless people expect remain a distant dream.

This point, even the Federal Reserve's short-term interest rate cuts are merely a stopgap measure, treating the symptoms rather than the root cause.

Conclusion: Ethereum Needs a "Self-Revolution," Not "Passive Waiting"

In summary, the abstractly summarized problems may be more piercing than the specific superficial phenomena, but they indeed represent the current situation that the Ethereum ecosystem urgently needs to address, which cannot be escaped or avoided.

At its core, although the on-chain world is a technological window embodying the ideals of decentralization and expectations of transparency, many occurrences, many problems, and their solutions rely on off-chain "human governance" and "consensus."

To some extent, as Ethereum enters its 11th year, it indeed requires a "self-revolution," rather than passively waiting for the situation to deteriorate to an irreparable extent.

In the next article, we will provide our "solution ideas" and handling methods, discussing with readers in an attempt to find new breakthroughs and growth points for the Ethereum ecosystem.