Ethereum is on the decline, while Bitcoin is on the rise?
Recently, the voices of FUD surrounding Ethereum have been incessant, with most discussions focusing on the price of ETH. Indeed, BTC is breaking new highs every day, while ETH is still nearly 40% away from its peak in 2021 (4800 USD). Of course, recently the price of ETH has started to rise, giving the impression that it has been provoked. I also believe that this time, Ethereum is likely to break its previous high.
But what exactly is happening with Ethereum? Why is it unable to keep pace with Bitcoin in this cycle? Is Ethereum really showing signs of decline? Is it difficult to replicate its past glory? Will the next round of paradigm innovation in the crypto industry still happen within the Ethereum ecosystem? This article will take you back to the origin of the crypto industry—Bitcoin—to reflect on Ethereum and the entire industry, and explore where the path to revitalizing the crypto industry might lie.
1. Escaping the Inertia of Ethereum
First of all, no one can completely deny Ethereum! Ethereum has its value and pioneering significance, and smart contracts have indeed opened a new chapter for the entire crypto industry. At least before the birth of Ethereum, most projects in the crypto industry were merely poor imitations of Bitcoin. They simply modified a few parameters in Bitcoin's code to create larger block Bitcoin, faster Bitcoin, more private Bitcoin, and so on. Essentially, they were just simple knockoffs of Bitcoin; the concept of altcoins basically encapsulated all crypto projects before the emergence of Ethereum.
After Ethereum was born, the entire crypto industry entered a wave of imitating Ethereum, and since 2015, countless so-called public chains have emerged, such as larger block Ethereum, faster Ethereum, and better-performing Ethereum (including Layer 2, etc.). Moreover, the so-called ecosystems of each public chain have largely copied the Ethereum model, merely consisting of DeFi, GameFi, various L2s, modularization, and so on. Now, retail investors have become desensitized due to being repeatedly harvested by various cleverly named and diverse narrative concepts, so they simply believe nothing and only engage in the simplest and most straightforward memes. Although everyone knows they won’t last long, at least they can enjoy a quick gamble!
Without innovation, without vitality, with fragmented consensus and rampant zombies, the entire industry is permeated with a sense of hopeless doom!
Does the crypto industry still have a future?
However, when you look back at Bitcoin, it stands alone, continuously breaking new highs, seemingly unaffected by all of this! We can't help but wonder if the entire industry has been trapped in "Ethereum inertia" for too long, to the point where we have completely overlooked Bitcoin!
After all, Ethereum was inspired by Bitcoin and originated from the Bitcoin community. Ethereum is merely an interpretation of Bitcoin, yet the entire industry has taken the Ethereum model as everything. If we want to identify the issues with Ethereum and find new opportunities for paradigm innovation, we must return to Bitcoin, re-understand Bitcoin, and rediscover the source of innovation in Bitcoin, just like when Ethereum was first born! Let’s temporarily escape the inertia of Ethereum and return to Bitcoin for reflection!
2. Mechanical Consensus and Social Consensus
There are many ways to interpret Bitcoin, but today we are discussing Ethereum and Bitcoin, both of which belong to the category of public chains. When it comes to public chains, the consensus mechanism is an unavoidable topic! A public chain is a public blockchain; who owns it? It is owned by a group of people participating in the consensus. Public chains must rely on consensus to drive them; without consensus, there is no public chain. Therefore, discussing public chains without discussing consensus is mere empty talk!
The consensus of public chains can be divided into mechanical consensus and social consensus. The essence of a public chain is to rely on a set of mechanical consensus to continuously gather social consensus in a decentralized system. (As a side note, Layer 2 is not a public chain; Layer 2 only requires a sequencer node to operate, and Layer 2 itself does not have a consensus mechanism. Layer 2 lacks mechanical consensus and only has social consensus, so the value of Layer 2 is not supported by mechanical consensus. Currently, most projects have neither mechanical consensus nor social consensus, which is the fundamental reason for project failure.)
Mechanical consensus refers to a consensus mechanism that everyone can fairly participate in, such as the PoW mechanism. The participation method of mechanical consensus is computational power; the stronger the computational power, the stronger the mechanical consensus. Social consensus, on the other hand, revolves around the ecosystem, influence, and data of the public chain, including on-chain applications, users, etc., ultimately reflected in the price of the coin.
Participants in mechanical consensus are the primary investors, beneficiaries, and builders of the public chain. The launch and operation of a public chain completely depend on the participants of mechanical consensus. Participants in mechanical consensus invest substantial costs (such as computational power and energy) to engage in the public chain. Therefore, only participants in mechanical consensus have the original motivation to promote the development of the public chain ecosystem, as they are both the primary investors and the primary beneficiaries. Thus, to help the public chain gain greater social consensus, participants in mechanical consensus will continue to promote the development of the public chain ecosystem, while the application developers attracted by the public chain ecosystem are mostly transient; they are not as deeply bound to the interests of the public chain as the participants in mechanical consensus (unless they themselves become participants in mechanical consensus).
This also explains why the early promoters of the Bitcoin ecosystem mostly came from the mining community, while many leading applications on the Ethereum chain, such as Uniswap, chose to go their own way.
Therefore, when the price of a public chain starts to weaken, it indicates that social consensus has weakened, and the deeper reason is that mechanical consensus has weakened, or in other words, the participants in mechanical consensus have dispersed.
Now, let’s compare Bitcoin and Ethereum from the perspective of "consensus."
3. Returning to Bitcoin Consensus, Reflecting on Ethereum and the Industry
The mechanical consensus of Bitcoin is a dynamic competition model.
The mechanical consensus of Ethereum is a static fixed-income model!
To gain block rights, Bitcoin miners must invest the same computational power and energy within the same time frame to compete, but ultimately, the network will only select one node to produce a block, while the contributions of all other "competing nodes" become a massive redundant cost attached to the value of Bitcoin.
In simpler terms, the actual cost of producing each Bitcoin in the Bitcoin network is far greater than the cost incurred by a single block-producing node; it is a minting method that incurs the costs of all "competing nodes." Therefore, Bitcoin miners will continuously participate in the computational power competition to recover the block rights due to the significant redundant costs they have already invested. This is the reason why the consensus of the Bitcoin network continues to grow.
Thus, the actual consensus cost of the Bitcoin network is far greater than the current total market value of Bitcoin. How much greater? If we calculate based on an average of 10,000 mining nodes in Bitcoin's history, this theoretical gap should be 10,000 times. However, currently, there are about 100 active mining pools in the entire Bitcoin network; if we consider mining pools as a total node, this cost gap is roughly 100 times.
This is the consensus security that Bitcoin's PoW dynamic computational power competition model brings to Bitcoin, making the consensus security of Bitcoin almost impossible to assess in terms of strength!
On the other hand, Ethereum's PoS mechanism is a static fixed-income model, where the actual amount of ETH invested determines the amount of ETH rewards, which is essentially a static fixed return, currently stabilizing around 5%. Therefore, participants in ETH consensus do not need to compete, do not need to incur additional redundant costs, and can participate in profit distribution without needing to invest extra costs. This was also touted as the so-called "advantage" of Ethereum's PoS mechanism, which would not generate energy consumption. However, this "advantage" has also become a weakness of Ethereum's network consensus.
Because there is no investment of redundant costs, the actual consensus cost of Ethereum has decreased, and thus the consensus value of the Ethereum network has also diminished!
Therefore, when comparing Bitcoin's PoW mechanism with Ethereum's PoS mechanism, you will find that the network consensus cost of Bitcoin is almost immeasurable, with continuous investments in computational power and energy leading to unlimited consensus. In contrast, Ethereum's consensus has an upper limit, which is calculable; the staking rate of ETH represents the upper limit of Ethereum's consensus.
Thus, at the level of mechanical consensus, Bitcoin's mechanical consensus is stronger than Ethereum's, further influencing the differences in social consensus, which ultimately reflects directly in the price of the coin.
Moreover, if we view Bitcoin's PoW mechanism from the perspective of physics (thermodynamics), we will find that the PoW mechanism drives Bitcoin to become a system of entropy reduction that is closer to a living organism, which is the physical principle that keeps the Bitcoin network full of life and vitality.
From a thermodynamic perspective, all things in the universe tend toward increasing entropy, which means moving from order to disorder, from order to chaos, ultimately leading to extinction! However, there is one exception: life! Life feeds on negative entropy—Schrödinger.
Negative entropy is an external energy that helps internal systems transition from disorder to order. Life converts negative entropy into order, creating a local reduction in entropy. However, the phenomenon of entropy reduction exists only in local spacetime, and for every unit of entropy reduction that life achieves, it expels two units of entropy increase into the external universe; when combined, it still results in an increase in entropy for the universe.
Bitcoin's PoW mechanism allows a group of chaotic Byzantine nodes within the network to continuously digest computational power and energy to solve problems. Ultimately, the fastest node gains block rights, and nodes quickly verify and reach consensus, resulting in a previously disordered and chaotic network achieving consistency, thus creating an ordered system, which is an entropy reduction system, a living organism!
Therefore, in the living organism of Bitcoin, the computational power and energy input from miners is "negative entropy," which helps the chaotic and disordered nodes within the Bitcoin network reach consensus and unity, thus creating an entropy reduction system. The PoW mechanism is the digestive system of this living organism, where miners provide "negative entropy," ultimately enabling Bitcoin to thrive!
This is the physical principle that allows Bitcoin to continue to grow and flourish.
Now, let’s reflect on Ethereum:
At its inception, Ethereum also used the PoW mechanism and continued to operate for over seven years, which were also the years of rapid progress for Ethereum. Until September 2022, Ethereum officially transitioned from the PoW mechanism to the PoS mechanism, and everything quietly changed.
By cutting off the PoW mechanism, Ethereum lost the input of external computational power and energy, thus losing the ability to continuously consume "negative entropy," much like a living organism that has had its stomach removed without finding a replacement solution. Although it achieved weight loss in the short term, due to the lack of sustained feeding ability, gradual decline became almost inevitable.
Some say that Ethereum's price weakness is due to a lack of innovation in the ecosystem, with on-chain applications and users not continuously increasing. So, what is the deeper reason for these situations?
As we mentioned earlier, mechanical consensus directly affects social consensus. The ecosystem, applications, users, and coin prices are all manifestations of social consensus; the essence of weakened social consensus is that mechanical consensus has weakened.
Why has Ethereum's mechanical consensus weakened?
The PoS mechanism is a static fixed-income model, lacking competition in computational power and energy, which leads to a reduction in redundant costs, thereby weakening mechanical consensus; the PoS mechanism lacks the ability to consume "negative entropy," failing to offset the internal trend of entropy increase in the system through inputting "computational power and energy"; the staking mechanism of PoS also directly leads to the rich getting richer and class solidification. When class solidification occurs, it results in a community lacking innovation and vitality, ultimately causing these capabilities to overflow and benefit other competitors.
This series of manifestations reflects the weakness of social consensus indicators such as Ethereum's ecosystem, applications, users, and coin prices! Even if one could forcibly raise the coin price to elevate social consensus, the principles of physics cannot be violated.
Ethereum is indeed showing signs of decline, and this cycle is lagging behind Bitcoin step by step, which is the most authentic result! The next cycle will undoubtedly widen the gap even further!
If Ethereum is like this, other public chains imitating Ethereum will also inevitably struggle! The crypto industry has come to this point, truly reflecting that it has succeeded because of Ethereum and failed because of Ethereum! This may be something that any industry experiences during its development process.
However, opportunities often arise at this moment!
The greater opportunities in the crypto industry are certainly not within the existing Ethereum model; it is essential to escape the "Ethereum inertia" and return to the earliest context of this industry, back to the original point of this industry, to seek answers from there!
4. Returning to Bitcoin Consensus, Uncovering Bitcoin's Endless Treasures
Returning to Bitcoin for innovation is an industry issue and a long-term endeavor; perhaps, in the short term, it will be challenging for us to break through. However, when we begin to break free from the superstition of Ethereum and return to Bitcoin for rethinking, in addition to discovering the details behind "consensus," we may also uncover more hidden details that we have never noticed before.
These details fill us with hope for further paradigm innovation based on Bitcoin! For example, intuitively, one might think that Ethereum would be more efficient than Bitcoin in processing transactions. But, in reality, this is not the case.
Bitcoin's UTXO model can achieve concurrent processing of transactions and independent state changes without needing a unified world state tree to update the state. In fact, Bitcoin does not even have the concept of an account; the Bitcoin balance displayed on a user address actually represents the total amount of UTXO that a user can control with their private key.
When processing transactions, the UTXO model operates like a real transaction environment, where any pair of trading parties can frequently transact using different denominations of "UTXO" cash. The transaction status of one pair of trading parties does not affect the transaction progress of another pair, because UTXOs can independently change state without needing a unified central state tree for changes.
In contrast, Ethereum adopts a traditional account model, which is akin to a traditional bank account model. The account model requires a global state tree to perform balance calculations for each address involved in a transaction, meaning that each transaction state must be changed completely before the next transaction can proceed; otherwise, issues like double spending or transaction failures may occur. Therefore, the account model can only handle transactions serially.
In simpler terms, Ethereum's account model requires a central world state tree to uniformly process transactions and change the states of all accounts. Although this world state tree is driven by a decentralized mechanism, the need for a central entity to uniformly handle and perform global state changes makes it difficult to execute concurrent transactions and more flexible transaction modes.
There are many more details about Bitcoin that we have not discovered. Just in terms of "the ability to process state changes in parallel," Bitcoin's UTXO model outperforms Ethereum's account model. Moreover, the UTXO model's ability to process concurrently and change states independently can be extended to any entities that require independent state changes and concurrent processing, meaning UTXOs can express the state changes of other entities beyond Bitcoin transactions, such as the state changes of prediction markets, AI security models, etc.
Furthermore, due to Bitcoin's ability to process state changes in parallel being protected by the world's largest mechanical consensus—the Bitcoin consensus—this makes the Bitcoin network even more unique and irreplaceable. The combination of shared Bitcoin consensus security and UTXO concurrent state changes can unleash infinite energy. This is a detail that many people have not noticed before.
Of course, we are pleased to see that entrepreneurs in the Bitcoin ecosystem are already moving in this direction, such as the BitVM solution based on client verification and the UTXO model; and the BEVM team, which recently announced its abandonment of the Bitcoin Layer 2 track to fully transition to "shared Bitcoin consensus security + UTXO concurrent state changes."
When we shift our thinking, we will discover that Bitcoin is an endless treasure, with its development and application progress being less than 1%.
Conclusion:
When we begin to detach from the inertia of Ethereum to view the entire industry, we can confront some issues we previously dared not face. When we return to Bitcoin for reflection, we can draw infinite inspiration and innovative directions from Bitcoin. The birth of Ethereum was merely an abstract reflection and interpretation of Bitcoin, while later entrepreneurs abandoned reflection and fully replicated the Ethereum model, which is the underlying reason for the gradual lack of sustained innovation and vitality in the entire industry.
Of course, we have seen some teams beginning to return to Bitcoin and rethink, such as the shared Bitcoin consensus security + UTXO concurrent state changes, which is a highly promising entrepreneurial direction.
True paradigm innovation is not simple imitation but requires abstracting the principles behind it. The steam engine created by Watt did not directly trigger the Industrial Revolution; rather, someone abstracted and summarized the scientific principles behind the steam engine (the laws of thermodynamics), thus triggering a scientific paradigm revolution.
If Satoshi Nakamoto is Watt and Bitcoin is the steam engine, then in the 16 years of the crypto industry, most people have been imitating Bitcoin to create numerous different "steam engines" with various functions and forms, yet few have thought about and abstracted the scientific principles contained within Bitcoin itself, resulting in the industry not triggering a true Bitcoin paradigm revolution for a long time.
Of course, we have already seen teams thinking in this direction; this is the dawn of the industry, and we need more people to join in to promote the arrival of the Bitcoin paradigm revolution!
The inspiration for this article mainly comes from the Bitcoin learning and exchange community "Satoshi University" (Twitter ID: @ZhongbcDX_1028). I have long engaged in deep exchanges and learning about Bitcoin with many Bitcoin OGs and enthusiasts at Satoshi University, discussing opportunities for the development of the crypto industry together.
