Ethereum’s relative advantage in valuation and usage has peaked unless there is a fundamental change in the way the community and organizations operate. In this article, I discuss the future development of Ethereum by exploring the concepts of modular blockchain and database design and referencing GCR’s views.
The argument for the dilemma of innovators can be summarized as follows: “Successful companies often struggle to adapt to changes in patterns, especially in technological innovation. The reason is that they are overly focused on making their products successful rather than trying new and unfamiliar ideas.”
In the world of blockchain and smart contracts, we have made significant progress in the past few years. Now, the million-dollar or $250 billion question is: What is the future of Ethereum?
In this article, I will argue that Ethereum has reached its peak in terms of valuation (ETH.D) and relative usage and adoption. I will start by exploring the concept of modular blockchain and comparing it with traditional database design principles, and then relate all of this back to Ethereum and its future.
Modular Blockchain:
Now, people have a more principled way of thinking about what makes a blockchain function well and a reasonable approach to decoupling (and scaling) core components. This is the debate between monolithic and modular.
The core idea behind modular blockchain is four basic functionalities:
1. Execution: Determines the state “after” a transaction. For example, if I send tokens to a specific wallet, the execution layer will determine the relevant balance before and after the transaction.
2. Settlement: Determines if the submitted transaction is “valid.” After sending tokens, settlement confirms if the balance is correct.
3. Consensus: Determines the final state after a set of transactions. This layer determines the correct sequence of transactions and the final state after processing these transactions.
4. Data availability: To exist for any of the above three functionalities, there needs to be a previous state and an end state. The data availability layer provides the state to the execution layer and updates the state based on the final result of consensus.
Just like any engineering problem, a “perfect” blockchain only makes sense when there are well-defined use cases. This framework allows for more specialized blockchain design, with different requirements for blockchains built for high-throughput gaming compared to blockchains aiming to be global decentralized ledgers. This thinking framework reminds me a lot of the principles of database design, especially the debate around SQL vs. NoSQL.
Database Design:
Databases have been around for decades longer than blockchain. The consensus about their design is that there is no perfect database. Like most engineering problems, everything requires trade-offs.
Building a scalable database framework goes back to the question of “what is the use case?” Before making decisions, I would ask some questions:
– What is the approximate ratio of read to write? Applications like Telegram or Slack have similar levels of read and write, while Twitter has several orders of magnitude higher read volume than write.
– In distributed systems, there is a concept of consistency vs. availability. In other words, this can be rephrased as: Do we care more about inaccurate data or downtime of the application? Again, this depends on the situation. For fintech applications, consistency (accurate data) is much more important.
– How important is stale data vs. fresh data? How does this relate to the read and write workload? Does our database allow us to execute a strategy for handling concurrent writes and reads? For example, how do we prevent the classic double-spending problem when my wife withdraws cash from my bank while I swipe my debit card?
What are the reading patterns? Do you need flexible access to data, or is the data usually pre-defined? Do you perform a lot of joins across different datasets?
Besides technical considerations, it is also important to understand the following:
– How many engineers are proficient in this technology? How many engineers genuinely want to use this technology for building?
– If we want to fork the underlying code and make adjustments, is there a way to get positive support?
The Future of Ethereum:
Now, let’s tie all of this together – there is no such thing as a “perfect” blockchain. Good engineering involves trade-offs, and there is no one-size-fits-all solution. So how did Ethereum become such a “dominant” platform? Why does Ethereum’s pricing make it seem like it is the perfect blockchain? Finally, how will Ethereum develop in the future?
How did Ethereum become such a “dominant” platform?
Four years ago, Ethereum was the preferred platform for building smart contracts. It had excellent development tools compared to all other platforms, such as Hardhat, CryptoZombies, etc. Additionally, it had a loyal user base, and the chain and tokens were “decentralized.” At that time, centralized blockchains were more likely to be scams. ETH as an asset was also cheaper, which meant lower gas fees.
Today, developers have more smart contract platforms to choose from, each with its unique trade-offs. While scams still exist, the situation has significantly improved compared to four years ago with more talent and capital entering the field.
The reasons for Ethereum’s past success are also the reasons for its future failure. There was a time when Ethereum was the only viable smart contract platform for developers. Legitimate use cases like DeFi and NFTs provided a significant advantage for ETH. But during this phase, the focus shifted to value accumulation (super stablecoins) and competing with Bitcoin to become the native value store of the internet (flippening).
The desire to simultaneously be a smart contract platform and a decentralized “super stablecoin” added significant friction for marginal users and developers (higher gas costs, congested network). As Confucius (and GCR) said: “The man who chases two rabbits catches neither.”
How will Ethereum develop in the future?
Users will flock to places where applications exist and are cost-effective, while application developers tend to be more cautious and long-term in their approach. They have much greater expenses compared to the users themselves. Developers will build on platforms that offer long-term growth and scalability potential for their applications.
Now look at Ethereum, with an average transaction speed of 15-20 TPS, and gas fees often skyrocketing to $200. There are clear limitations to the types of applications that can be built on Ethereum, requiring very little interaction. For example, a lending protocol is a good application on Ethereum because I might interact with it a few times a year.
But if I were an application developer looking to build something that intends to scale to hundreds of thousands or millions of users with higher usage patterns, it is not feasible to build such applications on Ethereum.
This becomes increasingly evident as viable alternatives emerge.
FriendTech is building on Base L2.
The Pacman and Blur teams are considering launching their own L2.
DYDX uses its own specific application chain.
The modular blockchain framework provides a set of trade-offs that blockchains can choose from. We are now at a state where blockchain infrastructure supporting points along the trade-off curve is starting to emerge.
Lastly, and most importantly, are the incentives.
As Charlie Munger always says, “Show me the incentives, and I will show you the outcome.” The incentive structure built on Ethereum is weaker compared to other existing blockchains. Venture capital firms and new L1 teams are very interested in building a strong and thriving ecosystem. As an investor, I would question why my team should build on Ethereum when there are blockchains with lower L1 valuations that align with my interests and foster application development.
The replies in this tweet make things very clear.
ETH is no longer at the forefront of effective blockchain design. There are better smart contract platforms to choose from at any point along the trade-off curve, and the same goes for the incentive structure. Unless Ethereum undergoes a fundamental change in the way the community and organizations operate, its relative advantage in valuation and usage has peaked.