Author: Climber, Jinse Finance
There have been more and more topics and controversies surrounding Ethereum recently. Not only did Vitalik himself need to come out to explain his views, but even the Ethereum Foundation had to issue an announcement to quell the community’s doubts.
In this round of bull market, Ethereum's performance is mediocre. The approval of the Ethereum spot ETF in the United States did not make ETH explode as investors expected, but on the contrary, the price of the currency went down. This inevitably made Ethereum, which has the reputation of "the king of all chains", gradually lose the respect of investors and the community, and then questioned all aspects of Ethereum.
Ethereum urgently needs to reshape its authority amid constant controversy
In recent times, community members have raised varying degrees of doubts about Vitalik's opinions, the Ethereum Foundation, and even the construction of the Ethereum ecosystem, and the latter have responded and refuted them.
On August 25, KOL @0xstrobe questioned Vitalik and publicly accused him of poor communication on the topic of DeFi. The original content is:
“Vitalik, I think one of the reasons people are confused or frustrated about your views on DeFi is miscommunication — in your opinion, ‘DeFi’ seems to mean the 2021 mining craze Ponzi scheme.
But for many others, “DeFi” means saving and borrowing money on Money Markets like Aave, CDPs like RAI (which you mentioned too!), Synthetics, etc. These are all healthy decentralized finance applications - the revenue comes from borrowers, transaction fees, etc.
Many of the "Ponzi economics" that have been integrated into the DeFi ecosystem can only bring temporary improvements to certain indicators, but this is not all of DeFi."
Vitalik responded: The income you mentioned comes from borrowers, transaction fees, etc., which is what I am worried about. The value of crypto tokens is that you can earn income with them, and these incomes are paid by people who trade crypto tokens.
The answer is clear, for example: those who earn 8% annual interest in USD are being paid by those who pay 8% annual interest to long ETH with 2x leverage, but this means that the DeFi market exists downstream of the ETH market. So while DeFi may be great, it is fundamentally limited and cannot be the explosive innovation that drives crypto technology to another 10-100x adoption.
However, Vitalik's reply has attracted more questions and rebuttals. For example, a partner of Electric Capital said that Vitalik's words apply to all finance. KOL @PaperImperium said that Vitalik's remarks are a misunderstanding of human economic history. The CEO of Alphaverse Capital said that Vitalik's view is untenable.
Soon after, the Ethereum Foundation's transfer of 35,000 ETH aroused community doubts, mainly because the agency's annual expenditure report was not transparent.
ETHGlobal member Josh Stark said that the Ethereum Foundation is currently preparing an updated expenditure report, which will cover expenditures in 2022 and 2023 and will be released before the Devcon SEA conference (November). At the same time, he also revealed an overview of expenditure information in this report, including its internal and external expenditures, such as:
"L1 R&D" includes funding for external client teams as well as internal EF researchers. In these two years, internal spending accounted for about 38% and external spending accounted for about 62%.
Internal expenses include EF teams such as:
- Geth;
- Privacy and Extension Exploration (PSE);
- Solidity;
- Cryptography research;
- Robust incentive group;
- Devcon et al.
All of these teams work openly and share information about their activities on their websites, github, and social channels.
External spending means grants. We’ve been publishing regular reports on EF grant activity on blog.ethereum.org for the past 4 years, and in the chart I shared above, the largest new category is “New Organizations.” A key goal of EF is to help build new organizations that can strengthen and support the Ethereum ecosystem in the long term. This category includes grants to:
- Nomic Foundation;
- The Decentralized Research Center (@TheDRC_);
- L2Beat (@l2beat);
- 0xPARC Foundation (@0xPARC);
- and other Ethereum-related and adjacent organizations
In addition to questioning Vitalik and the Ethereum Foundation, community members have raised questions about the construction of Ethereum.
Ethenalabs Risk Director @MacroMate8 said that almost no new people have entered the ETH ecosystem since 2021. But on the other hand, SOL is full of young developers who are constantly developing.
In response, Josh Stark cited data from the Electric Capital developer report to refute it. Vitalik also replied that he liked this chart and underestimated the success of Ethereum by listing L2 as a separate category, but even with this obstacle, Ethereum still looks great.
Other questions include that Vitalik and most core developers do not view ETH as a store of value or a meaningful programmable currency, and Vitalik responded that if he did not believe ETH was SOV, he would not hold about 90% of his net worth in it.
Can Ethereum explode again?
Regarding the above-mentioned controversial topics and the official responses from Vitalik and Ethereum, many institutions and celebrities also gave their own insights and predictions on the prospects of Ethereum.
The founder of Cyber Capital said that Ethereum is declining and L2 is "dancing on its grave." He pointed out that since the implementation of EIP-4844 (Proto-Danksharding), Ethereum's fee income has dropped significantly and cannot keep up with the rate of inflation. At the same time, L2 network usage and fee income have hit new highs, and it has lobbied to keep Ethereum's capacity low. Bons believes this constitutes a "parasitic relationship."
In addition, L2 networks are actually stealing Ethereum's users and fees, attracting users by pretending to be "the same as Ethereum." Bons predicts that L2 networks will eventually migrate or become independent L1 networks, and Ethereum will gradually decline. He criticized the Ethereum leadership for "selling out" its own interests for the L2 network, believing that this exposed systemic problems in governance.
He warned that if Ethereum expands L1 in a breakthrough way in the future, it could cause the token and equity prices of all L2 networks to collapse, so L2 networks have an incentive to prevent Ethereum from expanding.
JPMorgan Chase gave the reason for Ethereum's poor performance in a research report: Ethereum spot exchange-traded funds have generally seen net outflows since their launch last month, while the spot Bitcoin ETF launched earlier this year has been more successful. The net outflow of Ethereum funds was about $500 million, while the net inflow of Bitcoin ETFs exceeded $5 billion.
The bank also said weak data from the Ethereum ETF was somewhat expected, noting that Bitcoin’s “first-mover advantage,” lack of collateralization, and lower liquidity meant it was less attractive to institutional investors.
Zhu Su believes that the problem of the Ethereum Foundation is not selling valuable tokens too early, but the inability to provide a coherent roadmap and effective leadership.
However, there are still some optimistic views on Ethereum.
CF Benchmarks CEO believes that demand for Ethereum spot ETFs may continue to grow in the coming months, and more wealth management companies are expected to offer such products to their clients.
He also said: "Once wealth managers and financial advisors complete the education process about what Ethereum is, its utility, and why they should hold it alongside Bitcoin ETFs, inflows into Ethereum ETFs will continue to climb. The education process will educate investors about the Ethereum economy and highlight its key differences from Bitcoin, thereby fully demonstrating that the allocation drivers are different and both belong in a balanced portfolio."
Arkham listed past data when the Ethereum Foundation recently sold a large amount of ETH. That is, in 2020, the foundation sold 100,000 ETH, and then ETH rose 6 times. Arkham: The Ethereum Foundation sold 100,000 ETH in 2020, and then ETH rose 6 times
The founder of 1confirmation believes that Ethereum’s market value may exceed Bitcoin in the next five years. Currently, Bitcoin’s market value is 4 times that of Ethereum. Both will continue to grow, but Ethereum will eventually surpass Bitcoin.
He explained that Bitcoin has a clear narrative (digital gold) and institutions have now accepted that narrative. Ethereum has been the most influential blockchain in the crypto space for the past five years, but people (outside the circle) know very little about Ethereum. Ethereum is scarce, generates income, and has real use cases. Since its market value is now significantly smaller than Bitcoin, Wall Street can own more. Wall Street is expected to continue to buy and promote Ethereum to the world in the coming years.
Mads Eberhardt, senior cryptocurrency analyst at Steno Research, gave advice on how to get out of Ethereum's predicament. He believes that interest rates are the most critical factor affecting the attractiveness of DeFi because it determines whether investors are more inclined to look for higher-risk opportunities in the decentralized financial market.
Conclusion
As a representative of blockchain technology, Ethereum has been given unlimited expectations, and more and more L2s have been generated around it. However, in this round of crypto market cycle, Ethereum and its ecosystem seem to have stalled, with no bright spots at all, which is why it has been continuously criticized by the community.
However, the responses of Vitalik and Ethereum officials to the community’s questions were quite sincere and timely. Ethereum has also experienced a bigger crisis of trust, so we should continue to be more patient with this king of chains.
