Reconsidering the Development and Challenges of ETH: What Exactly Led to the Loss of Vitality of ETH

Original author: @Web3 Mario

The Social Web was very lively this weekend, and a new round of debate about ETH has started. I remember there should be two reasons for this. Firstly, the interview between Vitalik and ETHPanda has caused extensive discussion in the Chinese community. On the other hand, compared with SOL, the continuous decline in the BTC exchange rate of ETH has also caused widespread dissatisfaction. Regarding this issue, I also have some opinions to share with you. Overall, I believe that the long-term trend of ETH is not a problem, because there is actually no direct competitor in the market. In the narrative of Ethereum, the key position in the “Decentralized Execution Environment” is “Decentralization” rather than “Execution Environment”, and this basic position has not changed. The core reasons for the current bottleneck in the development of ETH are twofold. Firstly, the Restaking track has caused Vampire Attack on Layer 2 of mainstream technology development paths, which has diverted a large amount of resources from the ETH ecosystem. Since the core mechanism of Restaking will not create incremental demand for ETH, it directly leads to the inability of application side to obtain sufficient development resources and user follow-up, and the promotion and user education are stagnant. Secondly, the Key Opinion Leader in the Ethereum ecosystem is becoming aristocratic, forming an interest class, which makes the class flow appear solidified, and the developer ecosystem lacks sufficient incentives, so innovation naturally appears weak.

Restaking Vampire Attack on Ethereum Ecosystem Resources

There has actually been some discussion about this in a previous article of mine, and today I hope to take this opportunity to reiterate it.

We know that Ethereum’s official development path has always been to form a completely Decentralization execution environment through Sharding, in simple terms, it is a completely distributed cloud not controlled by any party. Applications can obtain computing and storage resources on the cloud through Bidding, and all resources are completely regulated by the supply and demand relationship in the market. Considering the complexity of the technology. The reason for choosing Sharding is that you cannot tolerate 100% redundancy of all data, which will cause significant waste. Therefore, data can only be processed separately in different shards, and the processing results are finally aggregated by a certain Relay.

Considering the complexity of technological iterations, there have been some changes in the technical selection of Sharding. The community has ultimately settled on the Rollup-Layer 2 solution as the mainstream direction. In this solution, all applications can choose to be built on separate Layer 2, while the Ethereum Mainnet sinks to become the infrastructure for all AppChains. In addition to bringing data finality to AppChains, it can also serve as an information Relay. This master-slave architecture is a good solution in terms of efficiency and cost. It not only reduces the cost of application execution but also provides a good guarantee for the ‘security’ based on the degree of Decentralization.

Meanwhile, Ethereum has also designed a relatively self-consistent business model and a decent economic model for ETH. On the one hand, it switches the POW consensus mechanism of the mainchain to an asset voting-based POS mechanism. As a result, participants can receive dividends from the mainchain transaction fees. On the other hand, each AppChain needs to confirm the finality of data through mainchain transactions, and these transactions require ETH as gas. Therefore, as long as the various Layer 2s of AppChain remain active, it indirectly promotes the activity of the Ethereum mainchain. This also enables ETH to capture value from the entire Ethereum ecosystem.

However, the real problem arose in the hot trend that started at the end of last year, represented by ETH ReStaking in the EigenLayer track. The original idea of this track is not actually complicated. For those who have participated in Decentralized Finance, they may know that a considerable number of projects innovate around idle assets, which is known as ‘nesting dolls’. However, Restaking is more daring, choosing to directly reuse the ETH involved in PoS Staking and directly provide execution functions externally, known as AVS. Although I highly appreciate this direction in entrepreneurial creativity, it is actually the most direct cause of Ethereum’s current plight. Because at that time, the technical selection of Layer 2 was basically completed and relatively mature technical solutions had been developed. It should have been a time to focus on the application side, such as accelerating the iteration of related applications, and having a more sufficient budget for market promotion, etc.

However, the emergence of the ReStaking track is actually a Vampire Attack on Layer 2, which directly leads to the loss of value capture capability for ETH. Because ReStaking provides an alternative ‘second Consensus solution’ for applications without the need to pay the mainchain ETH cost. The most intuitive understanding is based on the current AVS, DA layer implementation. DA refers to data availability, which means using a technical solution to make data tamper-proof, and can be equivalent to data finality. In the previous description, we made it clear that AppChain achieves data finality by calling contracts on the mainchain, creating demand for ETH. However, Restaking provides a new option, which is to purchase Consensus through AVS. In this process, you don’t even need to pay ETH and can use any asset to pay for the Consensus purchase fee. This transforms the entire DA market from the previous Ethereum monopoly to an Oligopoly market shared by ReStaking and Ethereum, which naturally makes Ethereum lose its market pricing power and directly affects its profits.

Moreover, what is more deadly is that it squeezed the precious resources of Bear Market at that time. These resources should have been diverted to various applications for promotion and market education. However, they were attracted to the engineering of ‘reinventing the wheel’ for infrastructure, and today Ethereum’s dilemma is officially caused by the lack of enough active applications, resulting in a decline in the value capture system. Partners who have worked on projects may understand that the rhythm of project operation is very important. Only by launching appropriate products in the appropriate market can the project achieve long-term development. Any wrong decision can lead to stagnation in development. Therefore, it is not without sighing.

Of course, the nature of this problem is understandable. It is also a problem of democratic system, which is the efficiency problem caused by the lack of unified power. In a decentralized organization, all parties can naturally develop and compete for resources according to their own will, which is more conducive to value capture in a bull market because of the great potential for innovation. However, in the stock battle of a bear market, the lack of unified resource allocation leads to deviations in the route, which is understandable that it leads to development stagnation. On the other hand, Solana, an organization operated by this kind of company structure, naturally enjoys the efficiency advantages brought by centralization and is welcomed. The efficiency of capturing hotspots and launching targeted measures is also higher. That’s why Memecoin summer appeared on Solana.

Key Opinion Leaders and vested interests in the Ethereum ecosystem are being nobilitized

In the Ethereum ecosystem, there is a phenomenon: the lack of active opinion leaders like Solana, AVAX, or even the former LUNA ecosystem. Although these leaders are sometimes considered to be the driving force behind fear of missing out (FOMO), it is undeniable that they play an important role in community cohesion and entrepreneurial team confidence.

However, in the Ethereum ecosystem, it is difficult to think of influential leaders other than Vitalik. This phenomenon is partly due to the split of the original founding team, but also related to the solidification of the internal hierarchy of the ecosystem. Many of the benefits of ecosystem growth are monopolized by early participants. Imagine if you have participated in fundraising worth 31,000 BTC (currently valued at over 2 billion US dollars according to the market capitalization), you would already be very wealthy even if you do nothing, let alone the wealth in the Ethereum ecosystem has long surpassed this number.

Therefore, many early participants have started to adopt a conservative strategy, where maintaining the status quo becomes more attractive compared to expansion. To mitigate risks, they have become more cautious, which also explains why they tend to take a conservative approach in driving the development of the ecosystem. A simple example is that early participants only need to ensure the status of existing projects like AAVE and lend a large amount of ETH to leverage demanders to earn stable profits. So why do they need to vigorously promote the development of new projects?

But in the end, I believe that the long-term trend of ETH is not a problem, because there are actually no direct competitors in the market. In the narrative of Ethereum, the key to the positioning of ‘Decentralization of the execution environment’ lies in ‘Decentralization’ rather than ‘execution environment’, and this fundamental foundation has not changed. Therefore, as long as the integration of resources can be completed and the development of applications can be promoted, the future of Ethereum is still bright.