Ethereum: Are fundamentals there?

The following is a guest post and analysis from Shane Neagle, Editor In Chief fromThe Tokenist.

Since the fertile but somewhat fraudulent initial coin offering (ICO) frenzy in 2017, Ethereum (ETH) remains second only to Bitcoin, now at 9x lesser market cap. Over the last five years, Ethereum had an average annualized return at nearly 60%, which is neck and neck with Bitcoin.

However, over the last year, there has been a noticeable shift in Ethereum’s valuation, especially against rival blockchains like Solana (SOL). Compared to Bitcoin, which returned 33.73% over a one-year period, Ethereum yielded nearly 50% loss. At the present price, ETH reverted to October 2023 price level.

What is immediately noticeable is that alternative proof-of-stake Solana has large and frequent spurts of inflows, while Ethereum tends to go down without such rallies. Representing decentralized finance (DeFi), Ethereum now holds barely 52% market share, the lowest since May 2022.

In the meantime, Solana more than doubled its market share since May 2022, from 3% to nearly 8%. Considering there is no shortage of Layer 1 blockchains similar to Solana, is this a sign that

Ethereum will continue its slide, getting cannibalized by pure L1 chains that don’t rely on L2 solutions?

In other words, how should one view Ethereum’s fundamentals? Could it be the case that Ethereum is actually poised to maintain or even increase DeFi market dominance, but that ETH price will still be lackluster?

To attempt to answer that, let’s first revisit the big crypto picture.

What Is Ethereum’s Vision?

Ever since the internet became commercialized, it has been missing one obvious component – native value transfer. After all, if ebooks can replace books, and if emails can replace mail, why can’t there be emoney replacement for fiat currency? More importantly, why can’t contracts be automated to the extent of replacing banking services such as loans?

This has been the underlying push for blockchain technology, starting with Bitcoin. But for the internet’s native money transfer to be adopted at scale, it has to have three critical components:

It has to be trustless, eliminating the vulnerability of arbitrary human intervention. For something to be fully trusted, the spectrum of trust has to be minimized to near-zero.It has to be user-friendly, implementing intuitive design, seamless interoperability, and frictionless user experience just as smartphones have accomplished to be mass-adopted.It has to be scalable to handle the transition from legacy finance to blockchain finance.

Within this framework, Ethereum is positioned strongly as a theoretical edifice. Recently, one of top Ethereum developers, Justin Drake, filtered what Ethereum means across different venues of legacy human action.

But in practice, what is the likelihood of this happening?

Is Crypto Actually Viable?

At face value, Ethereum is aiming to uproot entrenched power networks. To expect it to go without major friction would be an exercise in folly. This is why we have seen sustained effort to cripple the expansion of DeFi services during the Biden admin.

When President Trump took office, and Elon Musk launched the Department of Government Efficiency (DOGE), it became even more apparent that the entire mediatic and political space runs on social engineering and institutional deception. And the underlying power of such a system is the lack of transparency in money flows.

In particular, what has been established is that:

If a power is threatened, conditions are erected to contain alternative power.In the context of cryptos, the base of entrenched power is the need for fiat conversion.DeFi apps may be useful, but are meaningless if one cannot spend money in the real world.Therefore, for fiat-crypto conversion to be viable, all participants in the (block)chain have to comply with the conditions of entrenched power.

Case in point, what if a person believes climate change to be a systemic hoax, aiming to suppress wealth distribution via net-zero policies? Such policies are funded and enforced via taxation. The exit from the funding for the perceived coercive policy would then require for laws to be broken.

This applies to any public policy perceived to be unjust or deceptive.

But if mass adoption of DeFi blockchains is to be successful and for credit cards to get a proper rival, there would have to be consistent compliance with the laws, no matter what they are at a given moment. That’s because dApp usefulness equals regulatory compliance. In other words, even a trustless system would have to tether itself to the arbitrary trust framework it purportedly aims to exit.

But if that is the case, why wouldn’t the entrenched power network implement its own money layer on the internet? After all, it would enjoy full credibility for mass adoption, while also being more convenient.

In the end, Ethereum’s vision may be staring down a wall too high to scale. But now that we’ve painted the big picture of crypto containment, is Ethereum scaling competitive in the first place?

Ethereum’s Revitalizing Initiatives

Although Ethereum’s transition from proof-of-work to proof-of-stake raised some hackles, it could be argued that the 99% energy reduction was worth it for scaling sake. This way, Ethereum has the potential to become a global smart contract launching pad.

On that road, the adopted approach is reliance on Layer 2 solutions such as Optimism, Polygon, Arbitrum, Base, Starknet, zkSync and others to offload traffic and reduce transaction fees. And the lower the transaction fees, the lower the friction is for the end-user.

The problem is, this approach introduces an entirely new layer of frictions such as juggling multiple chains, bridges and wallets. This not only elevates the barrier to entry, as the average user always seeks simplicity, but it fragments the capital that would’ve otherwise flown into Ethereum itself.

On the scaling front, however, Vitalik Buterin noted that the L2 approach managed to boost the blockchains transaction processing capacity by 17x. The overarching goal is now to make Ethereum into a kind of operating system (OS) for DeFi:

Make L2s interactions “under the hood” by creating chain-specific addresses, common standards for cross-chain bridges, and reduce transaction finality from weeks to minutes.Double the blobs (temporary data) per block from 3 to 6 with Pectra upgrade. The increased blob throughput should expand L2 layers further while maintaining low fees.To make ETH an appreciating asset, Buterin is hoping to entrench it as the primary collateral across DeFi apps.In addition to the burning mechanism as ETH transaction fees are shared, this could make ETH a deflationary asset. At the moment, ETH has an inflation rate of 0.754%, slightly lower than Bitcoin’s 0.829%.

However, Buterin also views privacy concerns as paramount, which is why the Ethereum ecosystem should move toward default one address per app. According to his own words, this would incur “significant convenience sacrifices, but IMO this is a bullet that we should bite”.

At a time when Ethereum’s ecosystem convenience level is dubious against pure L1s like Solana, it is yet to be seen if the “bullet” will backfire. Judging by the Deloitte survey in late 2024, 85% of consumers are “taking at least one step to address their privacy and security concerns”, but this sentiment typically suffers erosion when colliding with convenience.

Ultimately, Ethereum will have to reach a stage in which users engage with dApps without knowing they’re using crypto. In such a scenario, adoption rate should offset potential crypto containment.

The problem is, Solana already ranks 1st in terms of real-time transactions per second (TPS) at 1,049 while Ethereum ranks 17th at 14.07 TPS (over one week) – a reminder that even differences measured in a single tick can have major implications at scale.. Against Solana’s theoretical 60,000 TPS, Ethereum’s roadmap is set for 100,000 TPS as the blockchain is sharded in “the Surge” phase of development.

Accounting for all roadmap phases, users should not expect Ethereum’s mass adoption potential to materialize until 2030. That gives plenty of roadway for rival blockchains, including centralized ones from established financial institutions like J.P.Morgan.

The Bottom Line

Blockchain apps are currently in the clumsy era of flip phones with physical keyboards. To approach ubiquity, dApps must evolve into the era of smartphones — intuitive, seamless, and invisible to the user.

But such ubiquity may paradoxically rely on the very institutional support that the blockchain ecosystem set out to displace. Alongside technical hurdles, the memecoin mania has clearly demonstrated that much of the public’s entry into crypto remains ill-informed and speculative.

As more people accrue negative experiences through token-based gambling, this misallocation of capital risks alienating broader adoption. It also creates a dynamic in which blockchain ecosystems become ripe for centralization, offering assurances and the perceived legitimacy of credentialed institutions.

This is the lens through which Ethereum and its rival chains must be viewed: as exciting, innovative platforms for decentralized finance, yet still navigating a precarious path between idealism and reality.

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