Ethereum is winning, but ETH investors still are not winning.
You may have noticed that my stance on ETH has recently become more moderate. The decline in ETH's relative valuation has led to a loss of investor confidence, and when ETH aspires to be a network currency, investor confidence is key.
For years, the reasons for ETH's underperformance have been a focal point of debate. Many of the issues plaguing ETH's relative valuation are beyond its control—Gary Gensler, Michael Saylor, and others have contributed to this. (Gensler has already left, and ETH fund management companies have finally been established; some external issues will resolve themselves.)
Today, I want to focus on the challenges firmly controlled by the Ethereum community, as many of the reasons Ethereum has lagged behind the market for over three years are determined by the community itself. We should focus on addressing these issues to revitalize potential ETH buyers.
The value capture problem of ETH
Many of the challenges facing Ethereum can be distilled into a core theme: a broken value capture supply chain between Ethereum's utility and ETH's value.
In this episode, the CB team continues to discuss this Ethereum-specific issue, as SOL and TRX have already set historic highs, while Ethereum's economic model is particularly flawed compared to its competitors, especially the Layer2 model.
Speaking of stablecoins, concerns about the relationship between stablecoin supply and its Layer1 token value capture arose as early as the 2018-2019 bear market. Nic Carter published an article on Bankless in 2020 discussing this issue—Cryptocurrency Fiat: Symbiosis or Parasitism?
In short, buyers and holders of stablecoins on Ethereum Layer1 do not bring any value to ETH apart from spending about $0.50 in gas fees to purchase these stablecoins. If they do the same on Layer2, even if they purchase stablecoins worth billions of dollars, the value capture of ETH would drop below $0.01.
The narrative momentum of Ethereum
Nevertheless, the adoption metrics for Ethereum are undoubtedly bullish.
The recently released Robinhood Chain has deployed tokenized stocks on Ethereum, validating Ethereum's Layer2 roadmap and its position as a trustworthy neutral settlement layer for Wall Street assets. With the Robinhood Chain, OG commits that blockchain technology will upgrade Wall Street's outdated financial system for tokenization and trading, and everything is coming to fruition.
This statement is just one of many bullish signals from the network:
The Ethereum ecosystem maintains a 50% dominance in stablecoin supply, and if you ignore the opaque Tron ecosystem, its share rises to 75%.
The sensational IPO of CRCL particularly validates Ethereum, as Ethereum holds 66% of all USDC.
Coinbase is the most trusted and respected brand in the crypto industry, building Ethereum Layer2.
Ethereum operates with 100% uptime, prioritizing true decentralization without any counterparty to resonate with Wall Street's demands and enhance its brand image against other competitors.
The economic influence of ETH fund companies is continually strengthening:
If you want to promote bullish rhetoric for ETH and Ethereum, it is becoming increasingly easier to do so.
All the efforts made by Ethereum developers to maintain decentralization and credible neutrality are being rewarded, and the adoption metrics in the world's capital gravity center—Wall Street—are incredible.
Expanding the ETH narrative
Many people see the adoption and success stories above and see the opportunity.
Tom Lee's Bitmine fund management strategy is leveraging the narrative advantages of Ethereum. The strategy is simple: incorporate ETH into the balance sheet and then market ETH to Wall Street. Ethereum itself has many narrative highlights, and all ETH needs is a sufficiently dynamic person to excite Wall Street.
We are about to witness how underestimated ETH has been over the past four years. Is ETH's poor price performance due to market irrationality? Or does its decline genuinely reflect deeper, more structural issues?
Tribalism and social scalability
By delving deeper into the above, you will gain a more profound understanding of two aspects of ETH.
On one hand, a network adopting a Layer2 model cuts one link in the ETH value capture supply chain. But on the other hand, you will see an incredible success story, as if Wall Street could easily push ETH to $10,000.
My view on this dichotomy is as follows:
If you add narrative firepower to the unresolved value capture supply chain, you get tribalism, which is favored by insiders but rejected by outsiders:
Now, most people in Ethereum are excited by Ryan's proposed price of $740,000 per ETH, while those outside of Ethereum may see the same and think it's delusion (just read QT).
However, let's imagine an alternative scenario where ETH's superior value capture supply chain becomes a core part of the ETH narrative, just like in 2021. In this case, all Ethereum Layer2s are based on Native+Based Rollup, reducing Ethereum's block time to about 2 seconds (which is Ethereum's long-term goal).
In this world:
Rollups have synchronous composability, eliminating the need for network bridging. Lower Layer1 block times allow market makers to offer tighter spreads, leading to increased on-chain trading volume. Price execution power is significantly enhanced.
Ethereum's robust MEV infrastructure can ultimately be used to provide optimal execution for traders (on Memecoin, etc.), instead of the approximately 20% slippage they find elsewhere.
Cross-chain liquidity flows back to Layer1, while Native+Based Rollup can seamlessly tap into Layer1 liquidity, increasing trading volume accordingly.
Based+Native Rollup consumes 10 to 100 times the gas of current L2s while providing shared liquidity and composability, meaning all these activities on the Rollup will actually consume a significant amount of ETH.
Tokenized assets on rollups can be accessed by other parts of the Ethereum ecosystem. Ethereum's status as a platform for issuing and trading tokenized assets will be further enhanced.
What I articulated above is a future: the feedback loop between Ethereum's utility and ETH value capture will be restored.
Breaking the tribalism narrative
In 2024, Bitcoin will leap from an asset primarily promoted by its tribal community to being regarded as a 'special snowflake' asset by the world's most powerful governments. Only Bitcoin has strategic reserves. No other asset possesses such reserves.
The fundamentals of Bitcoin (the 21 million cap) force non-tribal investors to hold at least some Bitcoin.
Ethereum needs to do the same.
While Tom Lee and all other ETH fund companies are spreading the gospel of ETH to Wall Street, it would be better if they could stand on a coherent value capture story and leverage it.
The Ethereum community must quickly repair the feedback loop between Ethereum's utility and ETH value. We understand the necessary inputs. We also understand the stakeholders, including many who have already participated in realizing this vision and some who may need to be persuaded by other community members. We believe we can achieve this goal.
What are the stakes here? It is a more effective Ethereum growth story that we can sell to the world—one that can ultimately achieve the goal of the ETH tribe: breaking through the $10,000 price barrier.
This article is collaboratively reproduced from: Deep Tide
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