Why won't ETH maintain a monetary premium in the long run?
Editor's Note: This article comes fromBlue Fox Notes (ID: lanhubiji), reprinted by Odaily with authorization.
Editor's Note: This article comes from
Blue Fox Notes (ID: lanhubiji)
Blue Fox Notes (ID: lanhubiji)
, reprinted by Odaily with authorization.
Foreword: The author of this article is a staunch Bitcoin supporter, so his views are not surprising. The author believes that ETH will not be able to maintain its currency premium in the long run. He views the currency direction of Ethereum from various aspects such as Ethereum’s monetary policy, the possibility of node centralization, the second system syndrome, and the vulnerability of relying on DeFi applications to achieve value accumulation. Criticized. Predictably, this article will be supported by Bitcoin supporters and opposed by Ethereum supporters. From the perspective of Blue Fox Notes, it is too early for the author to make a conclusion. What do you think? The author of this article is Checkmate, translated by "LH" of the Blue Fox Notes community.
The ethereum project has long been criticized, especially by bitcoin enthusiasts, for its design, execution, and failure to deliver the product proposed during its crowdfunding. Ethereum is currently attempting a huge engineering challenge, trying to refactor the entire blockchain in order to integrate existing chains while allowing both chains to run in real time.
It's not that easy. It highlights irrefutable problems with the original design, and investors' continued uncertainty about the future.
At the same time, Ethereum has found a new direction, focusing on distributed financial applications. This is backed by what is known as a "moat" of developer activity. The underlying spirit of this movement is "open and unstoppable finance" and establishes ETH as the reserve currency asset of the entire ecosystem.
This article, however, takes a different stance: Despite this development, ETH tokens are unlikely to develop a credible monetary premium. This is especially important when ETH is competing with fixed-supply, deterministically issued, and deeply liquid digital currencies such as Bitcoin. The core arguments will revolve around the following themes:
Second System Syndrome and Ongoing Changes in Project Direction
Rely on the application layer for value accumulation
Underestimating the reality of the "tortoise and the hare" in Bitcoin development
(Blue Fox Note: Second System Syndrome, also known as Second System Effect, was proposed by Fred Brooks, author of The Mythical Man-Month. It means that after completing a small and concise successful system Finally, people will tend to expect a better next plan, but the actual result is often the opposite, and may create a large complex system with complex functions, that is, an over-engineered system, and finally fail)
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Monetary Policy and Governance
Today, this monetary policy is protected by a solid social contract. It is unlikely to change Bitcoin's monetary policy unless the fundamental value of the project is destroyed and the chain is hard forked. Most Bitcoin proponents agree that if the supply curve were tampered with, it would cease to be Bitcoin.
This provides investors with relative certainty and has attracted impressive value capture over Bitcoin's 11-year history. Bitcoin is designed to create confidence in future inflation and supply expectations.
For Ethereum, its crowdfunding in 2014 was carried out under the understanding that it will turn to PoS at a certain stage in the future. To encourage developers to move towards this goal, an "ice age" was incorporated into the protocol, which intentionally increases block times by ending PoW difficulty. This acts as a disincentive for miners to support PoW chains, making it easier for them to switch to PoS.
The Ice Age was recently delayed for the third time in Ethereum’s history due to a hard fork change to the consensus rules. In all cases, PoS implementations were not yet ready for deployment, and the first two hard fork delays were tied to lower ETH issuance rates.
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Ethereum bulls often point to the continued decrease in block rewards as a sign of increasing hardness and scarcity of its currency. However, a clear distinction must be made between asset issuance (hardness) and asset robustness or resistance to human tampering.
Although the issuance rate has been reduced to date, the choice of inflation rate is a product of developer intervention rather than a deterministic, reliable hard-coded change.
The point of criticism here is that a small group of people has the power to determine the inflation rate of what should be considered a global monetary asset. As long as the game is played long enough, eventually, those at the helm will abuse that power.
Future inflation rates and token supply are unknown. Even in ETH2.0, who has the right to decide what is the success of the minimum viable issuance? Someone will have the power to adjust the stake rate until a subjective and dynamic goal is reached. If you leave it to the algorithm and find it vulnerable, someone will come into the protocol and change the inflation. Since attack vectors never stop evolving, this process will never stop. As such, Ethereum can only be considered to have an unsound monetary policy, with a social contract that delegates monetary authority to a small collective.
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Centralization of nodes and validators
Bitcoin has had its most contentious period during the scaling wars against Segwit activation. The UASF (Blue Fox Notes: User Activated Soft Fork) movement invalidates miners' capture of the Bitcoin chain through social contracts. User nodes are upgraded so that miners who do not comply with the requirements cannot obtain effective rewards.
While node hardware will continue to be optimized, sync times and hardware requirements will only increase. If Ethereum does reach the global crowd, this could lead to a centralization of nodes where massive players can replace SSD drives and enable frequent upgrades. Node operators will likely be concentrated in a collection of Ethereum core developers (such as EF and Consensys), traders, crypto banks, and staking service providers.
Due to the lack of technical capabilities of ordinary users, the pledge reduction measures of ETH2.0 actually promote the behavior of centralization, and ordinary users will give priority to exchanges and equity pledge service providers because of convenience.
With the aforementioned centralization in play, the ability for users to signal intent and launch UASF-type defenses against malicious actors is greatly reduced.
This highlights the gradual concentration of governance rights to core developers, who hold a large amount of ETH to verify PoS and influence the direction of monetary policy experiments.
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Monetary policy is being discussed, and the latest experiment is EIP1559, which introduces the ETH burning mechanism, which completely changes the blockchain mechanism and incentive system.
Ultimately, this burning mechanism will benefit most current ETH holders and disadvantage future holders and users. Assuming the network is growing, the burn rate of ETH increases the user's gas cost in USD (fee inflation). Stakers are largely unaffected as they benefit from non-dilutive block rewards, as well as taxes generated through burns.
The authors worry that this monetary policy experiment was crafted by those with the most to gain in response to “research predictions” by developers who found that the current gas fee mechanism was unable to accumulate value. This looks very similar to central bank experiments and the Cantillon effect in today's world. (Blue Fox Notes: The Cantillon effect means that the increase in currency does not have the same impact on the prices of all commodities at the same time. The way in which the increase in currency affects the economy depends on the way in which the new currency is injected and how it is injected. channel. It does not necessarily benefit everyone, and those who get the currency first may benefit. The addition of currency causes some people to gain and others to lose.)
One can only conclude that Ethereum's monetary policy is relatively flexible, influenced by people rather than code. This uncertainty reflects unsound monetary policy (susceptible to human intervention) and instills a defensible notion of centralized governance. There is no doubt that this has hindered the development of the Ethereum currency premium, and it seems to only worsen over time.
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second system syndrome
The original design of the Ethereum project was to expand Bitcoin's feature set by introducing Turing-complete scripting capabilities. Its design intent is to create a global computing network, also known as the "world computer". In fact, this is a valid design goal, and Ethereum is well suited for it, and if so, it provides CAPTCHAs for the new internet of transactions.
The tradeoff of this design decision is increased protocol complexity, greater vulnerability and hacking surface, and inevitable blockchain bloat. The design direction of Ethereum also responded to market demand and made several shifts. The narrative has moved from the world computer to unstoppable dApps, to token issuance, and now to open financial applications.
While this represents an aspect of innovation and lessons learned, the design trajectory of the Ethereum project shows continued gravity towards the design of Bitcoin as a monetary asset. During this period, Bitcoin continued to build currency-like characteristics such as liquidity, network effects, and ultimately financial products that drove good reputation and product-market fit.
Ethereum is in many ways a perfect example of Second System Syndrome. In this case, a simple technology like Bitcoin is deemed unable to meet its design goals and is then iterated into more complex and "promising" projects, which ends up in an endless loop of research, new problems are discovered, and then delivery is delayed plan.
With the rebuild of ETH 2.0 being the latest solution to this problem, it once again paints an uncertain future for ETH holders. This new blockchain will eventually reset the developed Lindy effect of the existing chain, and at the same time it can reasonably be expected that more research will emerge and more problems will be discovered to be solved. (Blue Fox Notes: The Lindy Effect refers to those things that do not die naturally (compared to organisms that die naturally), the longer they exist, the longer they will survive. For example, classic books, encrypted currencies, etc. .Here the author refers to that since ETH2.0 is a new blockchain, it causes the original Lindy effect of ETH to be reset and new problems arise)
Additionally, the ETH2.0 beacon chain is very similar to Bitcoin in design, only handling consensus and global state, while pushing applications and inflation to shards (sidechains or Layer 2 in the case of Bitcoin).
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Rely on the application layer to accumulate value
Despite the outstanding technical and engineering achievements of the open financial ecosystem, there is still the risk of relying on third-party agreements to obtain value accumulation for ETH.
Lately, there have been a lot of high-profile "unstoppable", "non-custodial" and "decentralized" applications...in fact....can be stopped, custodial and centralized:
*Compound Finance was found to be custodial with developer backdoors and drain mechanisms.
*Developers shut down 0x after a bug was found in the 0x V2 upgrade.
These challenge the "unstoppable" narrative, and are actually dishonest product marketing claims, because although "decentralization" is advertised, there are actually custodians of backdoor products. Although security protections are effective in the early research and development stages, it sounds a lot like Second System Syndrome. Perpetual studies support a "nearly ready" development timeline.
Cryptography has no secure back door. If it can be accessed by developers, it can also be accessed by attackers.
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MakerDAO, the heart of the DeFi ecosystem, is guided by the MKR governance token. One could argue that without Maker and its DAI/SAI tokens, the DeFi ecosystem would rely on centralized permissioned stablecoin infrastructure such as USDT and USDC. Additionally, the vast majority of the ecosystem relies on the centrally controlled Maker ETH/USD price oracle.
This problem is not easy to solve in a trustless manner. In fact, this paper does not argue that trustless oracles are a problem that can be solved in the medium term, and emphasizes that this topic has been studied for decades. Any on-chain price flow (such as Uniswap) is vulnerable to liquidity attacks and requires such a large scale that it will be difficult to achieve at least a few decades. (Blue Fox Note: This assertion is too subjective)
Therefore, trustless oracles, a key component of DeFi, will likely remain centralized for decades. Attacks on these centralized oracles will be a fundamental risk to investors' capital for the foreseeable future. It is very applicable to describe DeFi with the concept of "house of cards". These centralized oracles are used as primitives for other composable protocols. The entire stack is only as resilient as its weakest link, leading to the actual risk of confusing users.
This appears to be a source of systemic risk and unmitigated risk.
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Depends on MakerDAO
The main criticism of MKR is that the token is highly concentrated in the hands of well-known VCs and teams. Indeed, a proposal to cut "decentralized" banking rates by 4% was recently passed, with 94% of the votes coming from a single entity. This points to an apathy of the voting community, insufficient incentives to participate, and the powerful influence of a small group of large token holders.
A hack on the MakerDAO oracle would not only result in liquidation of CDPs/Vaults, but all slave protocols would allow cheap liquidated ETH to be captured by savvy attackers.
Would a rollback be on the table if all 3% of ETH was transferred by hackers? What if instead of 3%, it was 30%? The attacker is now the largest validator on the PoS network. (Blue Fox Notes: 3% of the amount of ETH currently locked in DeFi here)
This is a real risk, the consequences of which are unclear.
If the value proposition of locking up ETH to drive open finance is undone, then it is reasonable to expect that all value accumulation under this assumption will also be undone. Ethereum bulls believe that smart contracts native to the protocol can be forked by third parties. True, however, this article questions how many iterations of a new narrative --> boom --> regulation/hacking/false promises --> bust, investors will tolerate before indifferently destroying future value accumulation.
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turtle wins the race
As a summary, the Ethereum project is affected by the following factors:
Relatively centralized governance and shaky monetary policy are signs that this will only worsen over time.
The latest experiments in EIP1559 seem to contradict the needs of all users except current ETH holders. This creates an unfair system and makes user transactions less and less popular on-chain due to rising fees.
Due to protocol complexity, Turing completeness, developer backdoors, and centralized oracles, Ethereum has a much larger attack surface than Bitcoin.
The narrative, project direction, and experimental features continue to change over time and are gradually anchoring the narrative of a sound currency like Bitcoin.
Excessive reliance on third-party applications to increase the value of ETH tokens can be stopped. The unbounded supply and liquidity of monetary policy requires such a mechanism.
Any centralized pools of ETH (including custodial DeFi applications) are under constant threat, to the detriment of PoS validators.
In the case of rebuilding the entire underlying blockchain, the Second System Syndrome reaches its apogee. It's the massive feat of rolling one chain into another, and it will take years.
At the end of the day, the reason Ethereum has struggled to grow and sustain a convincing monetary premium over the long term is simple.
Investors cannot be sure what they are buying, systemic and unmitigated risk is part of the social contract, and there is no tangible data to suggest that this reality will change.
One cannot count on potential investors, aware of the size, history, and depth of the uncertainty described above, to be unwilling to exchange some of their capital for ETH tokens.
The original vision as the world's computer is the best project narrative, and that's an achievable goal if there isn't an endless change in direction. The problem is that the "world computer" turns out to be a smaller potential market compared to a "monetary asset" like Bitcoin. Therefore, its narrative gradually shifted to "ETH is money".
