Analyzing the Ethereum economic model from an investment perspective

Editor's Note: This article comes fromOstrich Blockchain (ID: MyTuoniao), reprinted by Odaily with authorization.

, reprinted by Odaily with authorization.

Author: Lyn Alden, founder of Lyn Alden Investment Company, engaged in investment research for more than 15 years

Translation: Rachel, Chen Yiwanfeng

Bitcoin founder Satoshi Nakamoto solved the problems related to digital scarcity through a white paper in 2008, and launched Bitcoin in 2009. After the launch of Bitcoin, more other digital currency projects followed.

Many people ask me what I think about Ethereum and why I am not investing in Ethereum even though I am investing in Bitcoin. So below I will analyze the Ethereum protocol from the perspective of investors (not developers).

Overview of Ethereum 1.0

Ethereum was proposed by Vitalik Buterin (V God) in 2013, was crowdfunded in 2014, and launched in 2015.

V God, who was only 19 at the time, wanted to create a platform for decentralized applications. Big game maker Blizzard made his in-game characters neurotic, and he began a years-long quest to find technical solutions to correct these horrific injustices:

I was happily playing World of Warcraft from 2007 to 2010, but one day Blizzard removed the damage component from my beloved Warlock's Siphon Life. I cried myself to sleep, the day I realized the horrors that centralized services can bring.

—— V God

He described the discovery of bitcoin in 2011, after which a "fire" was lit.

Bitcoin uses the blockchain as a savings and payment technology, and the base layer is very simple. It focuses on doing one thing well: storing and settling value. Additional layers can be built on top of this base layer to leverage its ability to store and transfer values ​​for more complex purposes. An example is the Lightning Network, which enhances Bitcoin's scalability and can be used for micropayments.

Ethereum, on the other hand, is Vitalik's attempt to apply blockchain technology more broadly within the protocol's base layer. He has pitched ethereum as a "world computer," like an app store not controlled by any central entity. It's like a distributed operating system with a built-in token system, and programmers can use this ecosystem to create decentralized applications or DApps that use their own tokens.

The underlying technology of Ethereum is based on smart contracts, which are programmed agreements that are triggered when certain events occur in the blockchain. It requires a portion of Ethereum tokens to pay miners for executing smart contracts on the blockchain.

1. Application examples

Ethereum has been used to create various projects, and DappRadar is one of many sites that allows you to browse decentralized applications in the category of Ethereum and other smart contract protocols.

One of the most popular examples is stablecoins. Institutions can store fiat currency as collateral and launch tokens that run on top of the Ethereum protocol. These tokens are backed up 1:1 with fiat currency, so they tend to maintain stable prices, basically against the dollar, using Blockchain technology transfers and stores tokens. Users must rely on third parties to trust third parties because they must trust that the custody and collateralization of tokens is reliable, but exchanging tokens between counterparties is permissionless.

DeFi has become very popular in 2019 and 2020, and these applications replicate various banking functions, including earning yield, lending or exchanging tokens. For example, Uniswap is not a centralized trading company, but an exchange that operates in a distributed manner based on blockchain technology and incentive mechanisms.

Betting and gambling is also a significant area of ​​interest. An early example is CryptoKitties, a game that allows users to buy, collect, breed and sell cryptokitties, with each token representing a cat and each unique. Once generated, users will have their own cat tokens, and no one will take them away or change them like Blizzard's beloved warlocks. CryptoKitties were so popular that they severely clogged Ethereum's network in late 2017.

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Source: CryptoKitties

There are many crypto-based games these days, I don't play games like I used to, but if I did, I can certainly understand why the blockchain can add value to the gaming ecosystem, allowing users to hold items independently of the game publisher, The idea of ​​pets, characters, and even having other games recognize these items, pets, characters, is certainly cool.

However, it’s worth noting that many crypto-based games are currently running on Ethereum’s competitors, such as EOS and TRON.

Social networks and other systems are also projects that exist in the DApp ecosystem. In theory, the sky's the limit, but the question is whether they make enough economic sense.

Are decentralized applications really decentralized?

One of my concerns when reviewing decentralized applications is that many use cases are circular and speculative.

Ethereum is widely used for decentralized exchanges of cryptocurrencies, stablecoins, liquid units of account for trading cryptocurrencies, lending and earning interest on cryptocurrencies, which is a practice that serves as a source of liquidity, lending and lending for Ethereum, Also used to earn or trade various cryptocurrencies in a gamified manner.

So, this is a large operating system backed by cryptocurrencies for the purpose of transferring cryptocurrencies. A healthy banking system in the real world would have people saving money and banks making all kinds of loans for mortgages and business financing to real-world utility.

A banking system based on speculation, on the other hand, would be a group of banks taking deposits and then lending to speculators in the nearby stock market, plus technology providers to make this easy, with those speculators making the trades, mostly by those banks. Shares, shares in technology companies and shares in stock exchanges, thus forming a huge circular speculative party. By far the largest use case for Ethereum is a distributed version of this loop-based speculation system.

Some games are interesting and collectable in their own right, but for the most part Ethereum is currently mostly about distributed finance and speculative trading.

The main reason why some of these decentralized financial applications such as exchanges and liquidity mining have become more popular compared to their centralized competitors is that they bypass KYC.

The government is trying to implement KYC checks on regulated exchanges and custodians so they can track who is buying and selling cryptocurrencies. They can do analysis on public blockchains, but in order for them to be able to enforce tax fraud or other litigation cases, they want to be able to link blockchain transactions to specific individuals by having KYC gateways on as many exit and entry points as possible .

Decentralized applications make operations more difficult and are certainly more attractive to users who want to protect their privacy. Increased government surveillance has been a key catalyst in the development of privacy technologies or off-grid transactions in recent decades. In other words, if cash were invented today, it would be illegal because governments are hard to track and they don't want to.

If centralized exchanges and centralized crypto banks are subject to KYC rules, but decentralized exchanges and decentralized crypto banks are not, then we should of course expect non-KYC distributed versions to grow unless they are regulated hit.

Running code on Ethereum is more expensive than running code on Amazon Web Services. There are games or services that specifically use blockchain technology, such as enforcing digital ownership of non-fungible tokens, but otherwise, many of them are replicating services, such as cryptocurrency exchanges or moneylenders, in It also works fine without using a blockchain. So a lot of the growth seems to be around KYC, making it somewhat "permissionless".

However, the problem is that the ecosystem is not yet as decentralized as it should be, and there is a lot of attack surface should it be hit by regulators.

1. Third-party Ethereum node operators

Bitcoin was designed from the ground up to make it easy to run a full node. In fact, this design requirement was at the heart of Bitcoin's infamous "fork wars" in 2017, in which an easy-to-run version of Bitcoin's node core outperformed its hard fork, which increased the block size so that it It is harder to run a full node in exchange for higher network throughput.

This works very well for Bitcoin because, at the base layer, it's focused on doing one simple thing well: storing and transferring value. It's a simple blockchain.

Ethereum is more complex and has more targets on the base layer, so the node situation is more complicated, and some DApps have high requirements for nodes.

Since at least 2018, it has been pointed out that the Ethereum DApp ecosystem is quite dependent on third-party large node operators such as Infura. The situation is still serious, and ironically, Infura uses Amazon Web Services, so there are two layers of centralization.

Here is how Infura describes its products:

Here’s another third-party node operator, Alchemy, describing its product:

Applications running on Ethereum are more decentralized than regular applications on other platforms, but if most of what they are doing is bypassing KYC regulations, and governments decide to crack down on these practices, they have considerable Centralized attack surface. The government can prohibit cloud providers from hosting Ethereum nodes, and they can go after these companies that provide large-scale node services, which will not necessarily lower Ethereum itself, but will make it more difficult for DApps to run, thereby threatening the ecology.

If there is a government crackdown on Ethereum’s third-party node services, there will be a scramble among DApp operators to find ways to efficiently run their applications without these centralized third parties.

In an August 2020 episode of the podcast, Peter McCormack asked V God, "How dependent is Ethereum on Infura?"

God V answered:

First, I don't think the Ethereum network depends on Infura. Like if Infura disappears tomorrow, you know that the ethereum network will continue to function, and everyone who has an ethereum full node or an ethereum light node will still continue to function normally.

Ethereum applications will definitely become more difficult to use, and at the same time, it is possible to use Ethereum applications without relying on Infura.

Like I think in Metamask it's possible to spoof an endpoint to a local node and there are things like ethereum light clients like you can run Geth light and some other implementations have a light mode which is also like bitcoin The same block top verification, in fact in Ethereum, we even went out of our way to make the light client stronger. For example Ethereum has a concept called state tree where we are not only dedicated to transactions but also to account balances. So, given a block, like given a block header, even a small piece of data at the top of the block, you can create a very short proof that you know cryptographically the identity of a particular object. What is the balance?

And, those are definitely things that we can try to do better, and we're working really hard on that. Like, you know, a lot of hard work going on like creating a more decentralized backend for things like Metamask. You can definitely connect it to a full node or even a light node if you want.

In the October 2020 event, V God further elaborated on this issue:

You can have different levels of authentication. So, for example in a sharding environment, you don't have to check every single thing yourself, but there are similar techniques like data availability verification that can for example verify correctness probabilistically. You can verify beacon chain shards, you can check for fraud proofs, you can run stateless clients, you can even run light clients, which is better than trusting some server, and I think it's better for the ecology for more people to do these things The system is healthier, and people are more willing to do these things. For example, I'm not happy with the fact that you know that Metamask is only a client that talks directly to Infura.

I mean, I realize there's no better way at the moment, but it's definitely one we should try, and there are a lot of good projects that are trying to get past engineers, and even for example Eth 2 is designed better than Eth 1 is a simpler, better light client, so we hope things like Metamask will eventually adapt to it over time.

In November 2020, as Infura fell, some risks appeared in the market. Many exchanges had to temporarily stop allowing withdrawals of Ethereum tokens and various tokens based on Ethereum.

Infura linked the issue to a bug in one of the ethereum clients:

Earlier today (2020.11.11), Infura experienced its worst service disruption in our four years of operation. We realize we are a vital infrastructure for many great products and projects. I want to apologize to all users and the ecosystem. We recognize the trust you place in us and we never take it lightly. I want to share the details of this incident with you in order to bring transparency to what happened so that you can rest assured that our service will be better and even more resilient.

2. Security issues

2020 has seen many high-profile DeFi hacks and breaches.

This is unlike an exchange or custody provider that gets hacked without any issues with the underlying protocol. Instead, many of these DeFi hacks and exploits have flaws in the underlying protocols they exploit, resulting in the loss of user funds. In other words, this is a more fundamental problem at the token protocol layer enabled by Ethereum.

When multiple protocols are involved in a complex manner, many of which are less secure in terms of hashrate or other protections (e.g. network effects and many altcoins have weak security budgets, or high complexity of vulnerabilities), then Easier to hack.

3. Solutions to unknown problems

In summary, there is a high demand for stablecoins to be used as liquid units of account when trading cryptocurrencies and other purposes, there is a high demand for decentralized cryptocurrency exchanges and decentralized cryptocurrency liquidity providers And there is also a great demand for token-based games, social DApps. Ethereum has a large market share in financial DApps, while some smaller competitors have a considerable market share in gaming, social DApps.

Measured by the cost per line of code executed, these DApps are less efficient than centralized applications, but due to people looking to bypass KYC regulations, and since stablecoins are currently very useful in the world of cryptocurrency transactions, there is a lot of demand.

Ironically, however, the Ethereum solution to this need has a semi-centralized cluster. While it's more decentralized than a purely centralized system, it's not actually as distributed as some would hope, and Vitalik agrees. These centralized clusters provide a potential attack surface for governments to crack down on regulated, fully centralized and KYC regulated companies.

There are security issues with the use of Ethereum in various tokens, and most of the ecosystem is circular. So far, Ethereum DApps have not primarily served non-crypto industries with widespread success, but their main use case is as a platform for trading, lending, and transferring various cryptocurrencies. This circular speculation can drive development and price up very quickly, but can also unravel quickly if the opposite is true.

ethereum competition

Ethereum faces competition from other public chains, such as Cardano, TRON, Polkadot, etc.

However, they are not as far away from Ethereum as some coins are compared to Bitcoin, so they are worth keeping an eye on. Likewise, there are smart contract platforms that tie themselves to Bitcoin, RSK being an early example. Stacks 2.0, released last week, is a protocol built on top of Bitcoin that can use Bitcoin as a settlement layer, bringing smart contracts and DeFi to the Bitcoin network. The project is well funded (from multi-million dollar funding that the SEC actually oversees), they are also doling out funds for DApp developers to kickstart the network effect, it remains to be seen if the project will be successful, but the point is between this project and some smaller Ethereum will face some competition as it transitions between independent protocols.

Ethereum 2.0: the next iteration

Ethereum (Ethereum.org) describes some of the problems in its current protocol:

High demand drives up transaction fees, making Ethereum expensive for the average user. The disk space required to run an Ethereum client is growing rapidly. The underlying proof-of-work consensus algorithm that keeps Ethereum secure and decentralized has a big impact on the environment.

Core developers, including Vitalik, have been working on Ethereum 2.0 for years to solve some of the problems associated with the Ethereum network, which will bring about drastic changes to the core of the protocol.

First, it will change from proof-of-work (PoW) to proof-of-stake (PoS).

In the PoW mechanism used by Bitcoin, miners dedicate processing power to solving puzzles, and when a puzzle is solved, it adds another block to the blockchain, which means a bunch of transactions get processed. The correct blockchain is the longest blockchain determined by the majority of the network, and in a PoS mechanism, transactions are not verified by providing processing power, but by proving that they own units of the cryptocurrency, and no matter which chain Being verified by more currency holders will win.

If the proof-of-work blockchain splits, meaning there is a dispute over which block is the latest, then miners can only process one of these blocks at a time, and the longest blockchain will eventually be accepted by the majority. In the event that miners disagree on the latest block, each miner must choose which chain it thinks is correct and dedicate processing power to adding more blocks to that chain. Inevitably, one chain will overtake the other, most miners base on it, and that long chain will be the winner, the shorter chain will be discarded, and all miners providing processing power to it waste their money.

The PoS mechanism uses less energy but is an unproven technology in terms of security and decentralization. In fact, continued research in this area is one of the reasons why the completion of Ethereum 2.0 has been delayed for many years. An inherent problem with the PoS mechanism is that there is no cost to simultaneously verifying transactions on multiple chains, a stakeholder does not need to contribute to one chain, but can verify all splits on his token at the same time because it does not require much Processing power, so there is no price to pay for mistakes, they don't have to pick just one, so how do you resolve disputes between chains?

There are various solutions, and as part of research and development in recent years, many different blockchains with PoS mechanisms have emerged. In general, blockchains need a way to be aware of splits and penalize proof-of-stake validators for validating any chain that ends up not being the longest chain. This increases the cost of being wrong and incentivizes people to only validate chains that stakeholders really believe are correct, as PoW miners must. Ethereum 2.0 will have a mechanism to remove Ethereum tokens from validators who fail to do their job correctly, which would result in a huge cost of being wrong or attacking the network.

Ethereum has a much lower hash rate on its current proof-of-work system than Bitcoin's proof-of-work system, and uses GPUs instead of ASICs like Bitcoin. ASICs are specialized hardware with physical supply constraints (it is much harder for an attacker to get most of them; an attacker may need existing miners to participate using existing hardware), while GPUs are general-purpose and versatile. In theory, someone could buy a lot of cloud GPU power for a short period of time, and then try to 51% attack Ethereum 1.0, which is much cheaper than trying to 51% attack Bitcoin, and there is no special hardware or supply chain constraints.

Here is a Proof of Work hashrate comparison for Bitcoin vs Ethereum:

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Source: BitInfoCharts

The large difference in hash rate is not a metric for assessing the difference in the cost of attacking each network (since they have different hardware, GPUs are more expensive per unit of processing power), but it still makes for a useful comparison.

Also, amplifying some of the details by the logarithmic difference in hash rate, Ethereum has just recently recovered to the same hash rate as its mid-2018 peak, while Bitcoin’s hash rate is currently three times the 2018 peak. So, since then, Ethereum’s security has remained the same and Bitcoin’s has tripled.

1. Launch of Ethereum 2.0

Ethereum developers have been working on the Ethereum 2.0 update for years, experiencing multiple delays and aiming to complete it by 2022, which may end up being delayed. I don't blame them, it's very complicated.

First, a beacon chain was released that runs in parallel to the existing Ethereum blockchain, which was completed in December 2020. It allows staking, meaning Ethereum holders can submit a certain amount of ETH to operate a validator that will validate transactions. Anyone with 32 ETH can operate a validator, and those with less can join the validator pool. This is the heart of the proof-of-stake model.

Second, up to 64 shards will be created. Rather than one chain, there are dozens of parallel chains called shards that process transactions on Ethereum 2.0 and connect with the beacon chain. This will radically increase the transaction throughput of the system. Each validator can only operate on one shard at a time, validating transactions made on that particular shard. Sharding can pose security issues, for example 51% attacking one specific shard doesn't cost a lot of money if validators can choose which shard to operate on, so the beacon chain must somehow Coordinating validators randomly prevents this possibility.

Third, once all of this is running, the current Ethereum 1.0 chain will be docked into one of the shards. At that time, Ethereum 2.0 is born, and it can be considered to move away from alpha development and enter beta development, so that it can be further improved during runtime. Then at some stage with no breaking changes for a while, it can be considered out of beta development.

Additionally, there are Rollups and other sidechain solutions, somewhat similar to how the Bitcoin network uses Liquid and Lightning as auxiliary layers to increase throughput. With these developments comes the question of whether sharding is needed, which comes back to the question that the base layer itself is being developed.

However, this is all subject to change. A recent article by Ben Edgington on The Block outlines the changes to the roadmap:

A year ago, Ethereum 2.0 had a clear linear roadmap. Phase 0 (Beacon Chain) will be followed by Phase 1 (Sharding for Scalability), Phase 2 (Abstract Execution Engine), and finally Eth1 will be merged into Eth2 on top of this superstructure. The phase 2 design looks like it will take longer than expected, and at the same time the pressure is starting to build to get Eth1 merged into Eth2 as early as possible. So we inserted phase 1.5, where Eth1 "boosts and shifts" can be performed directly into Eth2 shards.

Then came a whole new scaling paradigm that doesn't rely on sharding at all, and that's Rollups. In October, Vitalik proposed a new Rollups-centric Ethereum roadmap as a path to scalability. Rollups are a so-called Layer 2 technology that offloads much of the computational and storage burden from the blockchain and benefits from its security guarantees using only the chain. They come in different forms, ZK Rollups and Optimistic Rollups, with different tradeoffs, and the technology is nascent and still in its infancy. Rollups will most likely provide most of the scalability Ethereum needs before Ethereum 2.0 is fully delivered.

Stateless Ethereum (although Rollups may relieve some of the pressure on Ethereum's state inflation) and promising new cryptography such as Kate commissions also suggest exciting new directions.

After all this work, our nice and tidy Phase 3 roadmap has now evolved from Vitalik's latest update to "The Spider's Web". I believe that if there is any community that can carry out this work, it is the Ethereum community.

What will Ethereum look like in a few years? Hard to say. If everything goes according to plan in the next few years, there is a strong belief that Ethereum investors will be rewarded handsomely, but with the technical route and overall architecture changing, there is also huge risk and lack of clarity at the base layer .

2. Ethereum Monetary Policy

One of the criticisms of Ethereum from Bitcoin proponents is that its monetary policy changes while Bitcoin does not.

Bitcoin produces a new block every 10 minutes on average, and each time this happens, a certain number of new coins are created. Bitcoin investors can tell you with considerable precision, for example, how many Bitcoins there will be in August 2026.

Ethereum, by contrast, has a more arbitrary monetary policy, which is changed over time by lead developers and accepted by the network when needed. It was launched from the beginning with 72 million pre-mined tokens (unlike Bitcoin, which has no pre-mined), and the current total supply is about 115 million. This chart shows total supply in blue on the left axis and annual supply inflation in orange on the right axis.

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Source: EthHub

The annual issuance rate with all these notes looks like it was drawn by Bitcoin enthusiasts making fun of Ethereum, but it comes from EthHub. Various Ethereum Improvement Proposals, or EIPs, by developers have changed their monetary policy over time for various reasons.

However, in addition to the transition process to Ethereum 2.0, Ethereum appears to be changing its monetary policy again with an update called EIP 1559, which will significantly reduce new token issuance.

Within the framework of EIP 1559, Ethereum will have both a deflationary and an inflationary factor, which together determine how many Ethereum tokens there are at any given time.

The deflationary factor of EIP 1559 is that the base fee that users pay to validators to validate transactions is burned instead of given to validators. Users can offer additional fees to validators to encourage them to get certain transactions through the queue faster, but the base fees will be burned each time. Since these fees are paid exclusively in fractions of ETH, a small portion of ETH is permanently removed from the system each day. The higher the total fees in the system, the more are burned each day.

The inflation factor of EIP 1559 is that validators will receive newly generated ETH from the network to permanently validate transactions. The total issuance rate depends on how much ETH is used for verification, with fewer validators yielding higher returns (thus incentivizing more validators for increased security), and too many validators yielding lower returns. The more validators there are on the network, the more ETH will be generated, but the amount generated by each validator will decrease, resulting in lower earnings for the validator.

As mentioned earlier, validators are at risk. Improper verification or being offline may result in some of their tokens being taken. Thus, the reward for newly created ETH incentivizes them to risk generating more ETH for themselves and provide the necessary transaction validation and security for the network.

In theory, EIP 1559 is a fairly rigorous framework. It secures an inflationary security budget for validators while also having a deflationary element in the form of fees.

Many Bitcoin proponents will disagree with the fact that there is no hard issuance rate or hard cap for ETH on EIP 1559. Actually, I have no fundamental problem with EIP 1559. I think this is a better monetary policy than what Ethereum has implemented so far, and it is well thought out. As long as monetary policy is rules-based and issuance is relatively low, I think this satisfies what Ethereum is trying to achieve with its protocol (being an oil-like enabler, not a gold-like scarce currency). Indeed, if transaction throughput is high relative to the number of validators chosen to operate on the network, the highest potential issuance rate in the proposed EIP 1559 system is low, and some potential outcomes on the network are crunch of.

My question is why should I assume that EIP 1559 will be permanent given how many times Ethereum's monetary policy has changed? Ethereum developers change monetary policy as often as the Federal Reserve, and for similar reasons. Perhaps if EIP 1559 had been deployed for five years, proved itself to work as intended without change, and Ethereum 2.0 was functioning properly, I would agree with reasonable confidence that it would not change and the system would already be working as intended. Until then, all I can do is watch how things play out.

3. Node characteristics

Let's look at node characteristics. Nodes refer to client software that users can run to validate the blockchain and help enforce the consensus mechanism. I will again use Bitcoin as a reference and then compare to Ethereum.

Even after 12 years of stable operation, the entire Bitcoin blockchain is still less than 350 GB, and is growing rather slowly at a pre-set limit. The bandwidth requirement to run a full node is only about 500 megabytes per day, which is very low. Stores and verifies the full bit of the entire blockchain running on a laptop or similar device over time that does not grow faster than the memory of a typical computer and requires only a basic internet connection Coin nodes will become a reality in the foreseeable future.

Here is the map visible on the web:

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Source: Bitnodes

Ethereum currently has various levels of nodes. Even though the Ethereum blockchain is much younger than the Bitcoin blockchain, the amount of space required to run a full node on the Ethereum blockchain is already larger than a Bitcoin full node because it grows faster per unit of time. Given enough time, it becomes increasingly difficult for normal users to operate a node, meaning that entire nodes may be restricted to large entities rather than accessible to any user.

In addition, there is something called an archive node in Ethereum, which is relatively complete because it contains various intermediate states. A full node can be expanded and turned into an archive node, but it takes a long time and terabytes of space, so they tend to only be run by larger specialized entities.

Ethereum 2.0 will change this. In order to greatly increase the transaction throughput of the system, validators will only validate transactions on specific shards (there may be 64 shards), so validators only store data and focus on a small part of the network.

However, there will also be hyper-complete nodes that store the complete data of the entire Ethereum 2.0 network. These would require massive amounts of storage and bandwidth, and could only be operated by a handful of large entities.

The Ethereum Wiki outlines the types of nodes that will exist in Ethereum 2.0:

Note that multiple "levels" of nodes can now exist in such a system:

1. Super full node: Download the full data of the beacon chain and each shard block referenced in the beacon chain.

2. Super node: only processes the beacon chain block, including the signature of the shard block, but does not download all the data of the shard block.

3. Single-shard node: Acts as a supernode, but also fully downloads and validates every collation on a specific shard it cares more about.

4. Light node: only downloads and verifies the main chain; unless it needs to read some specific entries in the state of some specific shards, it will not process any collation transactions, in which case it will download Merkle branches to the latest collation for that shard, and downloads the Merkle proof for that shard from there.

This is the difference between Bitcoin and Ethereum 2.0.

The Bitcoin community emphasizes that self-validation is a key principle, and that any regular user can download the open-source Bitcoin Core software on a basic laptop and the entire Bitcoin blockchain. This allows them to audit Bitcoin's entire money supply, view every transaction in all of Bitcoin's history, and personally verify that the entire network follows consensus rules.

With Ethereum 2.0, ordinary users will not be able to do this. They will need to trust other network participants, including these supernodes run by large entities, and rely on an assessment of the probability that the protocol will work as intended. They will only be able to directly access the network at a given time using single-shard nodes or beacon-only nodes or light nodes unless they can invest in a large computer or network infrastructure to run an ultra-full node, which is beyond the capacity of most users .

To its credit, a lot of thought went into the design. Ethereum developers want to avoid some of the problems of altcoins that try to increase throughput by making it difficult for each node to run, so they want to create a series of nodes to provide different levels of verification to users, which is not the same as in the protocol. As good as it can be when building so much complexity into the base layer.

4. Token Price Model

Ethereum 1.0 is pretty crowded right now, so transaction fees are high, which may be good for Ethereum price, you need ETH to pay transaction fees, and high fees mean you need more ETH to cover fees. But it's not good for the network in the long run.

The main purpose of Ethereum 2.0 is to greatly expand the transaction throughput of the system. This is necessary to become a "world computer", but it raises questions about the incentive structure for ETH pricing.

If transaction throughput is super high and fees are very low, users don't need much ETH to run a DApp. There is an interesting trade-off: high fees make DApps less attractive, while low fees may reduce demand for ETH.

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Bitcoin and Ethereum

Between Bitcoin and Ethereum, there is a cultural gap first.

Bitcoin attracted more libertarians and groups of Austrian economists, as well as fans of sound money, self-sovereignty, etc., and a large number of Silicon Valley financiers. Bitcoin enthusiasts love being able to run a full node on their personal computer, auditing the entire money supply and consensus rules of the Bitcoin blockchain, an area that is slower to develop but more stable because preserving the core Bitcoin protocol is the most important. Institutions with significant funds are starting to take an interest in Bitcoin, and the surrounding ecosystem is very security-focused, including multi-signature solutions and Bitcoin-only hardware wallets that go a step further in security than other wallets. Both the protocol and the surrounding ecosystem are hardened, battle-tested, and very stable.

Ethereum attracts more player culture and more experimentation. It can be a small speculative coin with a high failure rate, but it can also constantly re-evaluate developments in the technical field to see how its underlying framework can be improved. It's more ambitious at the base layer, and some see it as a feature, while others see it as a bug. It is more reliant on founders and has more trust in money supply and details. DeFi on Ethereum can gain popularity faster than the second layer of Bitcoin. As a result, there are more bitcoins used for decentralized transactions on Ethereum than on the Bitcoin Lightning Network, but the growth of DeFi so far has been essentially based on speculation.

Some Bitcoin enthusiasts believe that any other cryptocurrency is inherently a scam. Many insist that new uses of blockchain technology should be built on top of the proven Bitcoin, rather than paralleling it as a separate protocol. The Bitcoin developer community prefers to move slowly and carefully rather than take a fast-moving and disruptive approach, which they believe many other coins do.

In fact, digital assets other than Bitcoin have had a pretty bad track record. Out of thousands of tokens, many are outright scams, many tokens lack adequate security, and have been hacked at the base layer (not only through transactions, but the actual protocol itself is subject to 51% attacks or exploits ). In terms of price or hash rate, the vast majority have not surpassed the highs of late 2017, which Bitcoin has already surpassed.

Ethereum enthusiasts, on the other hand, see a lot of value in the Ethereum network, which is, in fact, another blockchain besides Bitcoin that has built up a degree of network effect over time, and it also Benefit from Metcalfe's Law. Some of them see Bitcoin as an old technology, or limited to digital gold, and believe that Ethereum will be the future. Many of them see Bitcoin’s role as a store of value, but they are just more interested in Ethereum’s potential for decentralized applications.

Vitalik coined the term "Bitcoin maximalist," which refers to the belief that Bitcoin enthusiasts believe that no other token other than Bitcoin can maintain significant value for a long time. By contrast, Bitcoin enthusiasts often point out that most people who get into cryptocurrencies trading various altcoins end up losing money in the inevitable downcycle, and that many of these protocols simply leverage Bitcoin's script to Abundance without adding lasting value, or simply not understanding what exactly has made Bitcoin successful over the past 12 years.

1. Speculative assets

In contrast, I am more inclined to invest in Bitcoin. It has a 12-year price history and a consistent monetary policy built around mining difficulty adjustments that happen every 2 weeks and supply halvings that happen every 4 years, which has so far driven algorithmically Increased price and adoption.

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Source: Blockchain.com

Bitcoin's base layer is out of active beta mode and has been in full operation for a long time. The base layer has gotten security updates over time, but it's still a working system. There have been no major changes to the underlying layers since 2017, and it has been operating under the same general framework since it launched in 2009. Larger changes in the Bitcoin space mainly occur in the second layer and the surrounding software, hardware, and financial ecosystems.

Ethereum, on the other hand, is still a work in progress on its base layer and is still in alpha development as it is still changing the core underlying mechanics. The design of Ethereum 2.0 is clever in many ways, and obviously a lot of thought has been put into it, but there is a lot of speculation about what it needs, how it will function, and maintain its own security. To address the limitations of the current threat network capabilities, they changed many aspects of the protocol that made the protocol successful for the price of the first 5 years.

Some macro investors like to have 90% bitcoin and 10% ethereum or 80% bitcoin and 20% ethereum as their portfolio, I think it's normal and people should do what they think is right for them Things, things that evaluate them as having a good risk-reward opportunity. Some would consider buying some ETH, locking it up, and seeing what happens five years from now is a rather asymmetrical act of speculation. If Ethereum breaks $1,400 to new highs, it has the potential to make big gains in the next year. In fact, as long as the network congestion fee is high, it will help ETH appreciate.

However, investors should understand that Ethereum is still in the alpha development stage, maybe in another 5 years, when Ethereum 2.0 is in place and running for a period of time, and the monetary policy is consistent during this time, it can be used like Bitcoin. Considered a nearly completed project. Until then, though, it's experimental.

Bitcoin itself has a lot of volatility and upside potential, so most investors don't need to take a speculative risk into a protocol that's still fundamentally developing on its base layer.

Accumulation of value tends to be concentrated in the hardest forms of money in terms of scarcity and safety, which is why gold has been the foundation of most of human history in finance. Things that can be used to perform work, such as copper or oil, are generally not options for the market to store long-term value. This analogy doesn't necessarily apply to Ethereum, as it also has a high traffic ratio, but from an investor's perspective, the burden of proof is on any secondary network, trying to optimize a lot of things, which it tries to do in the main way (store value ) against top networks.

The extent to which the Ethereum ecosystem can support a range of applications is somewhat different from long-term appreciation in terms of ETH price. Compared with the relatively simple and complete verifiability of the Bitcoin base layer, the base layer proposed by Ethereum 2.0 is very complex, with a beacon chain and dozens of shard chains, for large pools of funds to buy and hold tokens It may be less attractive.

2. Concorde Crisis

In my opinion, the biggest risk to Ethereum is that it could end up like Concorde.

The Concorde, which first flew in 1969, allowed the public to fly at twice the speed of sound. While functional, it was never an economically sustainable project. And today, 50 years later, the public still doesn't have the option of supersonic commercial flight. People in the 1960s thought we were supposed to be in space now, or flying cars like in the movie Jetsons, instead of traveling in a plane that was slower than the fastest commercial plane in 1969.

Designing and operating an aircraft that can safely and repeatedly exceed the speed of sound is an extremely challenging task, and where the sound barrier is breached, many aerodynamic changes occur. In the five centuries since its conception, the problem has never been solved in an economical way for commercial flight.

So while the Concorde was certainly cool, being able to get from New York to London in three hours, it was never going to compare to other alternatives when it came to solving a big enough customer problem at the right price. The market already pays more for first-class tickets to make long-haul flights more comfortable, rather than spending money on shorter flights.

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Monitoring Ethereum is actually very important for a variety of different investors.

Equity investors should perhaps pay attention to some DApp developments and see if any products in this ecosystem disrupt their traditional investments over time. Bitcoin investors should monitor it as part competitor and part collaborator, informing the development of the Bitcoin ecosystem.

In addition, stable coins are especially important, and the amount of funds locked in stable coins is very promising. Whether it is a good thing or a bad thing, this is an area worthy of attention. The U.S. Office of the Comptroller of the Currency (UCC) is now officially allowing U.S. banks to use stablecoins. They are a more liquid form of fiat currency that could have various implications for central bank digital currencies and the existing global monetary system.

While I don't think it's crazy to have a stake in Ethereum, I also don't have another clear way to model it other than speculation, as it's an unfinished product on the base layer with fairly large recurring use cases. With Bitcoin, I can make a more fundamental argument in favor of a non-zero position as a macro asset.

80/20, 90/10, 100/0 BTC/ETH ratios all make sense to me for the digital assets portion of the portfolio, my approach is 100/0, favoring bitcoin, I haven't seen one yet Compelling reasons to change this, unless I just want to speculate. Personally I need to see Ethereum 2.0 develop out of alpha, have a consistent monetary policy, and have more usage outside of token speculation to appeal to me in a more structured way.

Some in the digital asset community refer to Bitcoin as gold and Ethereum as oil. In other words, one is a store of value and the other is a job booster.

However, I think Bitcoin has an unexpected uptrend that persists through cycles in a way that most other cryptocurrencies do not. Ethereum may be the second largest blockchain network, staying in a functional form for a long time between cycles, has always benefited from Metcalfe's law, but it must first go through the 2.0 transformation.

From an engineering standpoint, I prefer Bitcoin's modular design. The base layer is simple and stable, and the design is almost "bulletproof". Above this layer, the ecosystem can innovate, and while it may not evolve as quickly as some would like, it will evolve in the direction the market would like. This is also how the existing financial system works, there is a basic settlement layer and faster payment layer built on top of these basic layers.

So far, the market in the Bitcoin ecosystem wants to maximize the store of value proposition through security, so it has achieved a level of multi-signature solutions and hardware wallets, which exceeds the level of other digital generations, including Ethereum. currency ecosystem. There's been little market interest in Bitcoin's second layer as a medium of exchange because there isn't much need for it yet, though Lightning Labs and other developers continue to build tools and infrastructure to handle increased demand.

As an analogy, in martial arts there are all different philosophies, some are preemptive and easier to attack, others emphasize a solid base, patiently absorbing or varying the initial attack, then countering harder and using your opponent's momentum against them .

In my opinion, Bitcoin is the latter. Instead of pumping and breaking fast like many altcoins, it moves slowly and has a tendency to set things right. The more ideas and innovations that emerge within the broader digital asset industry, the more Bitcoin developers will need to collaborate for their protocol and ecosystem.