Original Author: Tascha
Original compilation: 0xZshanzha
I am bearish on Ethereum.
But probably not for the reasons you think.
The transition from a single-chain to a Layer1-Layer2 structure has a big impact on ETH's valuation, and most people haven't thought through this lens yet.
First of all, some time ago, I wrote how to compare blockchain platform tokens with national currencies. I recommend you to read it, it will help you understand what I'm going to say next, because the starting point and framework of these two articles are basically similar.
In short, the L1 platform is like a national economy. You need native tokens to pay for every transaction on the platform, just like you need dollars for every economic transaction in the US. On-chain economic activity thus forms the basic demand for native tokens.
This means that given the initial equilibrium value of the size of the economy and ETH price, if Ethereum economic activity grows by 10%, ETH token demand will grow proportionally (assuming a stable token velocity). This translates into a proportional increase in the price of ETH due to the relatively stable supply.
By the way, the dynamic growth of the economy and the growth of token prices are usually mechanical, and please don't believe in any revenue-based valuation ceiling assumptions, those assumptions are meaningless from my perspective.
The data shows, as shown below, that activity growth is the most important driver of ETH price in the long run. Using the txn count as a rough proxy for the size of the ETH economy, you can see the correlation, and by the way, the correlation between txn growth and price growth is quite significant: roughly 10% txn growth translates to roughly 13% price growth.
(This is a fundamentally driven long-term relationship. Short-term price fluctuations are not considered here because they are too volatile.)
With such a correlation, does anyone wonder why the ETH price has stagnated for the past 6 months? Since May, due to high gas fees hampering Ethereum’s on-chain activity, and other L1 public chains here The development has been in full swing for a while, so the number of Tnxs in Ethereum has declined, which directly leads to the fact that the current economic activity is lower than the previous cycle peak.
“Active wallet addresses,” another measure of activity levels, has also declined since May.
If EIP-1559 hadn’t introduced the token gas fee burn mechanism in August and created a de facto supply shortage, we would currently see a larger decline in the price of ETH.
In order to solve the expansion/congestion problem, Ethereum is adding Layer 2 and rollup: let ETH L1 act as a security/settlement layer, and execute contracts and hashes on L2s, which can greatly increase the speed of end users and greatly reduce costs.
But as an investor, all you need to care about is - will this structural change increase or decrease activity on ETH - L1? (Because activity -> demand -> price growth, remember my analysis above?)
All things considered, the answer is that there will be less activity, at least in the short to medium term.
ETH L1 is now doing 1.3 million tnxs per day. ZK rollup can batch process 60k-80k tnxs before committing to L1. If we move all end-user tnxs from ETH L1 to rollup today, and all L2 batches are full, that means the number of tnxs on ETH L1 needs to drop to 1/20 of the current level.
L2 roll up can bundle 60k tnxs at one time, the latter is the tnxs that ETH L1 needs to process all. Even if the growth on L2 is exponential, compared with the current GAS, the cost will be greatly reduced.
Most importantly, ETH is going from exponential growth to linear growth, and the difference between the two is really big.
— Tascha (@TaschaLabs) December 28, 2021
Some people say that 1) proof verification is a high-value-added and complex tnx that consumes more gas than most other tnx.
2) Because the cost on L2 is very low, more activities will be generated, which is the meaning of expansion. If L2 activity increases exponentially, it will greatly stimulate the need for verification, which will lead to more activity on ETH L1.
I think:
For 1), the L1 verification cost of each batch of ZK roll up is 600k gas. In the current ETH L1, the tnx cost of a simple wallet is 21k gas. If a roll up batch has more than 28 simple wallet tnxs, the gas cost spent on L1 will be greatly reduced. Batch has a capacity of 80k tnxs, a simple mathematical common sense, 80k>28, so you can imagine how much this will reduce the gas fee.
For 2), the level of activity on the currently popular L1 knockoffs provides useful benchmarks that allow us to predict how much activity there will actually be on a new ETH L2. Solana, as the relatively most active copycat L1, achieves a TPS (tnxs/s) of about 1000 (tnxs unanimously voted are not counted).
The achieved TPS of other public chains/L2 is much lower. For example Polygon, which all new ETH L2s emulate, has a TPS of about 85. Note that the low TPS achieved on these chains is not due to technical limitations (at least not yet). They can go higher, but there is no need for more on-chain activity.
If one day the web3 economy grows so large that many ETH-L2s are running at high volume and continue to grow at breakneck rates, yes, that will indeed increase ETH-L1 activity. But that day is not today, and no one can tell you exactly when that day is.
By the way, now and in the future promised L2 space, Ethereum has to cross no man's land, where the growth of L2 is taking the existing tnx from ETH L1, but there is not enough activity in L2s to carry out L1 Proof verification on layers to make up for the activity they took away from ETH L1.
As shown below, as ETH traverses this no man's land, activity growth on ETH L1 may stagnate or be negative. This means that the direction of development of ETH is on the left and below the chart. For ETH ecosystem investors, the rational choice is to sell ETH and go long the high-growth L2 token.
What about institutional investors, you say? They like large caps with less risk. Therefore, in the near future, when a large number of institutions flood into the cryptocurrency market, it will support the demand for BTC and ETH.
This could indeed happen. But I wouldn't get my hopes up about dumping institutional tokens that we don't like, unless you really think they're stupid.
The fact is that whether it is an institution or an individual, the purpose of engaging in encryption is to obtain income, not for the safety of the principal, and large stocks are not "safer".
This is the Sortino ratio of the current mainstream Layer 1, which measures the return you get for each unit of downside risk you take. LUNA has the highest score in 2021. ETH and BTC rank lower.
There is a less obvious but equally important question about ETH's valuation.
The network effect of L1 tokens comes from the extensive participation of the owners of these tokens. BTC and ETH became the most popular collaterals in deFi, with almost all cryptocurrencies having them. As a result, their trading volume on the exchange is high and liquidity is sufficient.
And in order to use smart contracts, you must own some ETH, which leads to the current number of 180w ETH wallet addresses.
With the rise of the fake L1 layer, it is no longer necessary for people to hold ETH. And with the arrival of ETH L2s, even in Ethereum's own ecosystem, you don't need to own ETH. For example, you can buy ZK tokens on a central exchange, transfer to your ZK Metamask wallet, and spend ZK in the ZK L2 chain, all without touching ETH tokens.
In other words, as Ethereum transitions from a B2C model to a B2B model, there may be less direct interaction with end users, meaning less ownership coverage, liquidity, and volume of ETH tokens. All of these are important indicators about Token valuation.
You said that as the security layer of the Ethereum ecosystem, the importance of ETH Token is paramount, and users will definitely value this. Yes, you are right. But if "significance" is the determining factor of token value, then ChainLink and Graph will have a higher mkt cap than Doge and Shib.
In fact, direct interaction with as many end users as possible is a valuable advantage of Token. (You should take this into account when considering investing in any crypto project that only serves "enterprise use cases".)
This is not just a phenomenon in the crypto space. For example, among technology stocks, software companies with high-quality application software have higher P/E ratios than other IT subsectors such as systems software or semiconductors. The former get more market attention even though they don't have higher growth prospects.
As an average investor, it's much easier to buy shares of Zoom or slack -- because you know and use them regularly -- than it is to invest in something like "Paragon Database Solutions."
For L2, in order to compete with copycat L1, they need native Token to allow users to support and share the value and benefits created on the L2 platform. This means they take people's attention away from ETH, just like other L1 tokens. This also means that they will separate many Token users who originally belonged to ETH.
You don’t need ETH to go from a centralized exchange to L2, and you don’t need ETH to withdraw from L2. In this case, L2 becomes a de facto fake L1.
At this point, what ETH gets is only the TNX fee, and does not actually expand the network, which means that ETH has become a thing that is sitting on the mountain.
— Tascha (@TaschaLabs) November 28, 2021
You will say, but other knockoff L1s have the same problem. For example, the Avalanche subnet Token will also dilute the added value of AVAX.
Yes, but AVAX, ATOM, or ALGO don't have a market cap of $400 billion. They are much smaller, the L1 ecosystem is still on a high growth trajectory, and any L2 attached to them will not change their growth like Ethereum's L2. So the initial balance at the beginning is very important.
Summarize:
Summarize:
The growth of on-chain activity determines the price growth of L1 Token.
The structural shift from ETH L1 to L1-L2 could mean a stagnant or negative growth in the activity of ETH L1.
The transition from B2C to B2B mode reduces the need for direct interaction between end users and ETH, which has a negative impact on the liquidity, transaction volume and price of ETH Token.
Note:
Subsequently, Paradigm's CTO @gakonst refuted it. He believed that the article proposed that the expansion reduces the number of L1 transactions and L1 fees, so it is bearish, but this is wrong, and the expansion solution still needs to pay fees to L1. L2 would pay X for the security of ETH anyway, and L2 would collect more from users than they paid Y, leading to a virtuous cycle.
At the same time there are comments that L2 cannot exist without L1, so L1 will always generate value from L2 usage.
However, some people refuted @gakonst, thinking: First, if the expansion efficiency is too high, they are too good at using block space, then the L1 demand will decrease sharply; second, the exponential growth of L2 transactions will only lead to the linear growth of L1 transactions, So the more L2 grows, the more L1 loses in comparison, similar to the Matthew effect.
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