So, what will be the future of Ethereum? In this article, I will discuss the concept of modular blockchain and database design, and quote GCR’s views to try to answer this question.
The argument of the innovator’s dilemma can be summarized as follows: “Successful companies often struggle to adapt to changes in patterns, especially in technological innovation. The reason is that they are too focused on making their products successful, rather than trying out new and unfamiliar ideas.”
In the world of blockchain and smart contracts, we have made significant progress in the past few years. Now, the million-dollar or rather $250 billion question is: what will be the fate of Ethereum in the future?
Through this article, I will argue that Ethereum has reached its peak in terms of 1) valuation of all crypto assets (ETH.D) and 2) relative usage and adoption. I will start by exploring the concept of modular blockchain and comparing it with traditional database design principles, and then relate all of this back to Ethereum and its future.
Modular Blockchain
Now, people have a more principled way of thinking about what makes a blockchain work well, and a reasonable approach to decoupling (and scaling) core components. This is the debate between monolithic and modular.
The core idea behind modular blockchain is four fundamental functionalities:
Execution: Determines the state “after” a transaction. If I send tokens to a specific wallet, the execution layer will determine the relevant balances before and after the transaction.
Settlement: Determines if the submitted transaction is “valid.” After sending tokens, the settlement determines if the balance is correct.
Consensus: Determines the final state after a bundle of transactions. This layer determines 1) the correct order of a given set of transactions and 2) the final state after processing these transactions.
Data availability: To exist for any of the above three functionalities, there needs to be a previous state and an ending state. The data availability functionality provides the state to the execution layer and updates the state based on the final result of the consensus.
Just like any engineering problem, a “perfect” blockchain only makes sense when there are well-defined use cases. The existence of this framework allows for more specialized blockchain designs, with different requirements for blockchains built for high-throughput gaming compared to blockchains designed to be global decentralized ledgers. This thought framework reminds me a lot of the principles of database design, especially the debate around SQL and noSQL.
Database Design
Databases have been around for decades longer than blockchains. The consensus about their design is that there is no perfect database. Just like most engineering problems, everything needs to be balanced.
Building a scalable database framework goes back to asking the question, “What is the use case?” before making decisions. I would ask a few questions:
What is the approximate ratio of reads to writes? In applications like Telegram or Slack, the magnitude of reads and writes is similar, while in Twitter, the read volume is several orders of magnitude higher than the write volume.
In distributed systems, there is the concept of consistency versus availability. In other words, this can be reframed as: Do we care more about inaccurate data or downtime of the application? Again, this depends on the situation. For fintech applications, consistency (accurate data) is much more important.
How important is stale data versus fresh data? How does this relate to the read/write load? Does our database allow us to execute a strategy to handle concurrent writes and reads? For example, how do we prevent the classic double-spending problem when my wife withdraws cash from my bank while I’m swiping my debit card?
What is the read pattern? Do you need flexible access to data or is the data usually predefined? Do you do a lot of joins across different datasets?
Besides technical considerations, it is also important to understand:
How many engineers are proficient in this technology? How many engineers genuinely want to use this technology to build?
If we want to fork the underlying code and make adjustments, is there a way to get positive support?
The Future of Ethereum
Now, let’s tie all of this together – there is no such thing as a “perfect” blockchain. Good engineering is about trade-offs, and there is no one-size-fits-all approach. So how did Ethereum become such a dominant platform? Why does Ethereum’s pricing make it seem like it is the perfect blockchain? And finally, what will be the future of Ethereum?
How did Ethereum become such a dominant platform?
Four years ago, Ethereum was the preferred platform for building smart contracts. Compared to all other platforms, it had excellent development tools like Hardhat and CryptoZombies. Additionally, it had a loyal user base, and the chain and tokens were “decentralized.” At that time, centralized blockchains were more likely to be scams. ETH as an asset was also cheaper, which meant lower gas fees.
Today, developers have more smart contract platforms to choose from, each with unique trade-offs. While scams still exist, the situation has significantly improved compared to four years ago with more talent and capital entering the field.
The reasons for Ethereum’s past success are also the reasons why it will fail in the future. There was a time when Ethereum was the only viable smart contract platform for developers. Legitimate use cases like DeFi and NFTs gave ETH a significant advantage. But during this phase, the focus shifted towards value accumulation (stablecoins) and competing with Bitcoin to become the native value store of the internet (flippening).
The desire to simultaneously be a smart contract platform and a decentralized “super stablecoin” added significant friction for marginal users and developers (higher gas costs, congested network). As Confucius (and GCR) said: “The man who chases two rabbits catches neither.”
What will be the future of Ethereum?
Users will flock to places where applications exist and are cost-effective, while application developers tend to be more cautious and forward-thinking. Because their expenses are much higher compared to users themselves. Developers will build on platforms that have long-term growth and scaling potential for their applications.
Now, look at Ethereum, with an average transaction speed of 15-20 TPS, and gas fees often skyrocketing to $200. There are significant limitations on the types of applications that can be built on Ethereum, requiring very little interaction. For example, a lending protocol is a good application on Ethereum because I might interact with it a few times a year.
But if I’m an application developer planning to build an app with the intention of scaling to 100,000 or 1 million users and higher usage patterns, building such an app on Ethereum is not feasible.
This becomes increasingly evident as viable alternative solutions emerge.
FriendTech is building on Base L2.
Pacman and Blur teams are considering launching their own L2.
DYDX uses their own specific application chain.
The modular blockchain framework provides a set of trade-offs that blockchains can choose from. We are now in a state where blockchain infrastructure that supports points along the trade-off curve is beginning to emerge.
Last but not least, incentives matter.
As Charlie Munger has always said: “Show me the incentives, and I will show you the outcome.” The incentive structure built on Ethereum is weaker compared to other existing blockchains. Venture capital firms and new L1 teams are very interested in building a strong, thriving ecosystem. As an investor, I would question why my team should build on Ethereum when the token is so dispersed, and the ecosystem is already so crowded. Why not foster application development on a blockchain where L1 valuations are much lower and aligned with my interests?
The replies in this tweet make it very clear.
ETH is no longer at the cutting edge of blockchain design in any way you look at it. There are better options for smart contract platforms at any point along the trade-off curve, and the same goes for incentive structures. Unless Ethereum undergoes fundamental changes in community and organizational operations, its relative advantage in valuation and usage has reached its peak.
