Why Ethereum’s ‘Ultrasound Money’ Narrative is Doomed

Ethereum’s deflationary narrative relies on usage and people paying extremely high fees for blockspace, especially on the L1. However, the ETH 2.0 roadmap utilizes L2s and protodanksharding to scale. This means pushing activity, users, and valuable revenue (gas fees, and MEV revenue) to L2s where dozens of transactions are batched (combined) into 1 to be included in a block on the L1 they settle on.

Using L2s as appchains has some merit, and you can’t stop people from doing this, however as a scaling solution L2s are a terrible idea. This is because they fragment UX, liquidity, and user activity and expose people to centralized bridges which have been risky. Throughout its history, users and developers have flocked to ETH L1 because of its concentrated liquidity and userbase. The best tokens, NFTs, and top MEV searchers have taken their talents to the L1 in pursuit of profit. In fact, you can argue ETH L1 has been essentially used as a de-facto integrated (monolithic) chain. If this is not true, why didn’t $PEPE or $UNIBOT launch on Arbitrum or Optimism? They wanted the concentrated liquidity and “old-money” from ICOs and whales on Uniswap.

What will happen to Ethereum’s deflationary money narrative once all of its revenue and userbase is pushed to L2s where transactions burn a very small fraction of what they would on the L1? You end up with a situation where all L1 blockspace is not for users, it’s for L2s, and this has devastating consequences for the deflationary burn meme.

Furthermore, as new categories of applications come out such as DePIN, crankless Central Limit Orderbooks (CLOBs) and other instant, fiber optic blockchain dapps such as real time games there is real risk that Ethereum falls behind even further on apps. This could create a situation where users simply no longer demand Ethereum blockspace as highly as next generation blockchains where emergent types of applications exist. This may sound ridiculous, but this is a scenario most people in the industry are completely unprepared for.

Over the time period that core count (hardware) and internet speeds (bandwidth) have doubled, ETH L1 remains at 11 TPS Over the same timeframe, newer, faster blockchains like Solana have doubled their throughput and will continue to scale exponentially with Moore’s Law (multicore performance) and Nielsen’s Law (bandwidth). 90% of all venture dollars in the space have been allocated to EVM based technologies and infra, but few are prepared for a world where Ethereum is caught in no-man’s-land between harder immutable money (Bitcoin) and more performant smart contract platforms like Solana.

If there is one thing that is universally true in crypto it is to not middle curve anything, but I fear this is what a large portion of the space is currently doing…

Frinctionless capital

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