Written by: Alex Pack and Alex Botte, Hack VC
Compiled by: Yangz, Techub News
Abstract
Ethereum's performance in this cycle is not as good as mainstream coins like Bitcoin and Solana. At least from the perspective of critics, the culprit is Ethereum's modular strategic decision. But is that true?
In the short term, the answer is yes. We found that Ethereum's shift to a modular architecture has impacted ETH's price due to reduced fees and decreased token consumption.
When we combine the market capitalization of Ethereum and its modular ecosystem, the situation changes. In 2023, the value generated by Ethereum's modular infrastructure tokens is comparable to that of the entire Solana, both around $50 billion. However, in 2024, the overall performance of these tokens is not as good as Solana. Additionally, the profits from these tokens mainly belong to teams and early investors, rather than ETH token holders.
From a business strategy perspective, Ethereum's modular shift is a reasonable way to maintain ecosystem dominance. The value of a blockchain depends on the scale of its ecosystem; although Ethereum's market share has dropped from 100% to 75% over nine years, this share is still significant. We compared it with Amazon Web Services, which saw its market share decline from nearly 100% to 35% during the same period.
From a longer-term perspective, the greatest benefit of Ethereum's modular approach is that it enables the network to withstand potential technological advancements that could render it obsolete. Through L2, Ethereum has successfully navigated the first major 'extinction event' of L1, laying a solid foundation for its long-term resilience (albeit with trade-offs).
What went wrong?
Ethereum's strategic shift to a modular architecture: how crazy is it?
Decentralized protocols, not companies
Ethereum's Modular Ecosystem and Its Impact on ETH
We look at the impact of modularization on Ethereum from the following four aspects:
Short-term price (adverse)
Market capitalization (somewhat beneficial)
Market share (beneficial)
Future technology roadmap (debatable)
Fees and prices: adverse
Market capitalization: beneficial (to some extent)
Ethereum's ecosystem and ETH's dominance: beneficial
Technical aspects: debatable
From the perspective of the technology roadmap, Ethereum's decision to modularize the L1 chain into independent components allows projects to specialize and optimize within their specific domains. As long as these components maintain composability, DApp developers can build using existing best infrastructure, ensuring efficiency and scalability. Another greater benefit of modularization is that it provides the protocol with 'future-proofing'. Imagine if a new technological innovation changes the game; only protocols that adopt this innovation can survive. This situation has often occurred in technological history, such as America Online's valuation dropping from $200 billion to $4.5 billion due to missing the shift from dial-up to high-speed broadband internet. Yahoo also missed the transition to mobile internet by adopting new search algorithms (like Google's PageRank) too slowly, with its valuation dropping from $125 billion to $5 billion. However, if your technology roadmap is modular, then as an L1, you don’t have to catch every new wave of technological innovation; your modular infrastructure partners can catch it for you. So, has Ethereum's strategy worked? Let's take a look at the infrastructure that has already been built to match Ethereum:
L2 with best-in-class scalability and execution costs. At least two novel technological approaches have succeeded here, namely optimistic Rollup represented by Arbitrum and Optimism, and zero-knowledge proof-based Rollup represented by ZKSync, Scroll, Linea, and StarkNet. Moreover, there are more high-throughput, low-cost L2s. Nurturing two blockchain technologies that bring scalability OOM improvements to Ethereum is no easy task. Dozens (if not hundreds) of L1s launched after Ethereum have yet to deliver a 2.0 version with a hundredfold scalability and cost improvements. With these L2s, Ethereum has successfully gone through the 'first mass extinction event' of blockchain, expanding to hundreds of transactions per second (TPS).
New blockchain security models. Innovations in blockchain security are crucial for the survival of a protocol, just look at how every mainstream L1 today uses PoS instead of PoW. The 'shared security' model pioneered by EigenLayer may be the next major shift. While other ecosystems have also introduced other shared security protocols, such as Bitcoin's Babylon and Solana's Solayer, Ethereum's EigenLayer is the pioneer.
New virtual machines (VMs) and programming languages. One of the biggest criticisms of Ethereum is its Ethereum Virtual Machine (EVM) and its programming language Solidity. Solidity is a low-abstraction programming language that, while easy to code, is prone to vulnerabilities and difficult to audit, which is one reason why smart contracts based on Ethereum have been hacked. For non-modular blockchains, it is nearly impossible to try using multiple virtual machines or replace the initial virtual machine with another, but this is not the case for Ethereum. A new wave of alternative virtual machines is being built in the form of L2, allowing developers to code using alternative languages without using EVM, while still being able to build within the Ethereum ecosystem. Examples in this area include Movement Labs, which is adopting the Move VM created by Meta and promoted by Sui and Aptos; zk-VMs like RiscZero, Succinct, and implementations built by the a16z research team; and teams introducing Rust and Solana VM to Ethereum, such as Eclipse.
New scalability methods. Like other internet infrastructures or AI, we can expect OOM scalability improvements to emerge every few years. Even now, Solana has been waiting for years for its next significant improvement, named Firedancer, developed by a team (Jump Trading). Additionally, new ultra-scalable technologies are being developed, such as parallel architectures from L1 teams like Monad, Sei, and Pharos. If Solana cannot keep up, these technologies may threaten its survival, but Ethereum does not face this issue; it simply integrates these technological advancements through new L2s. This is precisely the approach that new projects like MegaETH and Rise are attempting.
These modular infrastructure partners help Ethereum integrate the biggest technological innovations in cryptocurrency into its own ecosystem, avoiding extinction and co-innovating with its competitors. However, this comes at a cost. As Composability Kyle pointed out, Ethereum's adoption of a modular architecture adds a lot of complexity to user experience. Ordinary users may find it easier to get started with a monolithic chain like Solana because they do not have to deal with cross-chain and interoperability issues.
Summary
So, in summary, what has Ethereum's modular strategy brought?
The modular ecosystem has sent a strong 'signal'. In 2023, the market granted growth to modular infrastructure tokens consistent with Ethereum similar to that given to Solana, but this was not the case in 2024.
At least in the short term, the modular strategy has harmed the price of ETH due to the resulting lower fees.
But if we consider the modular approach from a business strategy perspective, it starts to make more sense. Over the nine years since Ethereum's inception, its market share has fallen from 100% to 75%, while the market share of its Web2 competitor AWS has fallen to around 35% during the same period. In the world of decentralized protocols, the scale of the ecosystem and the dominance of the token are more important than fees.
From a long-term perspective, considering the modular strategy and Ethereum's need to withstand potential technological improvements that could make it the AOL or Yahoo of the cryptocurrency domain, Ethereum has performed quite well. With L2, Ethereum has survived the first 'mass extinction event' of the L1 chain.
Of course, all of this comes at a cost. The composability of Ethereum after modularization is worse than that of a bundled monolithic chain, harming the user experience. As for when (if ever) the benefits brought by modularization can offset the cost losses and competition with infrastructure tokens consistent with modular Ethereum concerning the actual ETH price, it remains unclear. Of course, this is good news for early investors and teams behind these new modular tokens because they can share a piece of Ethereum's market capitalization, but in many cases, these modular tokens are launched with unicorn valuations, meaning the distribution of these economic benefits is uneven.
In the long run, Ethereum may become a stronger player due to investments in nurturing a broader ecosystem. It will not lose ground like AWS did in the cloud computing market, nor will it lose everything like Yahoo and AOL did in the internet platform wars; it is laying the foundation for adaptability, scalability, and prosperity for the next wave of blockchain innovations. In an industry where success is driven by network effects, Ethereum's modular strategy may be key to maintaining its dominance as a smart contract platform.
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