When the wall falls, everyone pushes; is Ethereum at a dead end? Is there still a chance?

Author: Mu Mu, Plain Language Blockchain

Recently, due to prolonged underperformance, criticism of Ethereum has increased. Coupled with the Ethereum Foundation's untimely involvement in a "liquidation" controversy, it can be said that when the wall falls, everyone pushes, raising concerns about Ethereum's "future" once again. So this time, can Ethereum smoothly get through this "hurdle"?

01 Debate: Ethereum's "Seven Deadly Sins"

It seems that every time the market declines, some projects or institutions are targeted, and this time it unexpectedly fell on the "Ethereum," which has consistently held the second-largest market cap. Recently, social media has been filled with various "complaints" about Ethereum from well-known institutional partners and KOLs, as well as rebuttals from die-hard Ethereum supporters. Today, let's discuss the ongoing debate about Ethereum's "Seven Deadly Sins" and see who is right and who is wrong:

1) Is the Layer 2 development route wrong?

The implementation of Layer 2 has reduced transaction fees in the Ethereum ecosystem and has also lowered Ethereum's price, which seems to have caught many by surprise. After all, there was so much excitement and anticipation when promoting the Layer 2 route in previous years, as blockchain finally solved the scalability issue and broke through technical bottlenecks.

Having solved an old problem, a new problem has emerged. Many critics point to the erroneous Layer 2 route as the core reason for Ethereum's price slump, believing that Layer 2 "parasitizes and bleeds" Ethereum, dividing its liquidity while providing very little value back to Ethereum, leading to a loss of liquidity and on-chain transactions, causing ETH to naturally stagnate.

This point has been discussed more than once. In fact, if we only look at the surface, it is indeed true that Layer 2 has captured Ethereum's market, temporarily leaving Ethereum's on-chain activity in a lull. However, this precisely proves the success of Ethereum's Layer 2 route, as both the Ethereum mainnet and Layer 2 are part of the larger Ethereum ecosystem. Users and liquidity have largely remained within the Ethereum ecosystem without significant loss, and the attractiveness of Layer 2 is increasing. We will find that almost no new public chains have emerged to "compete."

A simple analogy: a city experiences traffic congestion, so several companies come in to dig subway lines, diverting people to take the subway. Then one day, the roads are no longer congested. At this point, surface transportation operators will certainly be affected, and taxi drivers will likely oppose the establishment of subways. However, soon the entire city begins to benefit from these new infrastructures, competitiveness increases, and talent and investment flow in, while the city's underground transportation expansion showcases new vitality and ushers in new development. The city's scale continues to grow, and everyone benefits.

Similarly, the reason Ethereum needs to scale is to lay the foundation for the future large-scale adoption of the entire ecosystem. At the same time, the cost of capital flow between Layer 2s is low, and interoperability issues are only temporary. A momentary price slump is not enough to negate the layered and modular scaling approach that has been researched for so many years.

2) Is inflation worsening?

Originally, the deployment of EIP-1559 significantly reduced Ethereum's inflation rate. In fact, for a long time after transitioning to POS, Ethereum's inflation rate was even negative. However, as Ethereum's on-chain activity declined, Gas Prices fell to low levels, and the concepts of Staking and Restaking caused the POS staking rate to soar, resulting in the amount of ETH burned being less than the newly issued POS ETH. Thus, Ethereum has recently entered an inflationary state. According to ultra sound money data, Ethereum has issued 70,000 new ETH in the past 30 days, with an annual inflation rate of 0.713%.

Now, critics have found evidence that Ethereum is "doomed," believing that Ethereum's inflation could lead to a potential "death spiral"…

However, people have overlooked another data point presented by ultra sound money: despite the current low price and extreme lack of on-chain activity for Ethereum, its annual inflation rate is still lower than that of Bitcoin, which claims to have "low inflation." This data may seem close, but it is important to note that Bitcoin's current market performance and ecosystem vitality appear to be higher than Ethereum's at this time.

Essentially, the issues Ethereum faces today stem from the successful implementation of Layer 2, which solved the scalability problem, coinciding with a downturn in the market and on-chain activity. We cannot ignore the immense benefits that future infrastructure development will bring.

3) Is the foundation liquidating to escape the peak?

Due to the Ethereum Foundation's history of liquidating at relatively high points, some people have set the "Ethereum Foundation liquidation" event as a liquidation indicator. Against this backdrop, on August 24, the Ethereum Foundation address deposited 35,000 ETH into Kraken, which was interpreted as liquidating to escape the peak, leading to a wave of "public condemnation" from many crypto users. Numerous KOLs and media outlets followed suit, spreading FUD about the Ethereum Foundation's liquidation.

In response, Aya Miyaguchi, the Executive Director of the Ethereum Foundation, stated on X, "This is part of our fund management activities. The Ethereum Foundation's annual budget is approximately $100 million, mainly composed of grants and salaries, with some recipients only able to accept fiat currency. For a long time this year, we were advised not to engage in any funding activities due to complex regulations, and we could not share plans in advance. Furthermore, this transaction does not equate to selling. From now on, we will gradually sell in a planned manner." (As a non-profit foundation, the Ethereum Foundation previously planned to withdraw 15% of its funds (in fiat value) each year for various ecosystem support.)

In simple terms, the Ethereum Foundation's response is that the 35,000 ETH is normal fund management, and transferring to an exchange does not mean an immediate sell-off, but rather a planned gradual sell-off.

On August 30, the Ethereum Foundation released its funding allocation report for the second quarter of this year, showing that approximately $8.5 million was used to fund nearly 100 community activities and projects, including community education, technical research, innovative projects, developer tools, research, and ecological development. The report clearly marked project categories, names, descriptions, and URLs. Clicking on these funded project websites reveals community and ecological technology conferences held in various regions around the world, as well as research projects from technical researchers/professors and tools aimed at improving the development experience for Ethereum developers. All of this reflects the vibrant and serious technical research atmosphere within the global Ethereum ecosystem community, a scene that is completely absent in many other communities.

So, do you think the Ethereum Foundation's annual budget of $100 million is worth it? Opinions may vary.

4) Does the spot ETF have no effect?

Previously, the approval of the Bitcoin spot ETF significantly boosted Bitcoin's price, while the approval of the Ethereum spot ETF seems to have had little positive impact on Ethereum's price.

I remember two years ago, Vitalik Buterin believed that a spot ETF for crypto assets might not necessarily be beneficial. He argued that we should not eagerly chase large institutional capital; the ecosystem needs time to mature before we gain more attention.

Perhaps the mainstreaming of Bitcoin and Ethereum has brought new capital inflows, but it may also lead to tighter centralized regulation.

One thing is certain: among the U.S. stock investors currently allocating to crypto asset spot ETFs, there are many institutions that are not necessarily "good Samaritans." As the size of ETFs increases, they will gradually influence the crypto market, whether positively or negatively. If the crypto market performs well and shows them potential for appreciation, they will allocate heavily; conversely, they could also cause significant sell-offs. Therefore, spot ETFs will only follow the trend, and under the current circumstances, it is indeed difficult for spot ETFs to play a positive role in the short term.

5) Is there a lack of innovation?

Previously, some "Ethereum killer" project communities claimed that Ethereum's innovation had stagnated, with little and slow development activity. Regarding this, it can only be said that Ethereum is quite wronged. The reality is that for many years, the Ethereum community has been the "leader" in technical innovation within the crypto community, with innovations in token economics and technology such as EIP-1559, Staking, Restaking, Layer 2, ZK, DA, and modularization all originating from the Ethereum community. To this day, whether in the Bitcoin ecosystem, Solana ecosystem, or other public chains, all have benefited from the solutions and open-source technological innovations brought by the Ethereum ecosystem over the years.

6) Is Vitalik running a "one-man show"?

There are always people who claim that Vitalik dominates Ethereum. While it is undeniable that Vitalik, as a founder, holds significant prestige in the Ethereum community, it does not mean that there is only one voice in the Ethereum community. As a decentralized community, it operates openly and transparently. Although Vitalik's opinions and suggestions are highly regarded, the final decisions still require extensive discussions among community developers to reach a consensus. This is the result of collaboration among numerous community members. Compared to most founders of crypto projects, aside from the absent Satoshi Nakamoto, most other founders are not as low-key and indifferent to fame as Vitalik.

At the end of August, when Vitalik Buterin updated the Ethereum Foundation's expenditure information, he responded in the comments that his salary is 182,000 Singapore dollars per year. Compared to the salaries of leaders in large international corporations, which can easily exceed millions, this is a mere drop in the bucket.

Additionally, the U.S. SEC has long been conducting investigations into the Ethereum Foundation and other institutions, with Vitalik being among the subjects of investigation. Ultimately, this year, the SEC dropped the investigation, indirectly confirming that the Ethereum Foundation and the project are sufficiently decentralized, making it impossible for the founder to "dominate."

7) Is transitioning to POS leading to centralization?

This old topic is still being debated. You can refer to a previous article for the first part. Of course, Ethereum's POS merge has been nearly two years. Looking back, Ethereum's stable operation is sufficient to prove the safety and reliability of POS.

02 Conclusion: The environment is poor, leading to internal strife

The world is always so strange. During the bear market, when Ethereum was holding strong, everyone shouted, "Amazing, unbeatable innovation, optimistic about the future." Now that the market is sluggish, everything has become a mistake.

In fact, since Ethereum's inception, from the DAO hack incident to the disproof of DApps and the rise of DeFi, it has been embroiled in endless debates. The intensity of each controversy precisely indicates that Ethereum's development is highly valued; it has long represented Web3 and the crypto market, becoming an indispensable backbone.

The current situation is likely mainly due to insufficient external liquidity caused by the U.S. dollar's interest rate hikes. In such circumstances, looking at traditional internet companies that are already mired in difficulties reveals that even unicorn companies in the AI star sector can collapse due to a lack of liquidity. The current crypto market is already in a better position compared to the bear market of the past two years.

The lack of liquidity has resulted in fewer new funds entering. Even though "old money" with more professional research on crypto assets praises Ethereum, the concept of Bitcoin as digital gold aligns better with the current environment. Meanwhile, the explosion of the Meme trend has naturally diverted a significant amount of new funds away from Ethereum, making it even more challenging.

Whether it is the decline of the broader environment or the tight liquidity, it will eventually pass. The innovation and application of crypto and Web3 will accelerate and catch up, and everything will return to normal.