I hear what you say, but I see what you do. - xh3b4sd
The new meta in Ethereum land has apparently been to suggest that we better reduce the amount of available blobs for data availability, because the fees generated as revenue on Ethereum are now "too low". When you have a look at the timeline, then high fees were bearish for Ethereum in 2021, because nobody could afford to use the chain. Now low fees are bearish for Ethereum in 2024 because current demand does not burn enough ETH. Those and other misinformed takes can be witnessed today in the realm of Crypto Twitter. It's all wrong. It's all backwards. It's all just super dumb and short sighted. The Jevons Paradox tells us that the falling cost of use induces increased demand to the extend that resource use inevitably increases eventually. EIP-4844, or Protodanksharding was rolled out in March 13th this year, which was 6 months ago. The average transactions per second across the Ethereum ecosystem was then below 100. We are now making almost 400 TPS consistently, with no signs of slowing down. In fact MegaETH is making the rounds now as another L2 with an outlook of realtime blockchain applications and a capacity of 100,000 transactions per second. Any quality blockspace that we create in this industry will be used eventually, because such quality blockspace has an inherent value that certain actors are willing to pay for. When you scale a system to accommodate more usage, you are not scaling back prematurely again only because scaling limits are not being hit just yet. That wouldn't make any sense. And so we are simply going to build out more applications and generate more usage in order to consume all the blobs we have right now. And then we will scale some more, and use up those blobs as well. Patience, dear reader.
In similar fashion of confusion as described above, we have been hearing arguments that L2 rollups are parasitic to Ethereum mainnet in a way that those rollups diminish the valuation of ETH the asset. People are looking at the underperformance of ETH relative to BTC and see a drawdown of 50% over the past 2 years. ETH/BTC went from a high of 0.08 to a low of 0.04, where it is sitting at right now. I was wagering the bet that August 2024 will roughly mark the ETH/BTC bottom, because all of the foreseeable and unforeseeable headwinds out there have already been dealt with by now. But enough of the financials. The point I want to make is that those financials are the reasons for unqualified opinions to spread far and wide. We are hearing that this, that, or the other thing ought to happen now, in order to make number go up. And none of those people have apparently ever built anything themselves, which would explain all of the nonsense we can see on the timeline again today. But let me humour you with another opinion. L2s are not parasitic. In fact, I think that all the ETH Killers, all the alternative L1s out there, the Solana's of the world, are now rather competing against L2s like Arbitrum and Base, instead of Ethereum. We can see that in metrics of various TVL and Volume categories. L2s are not parasitic because they extend Ethereum's real estate. And L2s are not parasitic because they create more opportunities for ETH to be used as money, gas and collateral. L2s are not parasitic because they are by no means incentivized to become L1s themselves. I think it is rather the other way around, and time will prove it. L2s are rather incentivized to grow the pie, by banding together with other L2s in one global layer of liquidity, because the union of blockspace and its subsequent opportunities is so much larger than the sum of its parts. That is Metcalfe's law all over again. That is why we are building networks of networks. And anyone trying to tell you a different story has in my mind not understood how network effects work. The joke about all of the heat that Ethereum mainnet and its L2 rollups are catching, especially from the Solana and Bitcoin community, is that people from those same communities are already building towards their own Layer 2 solutions. The audacity and hypocrisy in our circles is truly something else.
I guess it always helps to explain technical concepts, over and over again. One argument that the L2 naysayers like to repeat goes like this. Well, L2s are not incentivized to decentralize because they make all their money with sequencer fees, because this is where MEV is captured. For the attentive Powerlaw reader those types of arguments should be rather obvious to dismantle, and I gave most of it away already above. But let me spell it out again. As far as I am aware, there is nothing like sequencer fees in the first place. L2 operators run sequencers because they want to give users a way to consume blockspace. Sequencing is a service provided for free. It is true that sequencing is able to capture MEV, because sequencing very naturally decides how transactions are ordered. The default and most obvious algorithm to sort those incoming transactions is simply to include them as they arrived. Today, none of the L2s out there capture any of the potential MEV for themselves as far as I am aware. We have mentioned it here in the past several times, blockchains are no incentivized to benefit from MEV in a financial way because it reduces the quality of blockspace that users consume. Just imagine two different medival trails between two villages. One trail is known to be full of thieves and wolves. On that trail people are known to get robbed and eaten alive. The other trail can be walked safely. Which one of those trails do we think will be crossed more often? It will be the trail that is safe to pass without getting molested. The same is true for blockchain networks. Those that do not rely on robbing users have a fighting chance to survive in a sea of open source competition. And so as Justin Drake has explained again in the recent Reddit AMA of Ethereum Researchers, L2 rollups like Base make most of their fee revenue through congestion fees, which is a result of high blockspace demand. Congestion simply means that there is more demand than there is supply. That has nothing to do with MEV. MEV is typically achieved by reordering transactions in a block which would be something a sequencer would be able to do, but as we elaborated already, to the best of our knowledge this practice is not institutionalized, and it will probably not be institutionalized, ever, for the reasons that we outlined above as well. Now, I am not saying there is no MEV on L2s. What I am saying is that the incentives for L2s are to grow the pie, to extend Ethereum's real estate, and to contribute to a flourishing Ethereum ecosystem, because that is what creates more opportunities than any single player could achieve for themselves. And again, anyone trying to tell you a different story has in my mind not understood how network effects work. A unified Ethereum experience is coming. It may take a minute, but the most brilliant and most gritty people in this industry are all working on a future version of the world, in which the highest quality blockspace can be consumed within the Ethereum ecosystem. That is what I can sense every single day in this industry.
And the number for this week should be 0.033, which is the predicted ETH/BTC ratio by the end of the year, based on some podcast host that I was not able to get a hold of. I think this prediction is unrealistic, and I would have liked to bet money on that outcome. Just two problems. I could not get in contact with the person who has made the prediction, and, I was not able to deploy the app just yet on which I would have liked to lock in that bet. More on the app that I am building right now soon, I promise. Until then, we keep wandering this wilderness.