One of the many fundamental flaws in understanding systems is to confuse inputs with outputs. - xh3b4sd

Dear diary, it was very surprising to me when I heard several times this week, that some people started to entertain the idea of exchanging their ETH for BTC. This is so surprising to me, because it does not make any sense in my head. Imagine somebody holding ETH ever since it traded around 11 USD, since the very early days, now allocating more to BTC. And for what reason? What are those people doing? What made them allocate money to ETH in the first place. And what makes them now want to reallocate to BTC? To me those kind of stories are a tale of social media intoxication and survivorship bias. If you spend too much time on social media, listening to opinions and dangerous half knowledge on the internet, instead of listening to your own thoughts, then you effectively sign up to be brain washed in ways that cannot be too healthy. And then, acknowledging that BTC had a good run up to this point, nobody has a plan for BTCs future. And nobody seems to be too concerned with that minor detail anyways. Well well well. I am oddly reminded of the Grasshopper and the Ant. And guess who the industrious ant is in our analogy. I don't want to spend too much time on the topic of social media intoxication. The bottom line is, be productive in your own right and don't get brainwashed on the internet. Or put differently, try to hear your own thoughts. What I want to further discuss here is the future of Bitcoin. There are two good things I can say about BTC today. The first one is this. Bitcoin was and is the pioneer of decentralization and all of its implications. It challenged the status quo and showed us how we can use technology to be better tomorrow. And the second point I would like to make in favour of BTC is this, rather sad argument. Number went up, like, a lot. BTC had a good run so far. I am not saying that it is over for BTC. My thinking here is rather that Bitcoin, the network, gets into a more and more challenged position over time, even if the price chart makes you believe otherwise in some quarters. The future of BTC is full of structural challenges. And it seems that almost nobody in its community is concerned with any of the dark clouds, that at least I can see on the distant horizon. But let's get more concrete then. What are those dark clouds? The complicated way of explaining the fundamentally most broken aspect of Bitcoin is its security budget. Another way of framing this particular issue would be to say that, long term, Bitcoin has no money to run its own network. One fundamental flaw in how the Bitcoin network functions is the immense amount of resources that is required in order to mine a block. And mining a block is the very process that makes a blockchain network secure in the first place. The irony of it all is that all of this energy required is the very selling point of Bitcoins security by today's standards. And I think this conundrum confuses people, like, a lot. If you cannot mine a block, then you can either not participate or the entire network becomes unusable. And so, making it ever more and more expensive to mine a block requires ever more and more money in order to operate the network. Well, the network, that is Bitcoin, is operated by miners. Those miners are typically very large, at times, very cyclical businesses. And their entire purpose is to mine BTC so that they can sell it again. This activity will at some point materialize as an energy leak in the system, because the implication of higher operational costs is the need for ever higher revenues. And which business in the history of mankind has ever had the luxury of continuously generating ever higher revenues? In a way this is the very definition of a ponzi scheme. And there is a fascinating mental model that, by definition, is rather unintuitive. The problem with understanding complex systems is often that people confuse inputs with outputs. Imagine you are wandering through a forest, and you pass by a little creek. Now ask yourself what the chances are for that creek to be right here in that forest. That is a very complicated question to ask now, isn't it? Yes, and it is also the wrong question to ask. In fact, this question confuses the actual input, the creek, with the actual output, the forest. The forest isn't just there by some miracle. And the creek doesn't just randomly appear in the forest. The creek was there all along, and over time the forest grew around it. Because where there is water, there can grow trees. Now back to Bitcoin. We have the miners that mine blocks, which is very expensive. And we have BTC, which is the thing that the miners sell. People in the Bitcoin community will now argue that BTC has to increase in price because it becomes more and more expensive to mine it. And this very statement confuses once again inputs with outputs. The price of BTC doesn't have to do anything. The price of BTC is an input to the viability equation of a Bitcoin mining business. And if this input erodes, then the miners go bankrupt. The need for the Bitcoin network to consume ever vaster amounts of energy does not magically increase the price of BTC. Because the price of BTC is an output in an asset valuation equation, where the inputs for this equation are utility and speculation. The Bitcoin community prides itself in the fact that Bitcoin can't be changed. The total supply of BTC is capped at 21 million units. Nobody wants to touch the underlying protocol. That is a feature, apparently. The idea sounds nice, I think long term though, this is just not how anything works. And so Bitcoin will either find ever greater fools, or one day, becomes too heavy to move. And the fact that after 15 years of its existence, nobody is asking the hard questions, should make everyone being exposed to this network uncomfortable. Bitcoins security budget is broken. Bitcoin will have to adapt, or subside eventually.

If you haven't heard already, I have to tell you. The documentary "Vitalik: An Ethereum Story" has been released. This is a movie telling the story of Ethereum, including all of its vision and struggles. And maybe that is one of the most beautiful things about Ethereum. It is confronting its struggles. In that way, Ethereum is the industrious ant preparing for winter. And isn't that something? If you haven't seen the movie, or if you can't, then go watch the trailer on YouTube. I found it very moving and inspiring. And understanding the philosophy of the people building Ethereum, and understanding that their vision for the future is in some way aligned with my own, makes me very hopeful. And I think that the best days are yet to come. Those are the early days. And we are the pioneers.

In other news, another interesting L2 rollup was announced recently. It is called Atlas, and it is built using a custom implementation of the Solana Virtual Machine. Atlas will settle to Ethereum to access Ethereum’s assets in a trust minimized fashion. And with that, Atlas will benefit from Ethereum’s security and censorship resistance. At the end of the day, we will have to see how all of those L2s earn their right to exist in the first place, and how they get adopted and used in the real world. For now it is just interesting to see that more SVM based L2s are being created. The rollup centric roadmap in full swing!

Our number for this week is the number of distinct addresses interacting with one or multiple L2 rollups in a given week. And that number crossed 10 million now for the first time. We can't strictly talk about users, because we don't really know what a user is onchain. We can talk about addresses though. And there have now been 10 million addresses active within a single week across all the L2 rollups, which is a crazy amount. Those adoption metrics are steadily increasing, whatever the ETH price is doing. So fret you not, out there in the dark. Our Ethereum is going to make it.