The “solutions” to these problems are all laughably over-optimistic

As for-profit companies will not give up their revenue

This is how ETH betrayed its roots & became a platform for centralized services:

Competing L1s & L2s are devouring ETH’s user base while its leadership promotes & celebrates ETH’s downfall. This is a sad state of affairs, as it betrays the founding principles they once claimed to hold dear. Promoting centralized solutions while also empowering companies that are forced to comply with government censorship.

Privacy has always been one of the cornerstones of the cypherpunk movement, as cryptography has brought the promise of the widespread use of privacy-enhancing technologies. Despite that legacy, ETH is instead pushing the majority of users onto L2s that can monitor, freeze, steal & censor your money; this clearly falls far short of that old cypherpunk ideal. Following the same self-destructive path as BTC by pivoting away from on-chain scaling in favor of L2s. History is, in fact, repeating itself:

L2 Centralization

The reality today is that all major L2s are totally centralized & can censor & steal user funds. As admin keys controlled via a multi-sig can change the contract rules (including theft) & centralized sequencers can also censor anything right now.

However, what matters more is the potential path for change. This is where things start to look really bad, as all of the proposed solutions to L2 centralization are laughably over-optimistic, requiring for-profit companies to give up massive amounts of their current revenue…

This completely ignores human nature & history, a typical mistake for high-level engineers & computer scientists to make. This is why studying blockchains has to be multidisciplinary, including the humanities. This is exactly because this criticism of ETH’s proposed solutions is not technical in nature but instead points out the hard social coordination problems inherent in those proposed solutions.

Decentralizing requires powerful parties to surrender their power. Historically, this rarely happens as it goes against their incentives. Sometimes, exceptional people do the right thing. But on average, especially when looking at large groups of people, we should always bet on incentives, as that far better predicts the masses.

This is also why I do not expect most L2s to ever decentralize. As the incentives clearly point towards L2s remaining centralized, “trust me, bro,” is not good enough, especially when we are supposed to verify, not trust.

Drake’s Rebuttal

Shifting what part of the system collects that revenue is not a proper solution either, as @drakefjustin recently attempted by putting Base’s revenue in the execution bucket & not within the sequencer bucket. That is because for Base to truly ever “decentralize,” it will have to sacrifice all its revenue; keeping the execution centralized, as Drake is implying here, is not a proper solution at all.

The harsh truth is that Coinbase will likely never decentralize & that this is what an “L2 scaling” roadmap really looks like! A surrender of users to centralized & essentially custodian solutions, crushing the original vision under the weight of KYC, AML & institutional-level censorship.

L2 Interoperability

L2s will consistently oppose a common interoperability protocol by attempting to get everyone to adopt their own solution, even if that hurts their long-term success. This is similar to the tragedy of the commons problem in political science. Twenty-plus attempts at a unified interoperability protocol are the equivalent of not having a unified interoperability protocol at all!

L2s are competing with each other & the L1 itself, forming into competing ecosystems instead of a single ecosystem, unlike L1 scaling. The free market will continue to create a wide diversity of competing L2s. Representing the various power blocks that do not always get along. This dynamic is good in most cases, but for blockchain scaling it only guarantees massive fragmentation, destroying UX in the process. Thinking everyone will use the same seamless interoperability protocol. While custodians pack up shop in favor of superior technology… Is a fantasy & does not represent how free markets actually work, as there will always be custodians & centralized L2s in that environment.

Ironically, as ETH core pushes for an enshrined/based L1 sequencer, the L2s are pushing their own “shared sequencers,” such as Arbitrum’s Superchain, Polygon’s Agglayer & more. The only way “shared sequencing” works is if we all use the same one; this makes it non-viable. It is unrealistic to expect these major L2s to abandon their efforts at “solving interoperability.” The same is also true for Eigenlayer & other restaking platforms, as they also fulfill sequencer-like functions. This all makes a true shared sequencer a total non-starter, as they are mostly all greed-inspired fantasies. Driven by the thought that if everyone used the same L2 (their L2), it would solve the UX problems! Technically true, but practically false. I would put that in the same bracket as BTC maximalist, thinking there will only be one…

This is why fragmentation & the breaking of composability across L2s can never be solved. For the same reason, interoperability across L1s has not been solved to this day. However, at least under that paradigm, L1s are not artificially bottlenecked because of this toxic L2 narrative. That is why my problem is not with the L2s themselves per se but more with the lack of L1 scaling specifically, even if that is a consequence of the L2 lobby.

Economic Security

This shift away from actually USING ETH is its downfall & death, as cryptocurrencies live off economic security, no matter how much @aeyakovenko trolls the ETH community by claiming it is just a meme. The bottom line will always still be revenue & it should be beyond evident that the chain that hosts its own usage will always gain more revenue over the long run compared to chains that outsource all of their usage, as that is what ETH is doing now, explaining why this is such an insanely terrible move from all possible perspectives!

Perverse Incentives

Now we get to the elephant in the room: There is several orders of magnitude more funding for L2s compared to the L1 in ETH & BTC. Billions are being created around L2 tokens & VC funding, compared to mere millions for L1 development. This creates clear conflicts of interest, possibly even straight-up corruption. As the incentives are so perverse that it can lead to devs arbitrarily restricting L1 capacity in favor of L2s. All they would have to do is not pursue or support L1 scaling technologies…

This is how L2s have become the greatest corrupting force in this industry. As they benefit from not scaling the L1 in the short-term. Turning developers into multi-millionaires through L2 tokens & equitity. Certainly does also add a strong bias towards L2 scaling over L1 scaling. That is because L2s earn far more by supporting a narrative that restricts L1 capacity in favor of exclusively scaling through L2s; this creates a clear conflict of interest between the long-term success of the L1 (ETH & BTC) & the short-term profit of L2-focused companies.

This is also because VCs can rent-seek with “L2 scaling,” as these are usually for-profit enterprises, whereas L1 scaling is a public good. There is no way VCs can skim a percentage of the fee over a well-designed L1. However, that is the norm in the L2 world right now. Scaling the L1 does not benefit these VCs in the short term, whereas an “L2 scaling” roadmap does, even if that lays the seeds of ETH’s self-destruction in the long run.

L1 Scalability

There is a central assumption underpinning both perspectives, which is L1 scalability. The ETH position depends on the trade-offs for L1 scalability being untenable. It is this technological limitation that, therefore, justifies an “L2 scaling” roadmap in their mind.

The L1 scaling paradigm is far more optimistic, as it acknowledges the fact that L1s today can scale to meet demand without sacrificing decentralization. Whether that be through pure parallelization, DAGs, or sharding techniques, there are many roads to Rome. The ETH community is ideologically attached to an outdated technological paradigm, very much like the Bitcoiners. ETH is also quickly becoming a dinosaur, like Bitcoin, all with the same strange toxic & cult-like ideological trimmings.

ETH Maximalism

It is no coincidence that ETH supporters gradually started becoming indistinguishable from Bitcoin maximalists, as they adopted the same philosophies & narratives as their coping mechanism/belief system.

Precisely because this is all a consequence of the same systemic flaws in the governance structure that allowed this to occur in both BTC & ETH in the first place. The environmental pressures, therefore, create a particular type of belief system, much like convergent evolution does in the biological sense. I am also convinced that if formalized on-chain governance was implemented, not scaling the L1 would never have been considered a realistic option.

Governance

Ultimately, it comes down to “who decides”. The ugly reality is that a relatively small group of people gets to decide on both BTC & ETH. That is what “off-chain governance” boils down to; a highly centralized decision-making process. This can be captured by small groups with perverse incentives (such as for-profit L2s), which directly benefit from not scaling the L1 in the short to medium term.

On-chain governance allows all stakeholders to vote on proposals in an entirely transparent process, which understandably results in very different outcomes. That, most importantly, favors the L1 & not the interests of whatever groups happen to capture the centralized governance process at that time.

Most often, these off-chain governance processes are laughably easily captured & perverted when viewed from the lens of political science & philosophy, as a “GitHub dictatorship” is nowhere near as robust as a nation-state. On the other hand, an on-chain governance process with a large number of stakeholders combined with more complex checks & balances & divisions of power does stand a chance to stand the test of time & the worst that our human nature has to offer.

This is where on-chain & governance has to be seen as a mechanism that protects decentralization instead of repeating old-school/legacy governance. In reality, the opposite is true; off-chain governance replicates pre-blockchain governance systems; I will add very poorly in most cases. On-chain governance is something entirely new that leans into the inherent advantages of blockchain technology & aligns itself with the L1 & collective decision-making. It is no surprise then that this idea has been entirely rejected by BTC & ETH’s leadership. Whoever wields the most influence also has the most to lose if on-chain governance is implemented; this is why the incentives act against its establishment if it is not set up early enough.

Real Solutions

The solution lies in abandoning ETH, voting with our feet & supporting its scalable competitors. Because, as stakeholders, we have no real voice in ETH’s governance process.

We can undoubtedly admire efforts to lead a full-scale rebellion against the current status quo in ETH, akin to the blocksize debates in BTC. However, as a veteran of that civil war & being on the “losing side” during that time (big blocks), the odds do not look good at all. Because at that time, the majority of businesses, miners, stake & users were in favor of bigger blocks. Yet the Core developers still got their way & the blocksize limit is still at 1MB 8 years later!

Stronger evidence for effective centralized control over the rules of a decentralized network might not even be possible hypothetically. ETH has nowhere near the level of support for the revolution that BTC did, so I cannot see how it could succeed, especially without formalized on-chain governance.

Another strong demographic effect occurs in this free market of cryptocurrencies that we have to account for: The people who support L1 scaling leave ETH, & the people who do not end up joining it. Who is now left to fight for L1 scaling? The same effect has occurred in BTC, turning it into a monoculture with no real potential for change. All of these shifts started from the top of the leadership structure, gradually pivoting the entire ecosystem away from its original goals.

We used to believe in “fork governance,” but that is wrong for two reasons: the “agree or fork off” barrier is too high, so it devolves into an effective tyranny. The second problem relates to the market not actually routing around the offending chain through a fork but choosing later-generation chains instead. This explains why the market did not route around BTC through BCH but ended up upgrading & going all into ETH instead at that time.

History Repeating

I went from a die-hard Bitcoin supporter in 2013 to ringing the alarm bells by 2015, only to become a critic by 2017.

Abandoning BTC & buying into ETH’s promises of on-chain scaling with sharding, becoming a die-hard supporter by 2015, to again ring the alarm bells by 2022, only to become a full critic by 2024.

Say what you want about my position, but one thing is clear: I have been extremely consistent while BTC & ETH have changed from under me, despite our protests. A total pivot of the economics & purpose of a blockchain by arbitrarily restricting its capacity is radical & is the absolute opposite of a conservative approach; we should not allow them to invoke “conservatism” or “social contract” as an excuse, as these principles have been entirely violated.

The real tragedy is that we squandered our opportunity for global adoption twice, most likely setting us back by decades. The silver lining is that we can clearly identify the problem & implement solutions in the latest generation of blockchains to finally break this horrible & painful cycle.

Conclusion

Bringing us back full circle to the first solution & why ETH is doomed to fail. As we have to vote with our feet & support ETH’s competitors for the sake of decentralization & the cypherpunk dream.

If you truly love Ethereum & Bitcoin, you have to be able to let go of them for their sake, for the sake of their original vision. Exactly because that is far more important than the price of any three-letter ticker. Keeping our eye on the bigger picture is keeping our eye on the greatest prize:

Changing the world with financial sovereignty, censorship resistance & true monetary independence!

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