1. Ethereum’s Essence: Ownership

Ethereum is fundamentally a protocol about ownership. The Ethereum protocol creates a digital form of self-custodial, permissionless assets whose value can be transmitted globally and cannot be seized or censored. Ethereum’s steadfast pursuit of decentralization is aimed at achieving this goal; any compromise on decentralization could become an opportunity for seizure or censorship, fundamentally limiting the effectiveness of this ownership system.

The three main pillars of this argument are:

• The biggest difference between blockchain and traditional finance lies in ownership, meaning that users have inalienable rights to the storage and transmission of value.
• On centralized blockchains, certain powerful entities can influence the outcomes of the chain.
• The value stored in the ownership system is directly related to the credibility of the system’s ownership.

Overall, a centralized system that is susceptible to coercion from authoritarian entities cannot offer the same level of ownership effect as a decentralized system, and therefore, its value is lower. There is a common misconception that Ethereum’s decentralization is only valuable in scenarios like a “third world war” or a “post-dollar era,” but this is actually incorrect—decentralization is crucial right now.

Blockchain’s attack model must consider not only those who wish to reverse transaction finality but also those more subtle actors who attempt to control economic outcomes without completely destroying the system. Such attack behaviors manifest in various ways, including coercing validating nodes (see the latest employee report from the Federal Reserve Bank of New York) and implementing strict KYC/AML requirements on-chain (see Blackrock’s BUIDL fund details).

Solana’s claimed goal is to create the “best, most permissionless, and most accessible financial market” and a “globally shared state accessible without permission.” However, this goal cannot be achieved without a clear strategy to maintain trustworthy neutrality in its block production. If this is not achieved, the chain may ultimately become merely a regulated but transparent financial transmission layer—potentially subject to government censorship. This prospect seems far less attractive, impactful, and valuable compared to a property system centered on “anti-censorship” and “self-custody.”

Beyond the validator set, Ethereum has effectively decentralized many other parts of the ecosystem, including (i) the early distribution of ETH through crowdfunding and PoW mining; (ii) decentralized staking allocation; (iii) meaningful activity and transaction volume on L2; (iv) continuously improving client diversity… Ethereum’s decentralization efforts at the “human” level are also impressive—the network is publicly built by individuals and teams from around the world, allowing many to contribute to and invest in the future of the protocol. This genuine decentralization of value, power, and intellect is difficult to replicate. Additionally, since most of the technology is researched and developed in open-source and public domain environments, Ethereum also benefits from some of the advantages of ecosystems focused on execution scaling. Technology can be commoditized, but Ethereum’s decentralization cannot.

However, it’s important to note that market dynamics, rather than values, determine these ecosystem outcomes. If the marginal costs of decentralization are too high in terms of L1 execution, user experience, and value accumulation, the value of the most decentralized blockchain may also decrease. The bullish logic for Solana, Monad, BSC, and Tron is that these blockchains can provide relatively sufficient ownership utility for most users and applications with a lower degree of decentralization.

I tend to believe that, in the medium term, issues like censorship, asset seizure, KYC/AML, and node coercion will lead people to question the robustness of centralized systems, potentially restricting such systems’ markets to single jurisdictions. In a multipolar world where nations lack trust and attempt to regulate and monitor their citizens through capital control and financial surveillance, global economic activity is unlikely to naturally flow through a single system. Ethereum’s unique claim to trusted neutrality means that ETH is an asset that derives value from this trusted neutrality and is also the preferred choice for truly permissionless value storage in this system.

In contrast, dollar stablecoins issued by centralized institutions do not provide any ownership guarantees to holders. As Eigenlayer founder Sreeram has said, any holder of USDxxx could face arbitrary “harvesting“ by Circle or Tether—you cannot truly own programmable money in the presence of counterparty risk. I hope ETH and ETH-collateralized stablecoins and derivatives will become the default option for protecting digital property sovereignty.

2. Ethereum and Rollups

Ethereum’s neutrality and anti-censorship features make it the ideal platform for settlement, storage, and expression of value. However, relying solely on L1 settlement does not fully describe Ethereum’s roadmap centered around Rollups. Ethereum also serves as the settlement and data availability layer for Rollups.

I view Rollups (and their corresponding Rollup platforms, such as Optimism Superchain and Arbitrum Orbit) as distinct territories. Each territory competes to offer users what they want—fast transactions, low fees, simple on-chain processes, and so on—but this comes at the cost of some decentralization.

I refer to them as territories because, as it stands, the Rollup teams responsible for creating and expanding ecosystems will continue to have significant influence in their respective areas, which seems acceptable. The point of Rollups is that they make trade-offs that Ethereum L1 is unwilling to make. If Rollups needed to be as decentralized as Ethereum, why establish this symbiotic relationship in the first place? Rollups rely on Ethereum for security and decentralization, while Ethereum relies on Rollups to expand economic activity within the ecosystem.

A crucial premise here is that Rollups must reach Stage 2, meaning that the rules for upgrading bridge contracts are robust and provide a clear exit path for bridging assets. However, it should be noted that Stage 2 does not emphasize (i) the degree of decentralization of Rollup sequencers; (ii) the distribution of fees and MEV (miner extractable value) generated by Rollups; (iii) interoperability between Rollup ecosystems.

Stage 2 sets a standard for how Rollups should leverage Ethereum’s security and decentralization, but it does not impose many requirements on other aspects of Rollup design. I will not engage in debates about how or when Rollups should implement sequencer decentralization (though I generally agree with Max’s view—I don’t see their motivation for doing so). Nevertheless, I concur with Vitalik that this should not be the top priority. I believe Rollups’ most important tasks currently are (i) inheriting Ethereum’s security by achieving Stage 2; (ii) inheriting Ethereum’s anti-censorship features by having a transparent and efficient forced inclusion mechanism (unlike the current time delays). In my view, these are the key elements, all of which return to the theme of Ethereum providing the most robust ownership system for both L1 and L2 assets.

(2.1) Data Availability (DA) of Ethereum

A key element in Rollup design is the location where transaction data is published (i.e., which DA service is used). In practice, we can see that some new projects are opting for alternative data availability layers (alt-DA) from the outset.

I do not support the approach of some community members attempting to use social pressure or coercive measures to force projects to use Ethereum’s data availability layer (DA), as this approach is unsustainable. Instead, we should examine the unique advantages that Ethereum’s DA services can offer and consider potential network effects. The main advantage of using Ethereum DA is the ability to inherit Ethereum’s ownership utility and anti-censorship properties (am I sounding like a broken record…?). I like to describe this feature as enabling the “free flow” of Rollup assets. As an on-chain user, if I know my assets won’t be seized and that I can enjoy the same level of self-custody protection, I would be happy to conduct most of my daily financial activities on a Rollup with a slightly lower degree of decentralization than Ethereum. Based on this, let’s consider the following scenarios:

• Scenario Design: For a user who bridges ETH to L2 via a standard smart contract bridge, under what conditions can they withdraw funds back to a different address on L1?

The escape ability of L2 depends on the location where L2 publishes data.

• If the L2 is a Rollup that relies on Ethereum DA and publishes transaction data to Ethereum’s blobs, users can unconditionally use the “escape” mechanism. This is because every state update on the bridge contract is backed by data submitted to Ethereum’s blobs, ensuring that Rollup users can prove the validity of withdrawals and utilize L1 for transaction bundling (they always retain sovereignty over their L2 assets).
• However, if the L2 opts to publish transaction data to other DA solutions, the “escape” mechanism will only be available while the Rollup is active. By publishing L2’s transaction data on a different chain, the state updates on the bridge contract on Ethereum must be associated with the availability of transaction data on the alt-DA chain. In other words, if someone publishes an invalid state root to the bridge contract without posting transaction data to the alt-DA chain (a situation often referred to as a “data withholding attack”), L2 users will be unable to prove the validity of their withdrawals and therefore cannot withdraw ETH to L1 (they will lose sovereignty over their L2 assets).

It is worth noting that the second outcome would require L2 to permanently cease block production to lock all assets on the standard bridge contract, which is a rather extreme form of intervention. Based on the above scenario, a simple conclusion can be drawn: only Ethereum Rollups that reach Stage 2 and publish transaction data to Ethereum blobs can provide the same level of ownership protection for assets bridged to L2.

This scenario highlights the first network effect of Ethereum’s DA service (which I consider the most significant effect): a Rollup that publishes data to Ethereum DA can benefit from other Rollups doing the same, as all assets across the chains will share the same trust assumptions. Sreeram refers to this as the “trustless composability network effect“—a term I like, although the value from the user’s perspective is not yet clear. We are still in the very early stages of L2 adoption, and excessive speculation about this point may be unnecessary. What is currently more important is to ensure that Rollups do not have an immediate incentive to use external DA services. The goals of expanding Ethereum DA performance through PeerDAS and Danksharding align closely with the vision of providing Rollups with ample blobs, making it a straightforward decision.

In the future, we can imagine that Ethereum DA will generate other network effects. For example, in scenarios requiring real-time proof of transaction validity and preconsensus, Rollups using Ethereum DA might offer better cross-chain user experiences, greater liquidity, and more users. These arguments may seem too futuristic for many to fully believe.

The network effects of DA will only become crucial when we truly view DA fees as a core component of ETH asset value. Let’s delve deeper into this issue.

(2.2) ETH’s Value Capture

So far, we have not delved into fees and how they contribute to the value of Ethereum (ETH) as an asset, although this has been a major topic in recent weeks. Within the structure of this article, I consider this point to be less crucial than (1) Ethereum’s ownership utility and censorship resistance as a settlement layer, and (2) Ethereum’s role as a DA layer extending security and decentralization to Rollups. Nevertheless, it is necessary to consider more “direct” forms of value appreciation for ETH.

Personally, I align with Dankrad Feist’s recent viewpoint in an AMA, where he stated:

“I do not believe that fees from blobs will be the best value capture mechanism for Ethereum. The data availability market is too unstable — while Ethereum provides the best security, achieving something ‘close enough’ is too easy, and it will never be a good way to extract value.”

Fundamentally, I do not think Ethereum DA will have strong user stickiness. The network effects mentioned are not strong enough to consistently require L2s to pay high blob fees, but I do not see this as a problem. By providing cheap DA services for Rollups, Ethereum encourages them to build and expand economic activity within the Ethereum ecosystem. Therefore, proposals seeking to drive short-term burn rates by raising blob pricing seem to be misguided (I agree with Dankrad on this point). Francesco, another Ethereum Foundation researcher, also made excellent comments on the number of L2 transactions possible under the proposed DA expansion during a recent AMA.

Another source of value accumulation for ETH is the destruction of execution fees at the L1 layer. Max Resnick and his colleagues at the Ethereum Foundation have launched a campaign to bring all DeFi execution back to L1; meanwhile, Justin Drake believes that L1 execution “has no future.” My view falls somewhere in between. Once again, I want to reference Dankrad’s statement:

“Ethereum L1 will become the intersection of all these subdomains, and many very valuable activities will continue to occur on it, generating valuable fees. (To achieve this, some degree of L1 scaling will be necessary.)”

It seems that valuable activities will always take place on Ethereum, and creating a platform that facilitates significant L2 economic activity will also drive usage of the underlying chain. Therefore, scaling the L1 execution layer is necessary to support this growth, but I believe it is less urgent than “maintaining and enhancing Ethereum’s attributes as a settlement layer and DA layer.” This once again highlights my core point: Ethereum should maximize economic activity within its platform (including Rollups), and ETH should be positioned as a truly permissionless store of value, not merely an income-generating asset.

Focusing on ETH’s value storage attributes naturally leads to the question: “Why not choose BTC instead?”

I will conclude with a brief answer to this question.

3. About Bitcoin

There are many aspects of Bitcoin (BTC) worth discussing, especially now that it has reactivated research and development ecosystems in areas like ordinals, runes, Rrollups, and BitVM. However, this article does not aim to delve into these details, nor am I the right person to discuss them. Nevertheless, I will highlight a few key points closely related to the Ethereum vision mentioned earlier.

First is the issue of Bitcoin’s fixed supply cap of 21 million coins. This revolutionary idea of intentionally creating digital scarcity is extremely powerful, making Bitcoin one of the most valuable assets globally (as of September 2024, with a market cap of one trillion dollars, ranking tenth). However, I believe that the promise of the 21 million cap is a fatal flaw in the Bitcoin system because I think the fork choice rules in Bitcoin become fundamentally “unstable” as block rewards decrease. The common market response to this view is that transaction fee income will become high enough to incentivize honest mining behavior, but I do not agree with this perspective.

The chart below shows the volatility of Bitcoin network fees over the past six years. I do not believe that mining entities can remain profitable with such unstable income streams. For example, from mid-2021 to mid-2023, Bitcoin network fees were consistently below 1 BTC per block. A more optimistic scenario is that most BTC will be held by ETF issuers, who might choose to subsidize mining and continue to earn fees through asset management business models, but this is clearly not the outcome envisioned by the cypherpunk ethos. Additionally, the belief that fee income will incentivize mining seems to conflict with the mainstream “buy and hold” notion. If everyone is merely holding, then where do the fees come from?

Secondly, there is the issue of Bitcoin potentially self-disrupting as a settlement layer and data availability (DA) layer. The most viable solution I’ve heard for addressing Bitcoin’s fee source problem is that Bitcoin could serve as the settlement layer and data availability layer for L2 (payment parties). This is theoretically feasible and similar to the path Ethereum is taking, but there are two notable differences.

• The core security model of the Ethereum network does not rely on the fees generated from settlement and DA, thanks to Ethereum’s issuance mechanism. I even mentioned earlier that I do not believe DA fees are a key component of ETH’s value. For Bitcoin, however, continuously generating fees will be a necessary condition for survival, which seems to create a peculiar loop: “L1 security relies on fees paid by L2, while L2 relies on L1 security.”
• Bitcoin lacks both a scaling roadmap and standard practices for network upgrades. This is both an advantage and a disadvantage. While stability and predictability are core characteristics of the Bitcoin system, they may also hinder Bitcoin’s ability to transform into a settlement and DA layer. This seems to be a classic innovator’s dilemma, where the system might be too large and successful to make significant improvements, such as adding OP_CAT and increasing block size, which are necessary to provide the resources for L2 to achieve meaningful scaling.

I am very open to being proven wrong on these points, as my understanding of the Bitcoin ecosystem is relatively limited, and the views expressed above are based on my current understanding.

There is much more to discuss about Bitcoin, but I will leave it at that. BTC has solid reasons to be regarded as digital gold—a highly valuable but relatively static asset. In contrast, I believe ETH will have a more dynamic future. It will serve as a censorship-resistant, programmable store of value, supporting a larger digital economy by offering permissionless settlement, DA, and execution.

Conclusion

Ethereum is firmly committed to decentralization, aiming to create the most secure and censorship-resistant foundational platform for on-chain economies. The development blueprint centered around Rollups aims to expand the platform’s economic activity without sacrificing the critical features of the settlement layer. As a DA layer, Ethereum offers Rollups a cost-effective and highly trustless solution, allowing them to attract more users by somewhat reducing decentralization while preserving user asset sovereignty.

I agree with Myles O’Neil’s view that regardless of how the value capture mechanism evolves, the value of ETH will increase with the growth of economic activity within the ecosystem—therefore, it is premature to focus on optimizing value capture at this stage. Lastly, although I believe maintaining settlement attributes and expanding data availability are the most crucial aspects of the roadmap, I also agree that scaling the L1 execution layer should proceed in parallel, based on advancements and innovations across the field.

Fundamentally, I believe ETH’s value primarily stems from its role as a global, permissionless store of value. While the value accumulation narrative we’ve discussed is closely tied to ecosystem expansion, long-term growth in users and developers should take precedence over short-term focus on token mechanics. The development blueprint centered around Rollups is very reasonable: starting with settlement, then DA, and finally L1 execution—advancing in this order.

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