Written by: Alex Pack, Alex Botte, Hack VC Partners
Compiled by: Yangz, Techub News
Ethereum has underperformed mainstream currencies such as Bitcoin and Solana in this cycle. The culprit, at least in the eyes of naysayers, is Ethereum's strategic decision to modularize. But is this true?
In the short term, the answer is yes. We found that Ethereum's shift to a modular architecture has had an impact on the price of ETH due to lower fees and reduced token consumption.
If you add up the market capitalization of Ethereum and its modular ecosystem, the situation changes. In 2023, the value generated by Ethereum's modular infrastructure tokens will be similar to the value of Solana as a whole, both at $50 billion. But in 2024, these tokens have underperformed Solana overall. Moreover, the gains in these tokens accrue primarily to the team and early investors, not to ETH token holders.
From a business strategy perspective, Ethereum’s modular shift is a reasonable way to maintain ecosystem dominance. The value of a blockchain is determined by the size of its ecosystem, and while Ethereum’s market share has fallen from 100% to 75% in nine years, it’s still a significant share. We compare it to Web2 cloud computing company Amazon Web Services, whose share has fallen from nearly 100% to 35% over the same period.
From a longer-term perspective, the biggest benefit of Ethereum’s modular approach is that it makes the network future-proof against technological advances that could make it obsolete. With L2, Ethereum has successfully survived the first major “catastrophe” of L1, laying a good foundation for its long-term resilience (albeit with trade-offs).
Ethereum has underperformed in this round of market compared to Bitcoin and Solana. Ethereum is up 121% since 2023, while Bitcoin and SOL are up 290% and 1452% respectively. We have heard a lot about this phenomenon, saying that the market is irrational, the technical roadmap and user experience cannot keep up with peers, and the market share of the Ethereum ecosystem is being taken away by competitors such as Solana. So, is Ethereum destined to become the AOL or Yahoo of the cryptocurrency world?
The culprit for Ethereum's poor performance is actually a very deliberate strategic decision made by Ethereum nearly five years ago to move to a modular architecture and subsequently decentralize and split its infrastructure roadmap.
In this article, we will explore Ethereum’s modular approach, using data-driven analysis to assess how this strategy affects ETH’s short-term performance, Ethereum’s market position, and its long-term prospects.
In 2020, Vitalik and the Ethereum Foundation (EF) made a bold and controversial call to unbundle the various parts of the Ethereum infrastructure stack. Instead of handling all aspects of the platform (execution, settlement, data availability, ordering, etc.), Ethereum will intentionally allow other projects to provide these services in a composable manner. At first, they encouraged the new Rollup protocol as Ethereum L2 to handle execution (see Vitalik’s 2020 article "Ethereum Roadmap Centered on Rollups"), but now there are hundreds of different infrastructure protocols competing to provide technical services that were once thought to be the exclusive monopoly of L1.
To better understand how radical this idea is, imagine what this looks like in Web2. A Web2 service similar to Ethereum is Amazon Web Services (AWS), the leading cloud infrastructure platform for building centralized applications. Imagine if AWS had decided to focus only on its flagship products, such as storage (S3) and compute (EC2), when it was first launched 20 years ago, instead of the dozens of different services it offers now. AWS would have missed out on great revenue opportunities and been unable to market its expanding suite of services to customers. With a full suite of product services, AWS could have created a "walled garden" that would have made it difficult for its customers to integrate with other infrastructure providers, thereby locking in its customers. Of course, this is what happened. AWS now offers dozens of services that make it difficult for customers to leave its ecosystem, and its revenue growth rate is amazing (from hundreds of millions of dollars in the early days to about $100 billion in annual revenue today).
However, in terms of market share, AWS has lost market share to other cloud computing providers over time, with competitors such as Microsoft Azure and Google Cloud steadily expanding their market share every year, and AWS's market share has dropped from 100% at the beginning to around 35% now.
What if AWS took a different approach? What if AWS recognized that other teams might build certain services better and opened its APIs, prioritized composability, and encouraged interoperability, rather than creating a closed environment? AWS could have allowed an ecosystem of developers and startups to build complementary infrastructure, resulting in better, more professional infrastructure, a more developer-friendly ecosystem, and a better overall experience. This would not bring more revenue to AWS in the short term, but it would have given AWS a larger market share and a more vibrant ecosystem than its competitors.
Despite this, it may not be worth it for Amazon. Because it is a public company, it needs to optimize for revenue, not a "more vibrant ecosystem." For Amazon, splitting and modularization may not make sense. But for Ethereum, it may make sense, because Ethereum is a decentralized protocol, not a company.
Like companies, decentralized protocols also have usage fees, or to some extent, "revenue." But does this mean that the value of the protocol should be based solely on these revenues? No, that is not the case.
In Web3, the value of a protocol is determined by the overall activity on its platform, by having the most active ecosystem of builders and users. Below is our analysis of the relationship between token price and Metcalfe value (a measure of the number of users in the network) for Bitcoin, Ethereum, and Solana. In all cases, token price has been highly correlated with Metcalfe value, a relationship that has persisted for several years, and in the case of Bitcoin, for more than a decade. Why is the market so focused on ecosystem activity when pricing these tokens? Stocks are priced based on growth and earnings. Currently, theories about how blockchains accrue value to their tokens are nascent and have little explanatory power in the real world. Therefore, it makes sense to value the network based on its strength, such as number of users, assets, activity, etc.
More specifically, token prices should actually reflect the future value of their network (just like stock prices reflect the future value of a company, not its current value). This brings us to the second reason why Ethereum might want to modularize, which is to use modularization as a kind of "future-proofing" to increase the likelihood that Ethereum will remain dominant in the long run.
In 2020, when Vitalik wrote the "Rollup-centric Roadmap", Ethereum was at the 1.0 stage. Ethereum was the first smart contract blockchain ever, but it was clear that there would be several orders of magnitude (OOM) improvements in the future in terms of blockchain scalability, cost, and security. The biggest risk for first movers is that they are slow to adapt to new technological paradigm shifts and miss the next OOM leap. In Ethereum's case, this is the transition from PoW to PoS and the transition to a blockchain that is 100 times more scalable. Ethereum needs to foster an ecosystem that can scale and make major technological advances, otherwise it risks becoming the Yahoo or AOL of its time.
In the world of Web3, decentralized protocols replace companies, and Ethereum believes that in the long run, fostering a strong modular ecosystem is more valuable than mastering all infrastructure, even if it means giving up control of the infrastructure roadmap and revenue from core services.
Next, let's take a look at how this modular decision is implemented through data.
We look at the impact of modularization on Ethereum from the following four aspects:
Short-term price (unfavorable)
Market value (favorable to some extent)
Market share (favorable)
Future technology roadmap (to be discussed)
In the short term, Ethereum's decision has had a significant impact on the price of ETH. Although the price of Ethereum is still rising sharply from the trough, in some periods, Ethereum's performance is not as good as many competitors such as Bitcoin and SOL, or even the Nasdaq Composite Index.
This is undoubtedly largely due to its modular strategy.
The first way Ethereum's modular strategy affects the price of ETH is by reducing fees. In August 2021, Ethereum introduced EIP-1559, which means that excess fees paid to the network will cause ETH to be destroyed, thereby limiting supply. This is somewhat equivalent to stock buybacks in the public stock market, which will put positive pressure on prices. In fact, it did work for a while.
But with the introduction and development of L2 for execution, and even alternative data availability (DA) layers like Celestia, Ethereum's fees have fallen. By abandoning core revenue-generating services, Ethereum has seen a decline in fees and revenue. This has had a big impact on the price of ETH.
Over the past three years, the relationship between Ethereum fees (in ETH) and ETH prices has been statistically significant, with a weekly correlation of +48%. If the fees generated by Ethereum fall by 1,000 ETH in a week, the ETH price depreciates by an average of $17.
Of course, these fees are not going nowhere, they flow to new blockchain protocols, including L2 and DA layers, etc. This also leads to the second reason why modular strategies may hurt ETH prices, that is, most of these new blockchain protocols have their own native tokens. Whereas before, investors could buy just one infrastructure token to get exposure to all the exciting growth happening in the Ethereum ecosystem, now they have to choose from many different tokens (CoinMarketCap lists 15 tokens in its “modular” category, with dozens more receiving venture funding in private markets).
This new category of modular infrastructure tokens could hurt the price of ETH in two ways. First, if blockchains were companies, then they should be completely de-appreciative, with the combined market cap of all “modular tokens” becoming the market cap of ETH. This is usually how it works in the stock world. When companies split up, the market cap of the old company typically decreases as the market cap of the new company increases.
But for ETH, it could be worse than that. Most cryptocurrency traders are not particularly sophisticated investors, and when faced with the scenario of having to buy dozens of tokens to get “all the cool growth that’s going to happen on Ethereum” instead of just one, they might get overwhelmed and simply not buy any tokens. This psychological overhead, as well as the transaction costs of buying a basket of tokens instead of just one, could hurt the price of both Ethereum and modular tokens.
Another way to estimate the impact of Ethereum’s modular roadmap on its success is to look at how its absolute market cap has changed over time. In 2023, Ethereum’s market cap increased by $128 billion. In contrast, Solana’s market cap increased by $54 billion. While the absolute numbers are higher, Solana’s growth was off a much lower base, which is why its price increased by 919% compared to ETH’s 91%.
However, the picture changes if you take into account the market cap of all the new “modular” tokens that have come about as a result of Ethereum’s modular strategy. In 2023, that number increased by $51 billion, roughly in line with Solana’s market cap growth.
What does this show? One explanation is that with the shift in modular strategy, the Ethereum Foundation has created the same value for a modular infrastructure ecosystem that is consistent with Ethereum as Solana. Not to mention the $128 billion market value it has created for itself. Imagine how envious Microsoft or Apple would be of Ethereum's achievement if they spent years and billions of dollars trying to build their own developer ecosystem around their products.
However, this is not the case in 2024. SOL and ETH continue to grow (although the growth rate is not large), while the market value of modular blockchains is declining overall. It could be that the market lost faith in the value of Ethereum’s modular strategy in 2024, it could be pressure from token unlocks, and of course, it could be that the market was overwhelmed by the psychological cost of buying a basket of tokens to go long Ethereum-related infrastructure, compared to just buying a single token to go long the Solana technology ecosystem.
Let’s move from price action and what the market is telling us to the actual fundamentals themselves. Maybe the market was wrong in 2024 and right in 2023. Did Ethereum’s modular strategy help or hinder it from becoming the leading blockchain ecosystem and cryptocurrency?
Infrastructure aligned with Ethereum has performed exceptionally well in terms of fundamentals and usage. Ethereum and its L2s have the highest total value locked (TVL) and fees among their peers, 11.5x that of Solana, and L2 alone is 53% higher than Solana.
If you think about it from the perspective of TVL market share, when Ethereum was launched in 2015, it had 100% market share. Despite hundreds of L1 competitors, Ethereum and its modular ecosystem still maintains about 75% market share to this day.
In 9 years, the market share has dropped from 100% to 75%, which is pretty good! To be aware, AWS's market share dropped from 100% to about 35% in about the same period.
But does ETH really benefit from the dominance of the "Ethereum ecosystem"? Or is Ethereum and its modular parts thriving, but not ETH itself as an asset? It turns out that ETH is a ubiquitous part of the broader Ethereum ecosystem. When Ethereum expanded to L2, so did ETH. Most L2s use ETH to pay for gas, and most L2s have at least 10 times more ETH in their TVL than other tokens. Looking at the table below, you can see the dominance of ETH assets in the three largest DeFi applications in the Ethereum ecosystem in their mainnet and L2 instances.
From the perspective of the technical roadmap, Ethereum's decision to modularize the L1 chain into independent components allows projects to specialize and optimize in their specific areas. As long as these components remain composable, DApp developers can build using the best existing infrastructure, ensuring efficiency and scalability.
Another greater benefit of modularity is that it makes the protocol "future-proof". Imagine that if a new technological innovation changes the rules of the game, only the protocol that adopts this innovation can survive. This situation often happens in the history of technology. For example, AOL missed the transition from dial-up to high-speed broadband Internet, and its valuation fell from $200 billion to $4.5 billion. Yahoo missed the shift to mobile Internet because it was slow to adopt new search algorithms (such as Google's PageRank), and its valuation fell from $125 billion to $5 billion.
However, if your technology roadmap is modular, then as L1 you don't have to catch every new wave of technological innovation, your modular infrastructure partner can catch it for you.
So, has Ethereum's strategy worked? Let's take a look at the infrastructure that has actually been built to match Ethereum:
L2 with best-in-class scalability and execution cost. At least two novel technical approaches have succeeded here, namely optimistic Rollup represented by Arbitrum and Optimism, and Rollup based on zero-knowledge proof represented by ZKSync, Scroll, Linea, and StarkNet. In addition, there are more high-throughput, low-cost L2s. Cultivating two blockchain technologies that bring scalability OOM improvements to Ethereum is no easy task. Dozens, if not hundreds, of L1s launched after Ethereum have yet to launch version 2.0 with 100x scalability and cost improvements. With these L2s, Ethereum has survived the blockchain’s “first mass extinction event” and successfully expanded to 100x transactions per second (TPS).
New blockchain security model. Innovation in blockchain security is critical to the survival of a protocol, just look at how every mainstream L1 today uses PoS instead of PoW. The “shared security” model pioneered by EigenLayer may be the next major shift. Although other ecosystems have launched other shared security protocols, such as Bitcoin’s Babylon and Solana’s Solayer, Ethereum’s EigenLayer is a pioneer.
New Virtual Machines (VMs) & Programming Languages. One of the biggest criticisms of Ethereum is the Ethereum Virtual Machine (EVM) and its programming language, Solidity. Solidity is a low-abstraction programming language that, while easy to code in, is prone to vulnerabilities and difficult to audit, which is one of the reasons why smart contracts based on Ethereum have been hacked. For non-modular blockchains, it is almost impossible to try to use multiple VMs or replace the initial VM with another one, but this is not the case for Ethereum. A new wave of alternative VMs are being built in the form of L2, allowing developers to code in alternative languages, not using the EVM, but still build in the Ethereum ecosystem. Examples of this include Movement Labs, which is adopting the Move VM built by Meta and promoted by Sui and Aptos; zk-VMs such as RiscZero, Succinct, and implementations built by the a16z research team; and teams such as Eclipse that are bringing Rust and Solana VMs to Ethereum.
New scalability approaches. Like other internet infrastructure or AI, we can expect OOM scalability improvements every few years. Even now, Solana has been waiting for years for the next major improvement, called Firedancer, built by a single team (Jump Trading). In addition, there are new hyper-scalability technologies in development, such as parallelized architectures from L1 teams such as Monad, Sei, and Pharos. If Solana can't keep up, these technologies may pose a threat to its survival, but not Ethereum, it can simply incorporate these technological advances through new L2s. This is exactly what new projects such as MegaETH and Rise are trying.
These modular infrastructure partners have helped Ethereum integrate the biggest technological innovations in crypto into its own ecosystem, avoid extinction, and innovate with its competitors.
However, this also comes at a cost. As Composability Kyle said, Ethereum added a lot of complexity to the user experience when adopting a modular architecture. It will be easier for ordinary users to get started with a monolithic chain like Solana because they don't have to deal with issues like cross-chain and interoperability.
So, in summary, what does Ethereum's modular strategy bring?
The modular ecosystem has issued a strong "opinion". In 2023, the market gave the same growth to modular infrastructure tokens consistent with Ethereum as it gave to Solana, but this was not the case in 2024.
At least in the short term, the modular strategy hurt the price of ETH because of the lower fees it resulted in.
But if you think about the modular approach from a business strategy perspective, things start to make more sense. In the nine years since Ethereum was founded, its market share has fallen from 100% to 75%, while Web2 competitor AWS has fallen to around 35% in the same period. In the world of decentralized protocols, the size of the ecosystem and the dominance of the token are more important than fees.
If you consider the modular strategy in the long term, and Ethereum's need to fend off OOM technical improvements in the future that could cause it to become the AOL or Yahoo of the cryptocurrency world, then Ethereum has performed quite well. With L2, Ethereum has survived the first "mass extinction event" of the L1 chain.
Of course, all this comes at a price. Ethereum's modular composability is worse than that of a single chain bundled together, which hurts the user experience.
As for the actual ETH price, it is unclear when (if ever) the benefits of modularity will offset the loss of fees and competition from infrastructure tokens consistent with modular Ethereum. Of course, this is great for the early investors and teams behind these new modular tokens as they get to capture a piece of Ethereum’s market cap, but the fact that modular tokens are in many cases launching at unicorn valuations means that these economic gains are being distributed unevenly.
In the long run, Ethereum may emerge as a stronger player for its investment in nurturing the broader ecosystem. Rather than losing ground in the cloud computing market like AWS did, or losing everything like Yahoo and AOL in the internet platform wars, it is laying the foundation to adapt, scale, and thrive in the next wave of blockchain innovation. In an industry where success is driven by network effects, Ethereum’s modular strategy may be the key to remaining the dominant smart contract platform.
KuCoin broadens its asset offerings by adding Root Network (ROOT) to its trading platform, facilitating seamless ROOT token deposits, outlining a clear trading schedule, and emphasising compatibility through Ethereum's ERC20 network.
JasperSam Altman's unexpected return as OpenAI's CEO follows internal turmoil, employees opposition, marking a shift in leadership.
Hui XinPancakeSwap gains over 98% support for introducing veCAKE and voting gauges, enhancing governance, liquidity, and CAKE staker rewards. veCAKE holders, akin to shareholders, can influence CAKE farm emissions and delegate voting rights, potentially earning extra rewards. The phased launch covers BNB Chain, Ethereum, and Arbitrum, reinforcing PancakeSwap's role as a dynamic decentralised exchange.
JixuAnimoca Brands integrates Ubisoft's Champions Tactics into Mocaverse's Web3 Program, introducing "Realm Points" for Moca ID holders. Animoca's Yat Siu and Ubisoft's Nicolas Pouard express excitement about the collaboration, emphasizing support for user onboarding and reinforcing their enduring partnership in the crypto gaming space.
JixuNYDFS has revised cryptocurrency listing criteria, prioritizing investor protection with stricter standards. Entities in virtual currency activities must secure DFS approval for listing policies, including comprehensive delisting policies by January 31, 2024, reflecting NYDFS's commitment to regulating the dynamic virtual currency market.
JixuKraken, accused of operating as an unregistered national securities exchange, broker, and clearing house, vehemently disputes the claims.
JasperRichard Teng, the newly appointed CEO of Binance, brings over three decades of financial and regulatory expertise, having served at MAS and ADGM. With a history of shaping Singapore's financial landscape and working closely with top government leaders, Teng is set to lead Binance through regulatory challenges and reshape its operational strategy.
JoyOpenAI launches ChatGPT's voice feature amid internal turmoil, earning praise for its transformative impact.
Hui XinThe claim alleges that Gemini's preferential transfers of funds from Genesis unfairly disadvantaged other creditors, prompting a plea to the court for rectification.
BrianSrikrishna Ramesh, known as Sriki, confined within a quarantine cell at Parappana Agrahara after his 2020 arrest. The notorious hacker allegedly orchestrated the movement of Bitcoins worth $1.2 million USD in just 22 minutes, triggering a Bitcoin scam that has left authorities scrambling.
Aaron