Ethereum, a $225 billion blockchain platform, is the focus of the spotlight. It’s a sharp turnaround from its peak transaction activity, user growth, and revenues are crashing. Quinn Thompson, Chief Investment Officer (CIO) of Lekker Capital, has declared Ethereum "completely dead" as an investment, sparking debate within the cryptocurrency community. His statement highlights concerns about Ethereum's tokenomics and its ability to maintain value amidst the rise of Layer 2 (L2) solutions.
Thompson's argument centers on the idea that Ethereum's foundational token economics, combined with community consensus that favors token proliferation, has led to its decline. This point of view is a stark contrast to the views held by most of the other experts. They are convinced of Ethereum’s continued network utility regardless of whether ETH still represents a good investment. The ongoing debate underscores how integral L2s are to scaling Ethereum. It asks the uncomfortable question of whether these solutions are just siphoning value off from the primary chain.
Concerns Over Ethereum's Declining Metrics
Thompson highlights the downturn in transaction activity, user growth, and fees/revenues as some of the primary symptoms showcasing Ethereum’s ongoing failures. From his point of view, for a number three network by market cap, it should be showing growth and expansion, not that it’s shrinking.
"Make no mistake, ETH as an investment is completely dead. A $225 billion market cap network that is seeing declines in transaction activity, user growth and fees/revenues. There is no investment case here. As a network with utility? Yes. As an investment? Absolutely not." - Quinn Thompson
This continued drop begs the question, how long can Ethereum maintain its value proposition? The emergence of alternative Layer 1 (L1) blockchains and the growing popularity of L2s only aggravate these issues.
Nic Carter, a partner at Castle Island Ventures, gives candid thoughts on what’s happening with Ethereum. It’s largely that tokenomics, he argues, that’s gotten Ethereum into its present sorry state.
"The #1 cause of this is greedy eth L2s siphoning value from the L1 and the social consensus that excess token creation was A-OK. Eth was buried in an avalanche of its own tokens. Died by its own hand." - Nic Carter
The Role of Layer 2 Solutions
L2s increase blockchain scalability by processing millions of transactions off-chain and only settling on-chain periodically. From there, they eventually finalize those trades on the origin chain. Omid Malekan, an adjunct professor of cryptocurrency and fintech at Columbia Business School. It is undeniable how strongly he feels that L2s are absolutely pivotal to the future of blockchain, and especially Ethereum.
"L2s are the only viable way to scale any blockchain. Whether their tokens capture value or not is a separate question. But it can’t be that L2s ‘siphoned value from ETH’ yet didn’t capture value themselves. Security is not free." - Omid Malekan
The adoption of L2s raises an interesting question that we need to answer. Are they siphoning value from Ethereum’s main chain without improving its net ecosystem? This ongoing debate is indicative of how network effects are monetized within Ethereum’s ecosystem.
"Is Ethereum going to be the first network ‘with utility’ in modern history where the network effects aren’t monetized? Can you provide any other examples of this happening?" - Omid Malekan
Ethereum's Tokenomics and Community Consensus
Ethereum’s tokenomics include a deflationary token burning mechanism. Through this process, 92.5% of all transaction fees are burned, which reduces the overall supply of Ether (ETH) over time. Ethereum network usage has a direct impact on this deflationary mechanism. Critics say that the Ethereum community’s focus on creating new tokens to create wealth will reduce ETH’s value.
"The social consensus among .eth’s in favor of excess tokens was because the creation of endless L2s, staking, restaking, DA, etc etc all enriched their pockets on the way up but no one wants to face the music now that the market is saying that was a mistake." - Quinn Thompson
The main argument isn’t about the dollars created by the Ethereum network. Everyone is asking if this value is being accrued to ETH holders, or if it’s being syphoned off somewhere. As the Ethereum and more broadly crypto ecosystem grows, the technology and complexities are increasing rapidly. With its myriad of L2s and dApps, investors are struggling to evaluate what ETH’s actually worth.
