Ether is starting to realize that it is failing. Builders are leaving the ecosystem in droves.

Look at the new projects coming into Web3 - they are far more likely to choose to build on competing L1s or Rollups.

This article will explain why this is happening.

There was a time when Ether started to focus on being a "robust currency". A number of improvement proposals were used to achieve this, including EIP-1559, "mergers" and a focus on deflating ETH all played a role.

These proposals directly benefit ETH holders by adjusting the token economics of ETH to derive more value from network fees ......

while aiming to reduce the supply of ETH in the process - leading smart investors to hold and pledge only ETH.

The crypto community is largely dominated by traders/investors, so these initiatives are often welcomed. People want ETH to add value (even if they use Ponzi-economy tactics)

But the goal of the business is to maximize value for the stakeholders.

New builders of Ether who understand this principle are starting to realize that Ether has just created a toxic environment for their protocols.

Why the path of Ether (especially after the merger) will continue to drive founders to choose other blockchains.

Ether will eventually become a replacement for Bitcoin's store of value, and not a very good one at that.

Those who think a deflationary base token will benefit ecosystem activity must never have taken an economics class.

Here's why.

Smart contract layers try to be the foundation of the economy, using their tokens to fuel activity.

The economy needs inflation to promote growth.

If you don't believe me, read @CryptoHayes' recent article: https://entrepreneurshandbook.co/a-samurai-a-knight-and-a-yankee-211bf975a31d

Deflationary tokens only lead to people buying and "HODLing".

It discourages investment in the broader ecosystem and imposes an extremely high opportunity cost on anyone who tries to buck the trend ......

This is well documented in world economics.

For a more modern example, look at the impact of deflation on the Japanese economy.

Compare this to the Federal Reserve's (designed to promote growth) target inflation rate.

In the course of human history, deflationary models have never been a boost to the economy ......

So, why has Bitcoin survived?

Because bitcoin is a store of value. It's not something that builds an economy, it's just a digital commodity ...... just like gold.

However, for an economy, you need currency. The US economy relies on dollars, not gold.

This is why the deflationary model is so detrimental to ethereum.

Ether was created as a smart contract layer for the digital economy.

Now, investors need to ask themselves why invest in growth (e.g. new protocols) when they can hold and pledge ETH ......

It's getting worse ......

Due to the adjusted token economics of Ether - especially in a post-merger environment - all activity on the blockchain accumulates back into base tokens and the supply of base tokens decreases.

Using the previous example, imagine if you tried to force an economy on top of gold (with a reduced supply), but anything you did in that economy would make gold more valuable.

Why would anyone choose to spend their gold?

This is the token model of Ether going forward.

There is an additional, fatal step ......

If the protocol founders leave Ether faster, the opportunity cost of just holding and pledging ETH for smart people to get invested is too high ......

So where does the cost of driving ETH appreciation and reducing supply come from?

Yes ...... so that sucks!

The problem is, I'm not the only one who knows this sucks.

Here are the main alternatives to this dilemma, which is why these alternatives are a lifesaver

1. "Rollup will solve this problem"

No, they won't. People who say this address many broken assumptions.

They start with the assumption that Rollups/Layer-2 on ETH2 will somehow reduce the cost of execution with deflationary base tokens

This is never mathematically possible. In this reality, everyone will eventually be priced out. Try again.

Second, they assume that all Rollups are willing to pay rent to Ether for the security model of ETH.

This is just silly.

In business, if you have two providers offering you similar products at different costs, you will choose the cheaper one every time.

Also ...... remember that businesses have a responsibility to maximize value for their stakeholders?

In this case, why didn't Rollup finally decide to create its own chain?

Oh wait, that already happened.

Importantly, Rollups can lead to severe liquidity dispersion - one of the most serious problems with cryptocurrencies.

The more Rollups there are, the worse it gets and breaks the user experience.

Cross-chain bridge solutions do not address this Rollup problem (especially with slower EVM chains). There is an unavoidable composability/security tradeoff.

OK, so start from scratch with the Rollup idea ......

There is a way for the protocol founders to survive deflationary base tokens on ETH L1 via treasury management!

Let's look at this crazy hypothesis.

1. Hedge Funds

Here ...... protocol founders should keep their funds in ETH so that their income can keep pace with ETH and provide investors with a more appropriate risk/reward profile ......

Do I need to explain the downside of this?

Therefore, in order to move beyond Ether, founders must.

a) engage in active money management, which basically means becoming a hedge fund and taking advantage of market timing ......

or

b) go they have to go to another chain to capture growth.

Yes ...... go to another chain. Separate the value from Ether. Push the founders out of Ether.

That's what we said at the beginning.

Ether is starting to realize that it is failing. Builders are leaving the ecosystem in droves.

Look at the new projects coming into Web3 - they are far more likely to choose to build on competing L1s or Rollups.

This article will explain why this is happening.

There was a time when Ether started to focus on being a "robust currency". A number of improvement proposals were used to achieve this, including EIP-1559, "mergers" and a focus on deflating ETH all played a role.

These proposals directly benefit ETH holders by adjusting the token economics of ETH to derive more value from network fees ......

while aiming to reduce the supply of ETH in the process - leading smart investors to hold and pledge only ETH.

The crypto community is largely dominated by traders/investors, so these initiatives are often welcomed. People want ETH to add value (even if they use Ponzi-economy tactics)

But the goal of the business is to maximize value for the stakeholders.

New builders of Ether who understand this principle are starting to realize that Ether has just created a toxic environment for their protocols.

Why the path of Ether (especially after the merger) will continue to drive founders to choose other blockchains.

Ether will eventually become a replacement for Bitcoin's store of value, and not a very good one at that.

Those who think a deflationary base token will benefit ecosystem activity must never have taken an economics class.

Here's why.

Smart contract layers try to be the foundation of the economy, using their tokens to fuel activity.

The economy needs inflation to promote growth.

If you don't believe me, read @CryptoHayes' recent article: https://entrepreneurshandbook.co/a-samurai-a-knight-and-a-yankee-211bf975a31d

Deflationary tokens only lead to people buying and "HODLing".

It discourages investment in the broader ecosystem and imposes an extremely high opportunity cost on anyone who tries to buck the trend ......

This is well documented in world economics.

For a more modern example, look at the impact of deflation on the Japanese economy.

Compare this to the Federal Reserve's (designed to promote growth) target inflation rate.

In the course of human history, deflationary models have never been a boost to the economy ......

So, why has Bitcoin survived?

Because bitcoin is a store of value. It's not something that builds an economy, it's just a digital commodity ...... just like gold.

However, for an economy, you need currency. The US economy relies on dollars, not gold.

This is why the deflationary model is so detrimental to ethereum.

Ether was created as a smart contract layer for the digital economy.

Now, investors need to ask themselves why invest in growth (e.g. new protocols) when they can hold and pledge ETH ......

It's getting worse ......

Due to the adjusted token economics of Ether - especially in a post-merger environment - all activity on the blockchain accumulates back into base tokens and the supply of base tokens decreases.

Using the previous example, imagine if you tried to force an economy on top of gold (with a reduced supply), but anything you did in that economy would make gold more valuable.

Why would anyone choose to spend their gold?

This is the token model of Ether going forward.

There is an additional, fatal step ......

If the protocol founders leave Ether faster, the opportunity cost of just holding and pledging ETH for smart people to get invested is too high ......

So where does the cost of driving ETH appreciation and reducing supply come from?

Yes ...... so that sucks!

The problem is, I'm not the only one who knows this sucks.

Here are the main alternatives to this dilemma, which is why these alternatives are a lifesaver

1. "Rollup will solve this problem"

No, they won't. People who say this address many broken assumptions.

They start with the assumption that Rollups/Layer-2 on ETH2 will somehow reduce the cost of execution with deflationary base tokens

This is never mathematically possible. In this reality, everyone will eventually be priced out. Try again.

Second, they assume that all Rollups are willing to pay rent to Ether for the security model of ETH.

This is just silly.

In business, if you have two providers offering you similar products at different costs, you will choose the cheaper one every time.

Also ...... remember that businesses have a responsibility to maximize value for their stakeholders?

In this case, why didn't Rollup finally decide to create its own chain?

Oh wait, that already happened.

Importantly, Rollups can lead to severe liquidity dispersion - one of the most serious problems with cryptocurrencies.

The more Rollups there are, the worse it gets and breaks the user experience.

Cross-chain bridge solutions do not address this Rollup problem (especially with slower EVM chains). There is an unavoidable composability/security tradeoff.

OK, so start from scratch with the Rollup idea ......

There is a way for the protocol founders to survive deflationary base tokens on ETH L1 via treasury management!

Let's look at this crazy hypothesis.

1. Hedge Funds

Here ...... protocol founders should keep their funds in ETH so that their income can keep pace with ETH and provide investors with a more appropriate risk/reward profile ......

Do I need to explain the downside of this?

Therefore, in order to move beyond Ether, founders must.

a) engage in active money management, which basically means becoming a hedge fund and taking advantage of market timing ......

or

b) go they have to go to another chain to capture growth.

Yes ...... go to another chain. Separate the value from Ether. Push the founders out of Ether.

That's what we said at the beginning.