At the time, it was a contrarian position. ETH was trading near its yearly high. The Dencun upgrade had just launched, promising cheaper transactions and a new era of scalability. The narrative was clear: Ethereum had won the platform war.

But the data told a different story. Dencun activated on March 13, 2024 — the exact day of ETH's yearly price peak. It wasn't a coincidence. By making Layer 2 transactions nearly free, Ethereum had effectively eliminated its own tax base. The revenue that funded network security, powered EIP-1559 burns, and gave stakers real yield began to evaporate.

I wrote about it. The response was largely dismissive: "Fees don't matter for L1s." "Value accrues to the settlement layer." "The ecosystem is growing."

Eighteen months later, Ethereum's daily fee revenue has fallen from $27 million to $500,000 — a 98% collapse. The protocol generates less than 4% of the value created on its own platform. Applications built on Ethereum earn $8.2 million per day; the base layer captures $318,000. It is as if a country with a multi-trillion dollar GDP collected less tax revenue than a mid-sized city.

Everything written in these essays anticipated this trajectory. Not because of any special foresight, but because the economic framework was right: Ethereum is not a technology company, and it is not a commodity. It is a digital economy — with taxation, monetary policy, fiscal trade-offs, and governance sovereignty. And like any economy that slashes its taxes without reducing its spending, the fiscal crisis was inevitable.

What these essays propose is equally straightforward: Ethereum has the sovereignty to fix this. It can implement fee floors for L2s. It can expand L1 capacity to bring users back. It can redesign its value capture mechanisms. The technical proposals already exist — EIP-7918, EIP-7935, gas limit increases. The governance apparatus is functional. The question has never been whether Ethereum can change its economics. The question is whether it will.

Along the way, these essays develop a framework that I believe is essential for understanding any Layer 1 blockchain: the framework of political economy. Staking rewards are dividends, not expenses. Gas fees are taxes, not costs. L2s are allied nations that use a shared currency but contribute nothing to security. Blockspace is sovereign territory. The Ethereum Foundation's neutrality is not absence of policy — it is policy.

This is a body of work that began with an accounting question and ended with a thesis about digital sovereignty. The 18 essays are organized into five sections — from monetary identity to technical reform proposals — and each one can be read independently. But read together, they trace the economic argument that the largest programmable economy on Earth urgently needs to resolve: how to govern itself.

───

The collection is organized into five thematic sections. Each essay can be read independently, but read together they tell the story of an economy searching for its fiscal identity. Each essay includes a relevance rating (⭐️/10) assigned by AI based on theoretical contribution, originality, and predictive accuracy. These ratings reflect analytical assessment, not editorial preference.

📝 SECCIÓN I — Accounting & Monetary Identity

How should we account for Ethereum's economics? The answer changes everything.

Are Staking Rewards an Expense for Ethereum? (https://paragraph.com/@cryptoplaza/are-staking-rewards-an-expense-for-ethereum)

April 2024 · ⭐️ 9/10

The essay that started it all. At a time when every financial analyst was applying corporate P&L frameworks to Ethereum — and concluding it was hemorrhaging money — this essay challenged the foundational assumption: are staking rewards really an expense?

Theoretical contribution: Staking rewards function as dividends — a redistribution of value to shareholders (stakers), not an operating cost. Under this framework, Ethereum's entire fee revenue is profit. This single reclassification transforms Ethereum from a billion-dollar annual loss into a profitable economic engine. It is the accounting insight upon which every subsequent essay in this collection depends.

Why it matters: If staking rewards are expenses, Ethereum is insolvent. If they are dividends, Ethereum is profitable. There is no middle ground. The entire valuation thesis hinges on getting this right.

Ethereum Issuance (https://paragraph.com/@cryptoplaza/ethereum-issuance)

August 2024 · ⭐️ 7/10

The essay that defends the small staker. When prominent voices in the Ethereum community proposed reducing issuance to make ETH "more scarce," this essay exposed the hidden cost: cutting dividends to the solo stakers who actually decentralize the network.

Theoretical contribution: Issuance reduction is a regressive policy. Large institutional stakers (Lido, Coinbase, Binance) absorb cuts through economies of scale. Solo stakers — the backbone of decentralization — get squeezed out. It is a policy that concentrates power under the banner of sound money.

Why it matters: The debate around issuance is really a debate about who Ethereum works for. This essay frames it as an inequality problem, not a monetary one.

Ethereum's Monetary Paradox: A Currency That Thinks It's a Commodity (https://paragraph.com/@cryptoplaza/ethereums-monetary-paradox-a-currency-that-thinks-its-a-commodity)

November 2025 · ⭐️ 9/10

The identity crisis essay. Eighteen months after the accounting essay, the question had evolved: if Ethereum is an economy, what kind of money is ETH? The market prices it as oil — a commodity valued on scarcity and extraction cost. But it functions as a currency — medium of exchange in DeFi, unit of account for NFTs, store of value through staking yield.

Theoretical contribution: ETH suffers from a fundamental category error. Commodity pricing (P/Revenue, scarcity models) and currency pricing (monetary velocity, yield) lead to entirely different valuations. Until the market — and Ethereum's own governance — resolves this identity question, the token will remain mispriced. A nation that doesn't know whether it's selling oil or issuing currency cannot design coherent economic policy.

Why it matters: This essay explains why ETH "doesn't trade like it should." The answer isn't market irrationality — it's category confusion.

📝 SECCIÓN II — The Revenue Crisis

Ethereum's fee revenue has collapsed 98%. These essays traced the structural causes — before the market noticed.

───

Are Fees Really Important for L1s? (https://paragraph.com/@cryptoplaza/are-fees-really-important-for-l1s)

August 2024 · ⭐️ 8/10

The essay that challenged the most comfortable lie in crypto. "Fees don't matter for L1s" was the dominant narrative throughout 2024. This essay dismantled it with data and first principles.

Theoretical contribution: Fees are the only organic demand driver for ETH. They power the EIP-1559 burn mechanism, fund real staking yields, and create genuine buy pressure. Without fee revenue, ETH has no economic engine — only narrative and speculation. Fees are not a nuisance; they are the tax base of a digital economy.

Why it matters: This essay was written when ETH fees were still healthy. The prediction that fee erosion would undermine everything — token value, security budget, staker incentives — has been fully validated by the 98% fee collapse.

───

Deterioration of Ethereum Demand (https://paragraph.com/@cryptoplaza/deterioration-of-ethereum-demand)

August 2024 · ⭐️ 9/10

The most prescient essay in the collection. Written weeks after the Dencun upgrade, when the industry was celebrating cheaper L2 transactions, this essay identified the structural damage before it showed up in the price.

Theoretical contribution: Dencun activated on March 13, 2024 — the exact day of ETH's yearly price peak. This was not coincidence; it was causation. By introducing near-free blob transactions, Ethereum executed the fiscal equivalent of a massive tax cut it could not afford. Users migrated to L2s. L1 fee revenue collapsed. The security budget began to erode.

Why it matters: This essay predicted with precision the revenue trajectory that unfolded over the following 18 months. At the time, the market dismissed the fee decline as temporary. It was structural.

───

Are Gas Prices in Ethereum Predictable? (https://paragraph.com/@cryptoplaza/are-gas-prices-in-ethereum-predictable)

September 2024 · ⭐️ 7/10

The pricing mechanism essay. Beyond the level of fees, there is a deeper problem: Ethereum's pricing is chaotic, unpredictable, and increasingly controlled by intermediaries.

Theoretical contribution: Gas price volatility makes Ethereum unsuitable for any transaction requiring cost certainty. Worse: a small oligopoly of L2 sequencers now controls the majority of transaction flow, paying near-zero fees to the base layer. Ethereum has not just lost revenue — it has outsourced its pricing power to entities with no obligation to contribute to network security.

Why it matters: Even if demand returns, the pricing mechanism is broken. This essay identifies the structural reform needed: Ethereum must reclaim control over how its blockspace is priced.

───

Ethereum Must Defend Its Premium: The Laffer Curve Perspective (https://paragraph.com/@cryptoplaza/ethereum-must-defend-its-premium-the-laffer-curve-perspective)

April 2025 · ⭐️ 9/10

The macroeconomics essay. The Laffer Curve — the principle that both zero taxation and excessive taxation produce zero revenue — had never been applied to blockchain economics. This essay did it.

Theoretical contribution: In 2021, Ethereum was on the right side of the Laffer Curve: gas fees were so high they priced out ordinary users. After Dencun, it swung to the extreme left: fees near zero, maximum activity, minimum revenue. The optimal point — where total revenue is maximized — lies between these extremes. Finding it is the central fiscal challenge for Ethereum governance.

Why it matters: This framework transforms the fee debate from a technical question ("how much should gas cost?") into an economic policy question ("what is the optimal tax rate for this digital economy?"). It is the intellectual bridge between Parts II and III.

📝 SECCIÓN III — Governance & The Ethereum Foundation

Ethereum has the sovereignty to fix its economics. These essays ask whether it has the will.

───

Reclaiming Ethereum's Value (https://paragraph.com/@cryptoplaza/reclaiming-ethereums-value-realigning-economics-with-the-ecosystems-reality)

April 2025 · ⭐️ 8/10

The proposals essay. After diagnosing the problem across five previous essays, this one offers concrete, implementable solutions — designed not as theoretical exercises but as potential EIPs.

Theoretical contribution: Three fiscal reforms: (1) A blob fee floor at 4% of execution gas, establishing a minimum contribution from L2s to network security — the digital equivalent of a federal tax floor. (2) ETH as a Digital Bond, guaranteeing a 4% staking yield funded by fee revenue — transforming ETH from a speculative asset into a productive one. (3) Retroactive grant commissions, funding core development through value capture rather than treasury depletion.

Why it matters: This essay moved the conversation from "what is wrong" to "what can be done." The blob fee floor concept anticipated EIP-7918, which emerged months later from independent researchers — validating the economic logic.

───

Ethereum Digital Economy (https://paragraph.com/@cryptoplaza/ethereum-digital-economy)

May 2025 · ⭐️ 9/10

The manifesto. If the revenue crisis essays diagnosed the illness and the proposals essay offered treatment, this essay redefines what the patient actually is.

Theoretical contribution: Ethereum is not a "world computer" — it is a digital economy. Gas fees are taxes. Staking rewards are dividends. L2s are allied nations using a shared currency. Blockspace is sovereign territory. This is not metaphor; it is the correct analytical framework. Once adopted, every governance decision becomes recognizable as fiscal policy — and fiscal policy can be debated, designed, and changed through democratic process.

Why it matters: This essay provides the conceptual vocabulary for the entire collection. Without it, the fee debate remains technical. With it, the fee debate becomes political economy — which is what it always was.

───

The Paradox of Subtraction (https://paragraph.com/@cryptoplaza/the-paradox-of-subtraction-how-ethereums-pursuit-of-purity-threatens-its-future)

October 2025 · ⭐️ 8/10

The most politically charged essay. The Ethereum Foundation adopted "subtraction" as its guiding philosophy — doing less, staying neutral, avoiding any intervention in economic outcomes. This essay argues that subtraction is not wisdom; it is abdication.

Theoretical contribution: Neutrality without value capture is not virtue; it is surrender. The Foundation's refusal to engage with economic incentives does not make Ethereum more "pure" — it makes it poorer. Meanwhile, competing ecosystems (Solana, Avalanche, Sui) actively invest in growth, subsidize developers, and design tokenomics that capture value. Subtraction in the presence of competition is self-imposed decline.

Key insight: "Silence is not neutrality. Silence is policy." Every decision the Foundation does not make is still a decision — with economic consequences borne by stakers, developers, and users.

───

Ethereum Is Not Linux (https://paragraph.com/@cryptoplaza/ethereum-is-not-linux-%E2%80%94-and-the-foundation-is-taking-us-there)

February 2026 · ⭐️ 9/10

The most provocative essay. Linux is the Foundation's implicit model: open-source infrastructure that wins by being free and neutral. But Linux's economic reality is a warning, not an aspiration.

Theoretical contribution: Linux succeeded — and captured zero economic value. Every dollar of value created on Linux accrued to the companies built on top of it: Red Hat, Google, Meta, Amazon. Linux the infrastructure is ubiquitous; Linux the asset is worthless. If Ethereum follows the same path — maximum openness, minimum value capture — then ETH the token becomes a utility with no economic rights. The applications will thrive. The protocol will starve.

Key insight: "Hope is not strategy." The Foundation's belief that value will naturally accrue to the base layer has no historical precedent and contradicts every economic framework. Value must be captured by design, not by faith.

📝 SECCIÓN IV — Valuation Framework

Traditional models fail for Ethereum. These essays build new ones.

───

Understanding Ethereum's Token Demand: A Micro Approach (https://paragraph.com/@cryptoplaza/understanding-ethereums-token-demand-a-micro-approach)

November 2025 · ⭐️ 8/10

The demand decomposition essay. Instead of modeling ETH demand as a single variable, this essay separates it into four distinct sources — each with different drivers, different elasticities, and different implications for price.

Theoretical contribution: Four types of demand for ETH: (1) Organic (~$218M/yr): gas fees — the only purely fundamental demand. (2) Monetary (~$23.8B stock): DATs, ETFs, strategic reserves — 12.8 million ETH locked by institutions who treat it as a monetary asset. (3) Productive (~$1.26B/yr): 34 million ETH staked for yield. (4) DeFi (~$50B TVL): collateral, liquidity pools, composability.

Key insight: Organic demand has collapsed 98%. But monetary and productive demand are at all-time highs. The market is accumulating ETH for what it represents — participation in a digital economy — not for what it currently earns. This is either visionary accumulation at generational prices, or collective delusion on an extraordinary scale. The distinction depends entirely on governance.

───

Are Layer 1s Overvalued — or Are We Valuing the Wrong Thing? (https://paragraph.com/@cryptoplaza/are-layer-1s-overvalued-%E2%80%94-or-are-we-valuing-the-wrong-thing)

December 2025 · ⭐️ 9/10

The category problem essay. At 1,029x P/Revenue, Ethereum is either the most overvalued asset in financial history — or the market is applying the wrong framework entirely.

Theoretical contribution: The valuation paradox dissolves when you recognize that L1 tokens exist in a category that traditional finance has never encountered. As commodities, they are wildly overvalued. As equity in a company, they are absurd. But as jurisdictions — with sovereign monetary policy, taxation authority, a GDP of billions, and a population of millions of active addresses — the numbers begin to make sense. The market cap of a jurisdiction is not its annual tax revenue times a P/E multiple; it is the present value of all economic activity that jurisdiction enables and can potentially tax.

Why it matters: This essay explains why P/Revenue ratios are misleading for L1s — and proposes the alternative: valuation through the lens of political economy, where sovereignty itself has value.

───

Ethereum as an Open Source Digital State (https://paragraph.com/@cryptoplaza/ethereum-as-an-open-source-state)

January 2026 · ⭐️ 10/10

The masterpiece. The culmination of two years of research. This essay formalizes everything that came before into a complete analytical framework for Ethereum as a state.

Theoretical contribution: A formal model of Ethereum as a digital state providing five public services (consensus, execution, data availability, identity, governance), governed by seven constitutional principles (permissionless access, censorship resistance, credible neutrality, composability, transparency, minimal extraction, community governance). The essay develops a complete fiscal framework — taxation through gas fees, monetary policy through issuance, sovereign wealth through accumulated burns — and applies human capital theory to argue that Ethereum must invest in its people, not just its code.

Why it matters: This is the essay that transforms the entire collection from a series of critiques into a constructive framework. It does not just diagnose the revenue crisis — it provides the intellectual architecture for resolving it. If Ethereum's governance ever adopts a coherent fiscal strategy, the analytical tools are here.

📝 SECCIÓN V — Technical Analysis + Cierre

Economic sovereignty requires concrete mechanisms. These essays evaluate the EIPs that could resolve the crisis.

───

EIP-7918: Restoring Economic Balance to the Blob Market (https://paragraph.com/@cryptoplaza/eip-7918-restoring-economic-balance-to-ethereums-blob-market)

November 2025 · ⭐️ 9/10

The most actionable essay. While other analyses remained at the level of principle, this one examines a specific proposal with the precision of a fiscal analyst.

Theoretical contribution: EIP-7918 establishes a dynamic price floor for blob fees — the blob base fee can never fall below 1/16th of the execution base fee. The mechanism is elegant: it links L2 contribution to network activity, prevents the collapse to 1 wei, and creates a minimum "tax" that L2s must pay for security. The estimated impact — a 1-3% increase in blob contribution to ETH burn — is modest. But the precedent is historic: it would be the first time Ethereum governance explicitly exercises fiscal sovereignty over its L2 ecosystem.

Why it matters: EIP-7918 is not just a technical fix. It is a constitutional moment — the point at which Ethereum decides whether L2s are free riders or contributing members of the economy.

───

Fusaka & EIP-7935: Raising the Gas Limit to 60M (https://paragraph.com/@cryptoplaza/ethereums-fusaka-upgrade-and-eip-7935-raising-the-gas-limit-to-60-million-%E2%80%94-expanding-capacity-without-diluting-value)

November 2025 · ⭐️ 8/10

The L1 scaling essay. While the industry focused on L2s as the scaling solution, this essay makes the case for scaling the base layer itself.

Theoretical contribution: A 66% increase in L1 transaction capacity. The economic logic is Laffer-adjacent: more transactions at lower individual cost can generate more total revenue than fewer transactions at higher cost. This is how cities work — expand the territory, allow more residents, share infrastructure costs across a larger base. Build more floors in Manhattan instead of sending everyone to the suburbs.

Why it matters: L1 scaling is the most underrated solution to the revenue crisis. It brings users back to the base layer, restores fee revenue, and eliminates the dependency on L2s for economic activity. It is the fiscal equivalent of expanding the tax base by growing the economy.

───

Fusaka & PeerDAS: Scaling Ahead of Demand (https://paragraph.com/@cryptoplaza/ethereums-fusaka-upgrade-and-peerdas-a-financial-analysis-of-scaling-ahead-of-demand)

November 2025 · ⭐️ 8/10

The bearish technical essay. PeerDAS is technically impressive — scaling data availability from 3 blobs to 72, a 24x increase. But this essay subjects it to financial analysis, not just engineering praise.

Theoretical contribution: When demand for blobspace is already insufficient to generate meaningful fees, expanding supply by 24x pushes prices further toward zero. PeerDAS makes Ethereum's data layer more powerful and less valuable simultaneously. It is the engineering equivalent of building a 24-lane highway to a town with no traffic. The technology is sound. The economics are destructive.

Key insight: "Scaling without value capture turns ETH from a productive economic asset into a pure utility." This is the central tension in Ethereum's roadmap: the engineering community optimizes for capacity while the economic base erodes beneath it.

───

The Central Thesis

Ethereum is not overvalued at 1,029x P/Revenue. It is strategically unresolved.

The protocol hosts $159 billion in stablecoins at an effective tax rate of 0.14%. It secures $224 billion in market capitalization on $218 million in annual revenue. Applications built on Ethereum generate $8.2 million per day; the base layer captures 3.9% of that value.

These are not the numbers of a failed economy. They are the numbers of an economy that has not yet implemented coherent fiscal policy.

Ethereum has the governance sovereignty to change its economics — blob fee floors, gas limit expansions, value capture mechanisms. The technical proposals exist. The governance apparatus exists. What remains to be seen is whether the political will exists.

The revenue crisis is real. But so is the sovereignty.

───

Jesús Pérez Sánchez

Crypto Plaza Research

February 2026

All essays available at paragraph.com/@cryptoplaza

The Ethereum Foundation is steering Ethereum toward a Linux model.

And if that vision prevails, ETH as a monetary asset will slowly die.

The Linux Temptation

Linux is one of the greatest technological achievements in history.

It is:

• Open.

• Neutral.

• Technically excellent.

• Globally adopted.

But Linux does not have a currency.

Linux does not need to sustain a monetary premium.
Linux does not rely on its native token to secure billions of dollars.
Linux does not collapse if its “unit of value” depreciates.

Linux survives because corporations build on top of it and monetize elsewhere.

Ethereum cannot afford that model.

Because Ethereum is not just infrastructure.
It is an economy.

The Dangerous Drift

The Foundation’s posture increasingly reflects a philosophy that sounds like this:

• Maximize neutrality.

• Minimize value extraction.

• Lower fees.

• Push execution to Layer 2.

• Let the ecosystem figure out monetization.

This works for Linux.

It does not work for a monetary system.

When Ethereum aggressively reduces base layer fee capture and shifts economic activity outward without a coherent value recapture mechanism, it is not just “scaling.”

It is hollowing out its own monetary base.

Open Source Without Value Capture Is a Subsidy Model

Traditional open-source ecosystems rely on:

• Donations

• Corporate sponsorships

• Foundations with treasuries

• Volunteer labor

• Indirect monetization layers

Is that the future envisioned for Ethereum?

Because if so, we should say it clearly:

That is a regression.

Ethereum briefly escaped the fundamental curse of open source:

World-changing technology that struggles to fund itself sustainably.

ETH’s scarcity, burn mechanism, and strong demand created something unprecedented:
A self-funding digital economy.

For a moment, open-source innovation was directly capitalized through a native monetary asset.

Talent was paid not through charity —
but through value creation embedded in the protocol itself.

That was revolutionary.

And now we are drifting away from it.

A Weak ETH Means a Weak Ethereum

Let’s be brutally honest:

• Core developers are well compensated.

• The Foundation has reserves.

• The roadmap advances.

But all of it ultimately depends on ETH retaining strength.

If ETH weakens structurally:

• Security weakens.

• Treasury purchasing power weakens.

• Talent retention weakens.

• External capital confidence weakens.

And if the Foundation signals — implicitly or explicitly — that the asset price is irrelevant, it sends a devastating message:

“ETH is not our concern.”

If ETH is not the Foundation’s concern, why should it be investors’ concern?

Why should it be institutions’ concern?
Why should it be sovereign capital’s concern?

A sovereign digital economy whose leadership treats its currency as a side effect is not sovereign.

It is naive.

The Argentina Problem

There is a dangerous macroeconomic analogy here.

A country can lower taxes and become “competitive.”
It can suppress yields.
It can subsidize activity.

But if its currency collapses in the process, competitiveness becomes irrelevant.

You may attract activity.
But you lose monetary credibility.

You lose the ability to import talent.
You lose capital stability.
You lose long-term trust.

If Ethereum compresses structural demand for ETH while simultaneously promoting low-fee abundance without monetary counterbalance, it risks recreating that dynamic in digital form.

A devalued ETH does not strengthen Ethereum.
It destabilizes it.

The Missing Discipline

What is most alarming is not the technical roadmap.

It is the absence of explicit monetary strategy.

In major Foundation communications:

• Where is the framework for protecting ETH’s premium?

• Where is the analysis of fee compression vs. security budget?

• Where is the discussion of long-term fiscal sustainability?

• Where is the recognition that ETH is not a governance token — but the backbone of the entire economy?

Silence is not neutrality.

Silence is policy.

And right now, that policy feels like:
“Let’s build great tech and hope the asset sorts itself out.”

Hope is not strategy.

Ethereum Must Choose

Ethereum faces a fork in philosophy:

1. Become Linux — neutral, technically dominant, economically hollow.

2. Become a sovereign digital economy — technically strong and financially disciplined.

The Linux path produces immense technical value.

But the monetary upside accrues elsewhere.

If Ethereum chooses that path, value will migrate to:

• L2 tokens.

• Application tokens.

• Infrastructure companies.

• Off-chain intermediaries.

ETH becomes a coordination commodity.
Not a capital asset.

And once that transition is complete, reversing it will be nearly impossible.

From Accident to Intention

Ethereum’s strongest phase was not an accident — but it was not fully intentional either.

Scarcity + burn + demand created a powerful reflexive asset.

That asset funded innovation at scale.

Now we are at risk of dissolving that reflexivity under the banner of “accessibility” and “neutrality.”

Neutrality without value capture is not virtue.
It is surrender.

Ethereum needs:

• Monetary leadership, not only technical leadership.

• Economic strategy, not only roadmap execution.

• Explicit protection of ETH’s premium, not embarrassment about it.

Because if the Foundation does not defend the asset,
the market eventually will stop defending it too.

And when that happens,
Ethereum will not become Linux.

It will become irrelevant capital.

BTC 2025 return: USD vs EUR

Using closes from Dec 31, 2024 to Dec 31, 2025:

• BTC in USD

  • Dec 31, 2024: $93,460.42

  • Dec 31, 2025: $87,501.95

  • 2025 return (USD): (87,501.95/93,460.42)−1(87,501.95 / 93,460.42) - 1(87,501.95/93,460.42)−1 ≈ -6.37%
    (Consistent with external estimates around ~-6.33% / -6.34%)

• BTC in EUR

  • Dec 31, 2024: €90,074.43

  • Dec 31, 2025: €74,500.96

  • 2025 return (EUR): (74,500.96/90,074.43)−1(74,500.96 / 90,074.43) - 1(74,500.96/90,074.43)−1 ≈ -17.29%

Numeric takeaway: in 2025, BTC fell ~-6.4% in USD, but ~-17.3% in EUR.
That gap (about -10.9 percentage points) is huge for “the same asset”.

What does this tell us about the impact of the currency?

Think of your “real” return in your base currency (EUR if you live/spend in euros) as:

Return (BTC in EUR) ≈ Return (BTC in USD) + Return (USD/EUR)
(approximate, but very useful intuition)

Since BTC in EUR did ~10.9 pp worse than in USD, that suggests that in 2025 the USD weakened versus the EUR (or, equivalently, the EUR strengthened). In other words: even if Bitcoin only fell “a little” in dollars, once you convert to euros the hit was much larger.

Practical reflection (for investing)

1. Your “correct benchmark” depends on your spending currency.
   If your expenses, taxes, and lifestyle are in EUR, your truth is EUR. Measuring in USD can give you a false sense of safety (or euphoria).

2. FX is an additional risk factor, even if you didn’t explicitly “buy it.”
   Investing in USD-priced assets (US stocks, BTC on USD-based venues, etc.) already introduces USD risk. Sometimes it boosts returns; other times it drags them down.

3. In crypto, FX can feel secondary… until a year like 2025 makes it obvious.
   -6% vs -17% changes decisions: acceptable drawdown, position sizing, rebalancing, and even investor psychology.

4. Hedging: not always, but worth thinking about.
   I’m not saying “always hedge” (it has costs and depends on your horizon), but:

   • If your goal is preserving purchasing power in EUR, measure, report, and decide in EUR.

   • If you report to investors in different currencies, clearly separate:

     • asset return (BTC)

     • FX return (USD/EUR)

Clean decomposition in English, splitting the -17.3% in EUR into:

1. BTC move in USD (the “asset” component)

2. EUR/USD move (the FX translation effect when you measure in EUR)

Inputs (prices + ECB FX)

BTC (close)

• Dec 31, 2024: BTC-USD = 93,460.42

• Dec 31, 2025: BTC-USD = 87,501.95

• Dec 31, 2024: BTC-EUR = 90,074.43

• Dec 31, 2025: BTC-EUR = 74,500.96

ECB EUR/USD (1 EUR = X USD)

• Dec 31, 2024: you provided 1 EUR = 1.0389 USD (I use it as given)

• Dec 31, 2025: 1 EUR = 1.1750 USD

Step 1) BTC return in USD (asset component)

(That matches the ~-6.4% figure.)

Step 2) FX effect (EUR/USD translation)

To translate USD prices into EUR:

So the FX factor from 2024→2025 is:

Interpretation: the euro strengthened versus the dollar in 2025 (EUR/USD rose), which subtracts ~11.6% from USD-denominated performance when viewed in EUR.

Paso 3) Resultado combinado en EUR (activo + FX)

That’s essentially the same as the -17.29% you get directly from BTC-EUR closes (tiny gap = rounding + different data sources/close conventions).

Final decomposition (percentage points)

• BTC (in USD): -6.37%

• FX (EUR/USD): -11.58%

• Combined (multiplicative): -17.23% (vs -17.29% observed)

Quick takeaway: for a EUR-based investor in 2025, FX explained roughly two-thirds of the drawdown (about 11.6 out of 17.2 points), and the rest came from BTC itself.

If there is one chart that matters above all others when valuing Sky, it is the stablecoin supply chart. Everything else—revenues, buybacks, staking yields, ecosystem expansion—ultimately rolls up into one outcome: how much stablecoin supply the system can sustain and grow over time.

Stablecoin supply is not just a vanity metric. It is the closest thing in crypto to a “core product KPI,” because it captures demand, trust, distribution, capital efficiency, and market positioning in one number. For Sky, whose economic engine is built around the stablecoin layer, supply is the cleanest and most objective measure of whether the protocol is winning or losing.

That is why the central question for valuation is not whether Sky has good technology, strong governance, or compelling token narratives. The core valuation question is far more concrete:

What growth scenario is most likely for Sky’s stablecoin supply and market share, and how credibly can the protocol execute it?

In 2022, the valuation case for MakerDAO (and now Sky) was extraordinary. The fundamental thesis at the time was simple and powerful: the stablecoin market would grow exponentially, and the category leader would capture a meaningful share of that growth. Back then, DAI had reached approximately $10 billion of supply in a total stablecoin market of roughly $180 billion, implying a market share of about 5.6%.

Four years later, reality looks very different. The stablecoin market has indeed grown aggressively—surpassing $300 billion—but Sky’s stablecoin supply remains below $10 billion. In other words, the market expanded, yet Sky did not participate proportionally. The protocol’s share of the stablecoin sector materially declined over that period. By early 2025, Sky’s supply had fallen to roughly $5 billion, while the total stablecoin market stood near $200 billion, implying only ~2.5% market share. That drawdown in both absolute supply and relative positioning is the central reason why the protocol’s valuation narrative became far more contested.

And yet the supply chart now suggests a potential regime change. From early 2025 to early 2026, Sky’s stablecoin supply has risen from roughly $5 billion to approximately $9.2 billion, while the stablecoin market expanded from ~$200 billion to ~$300 billion. That means Sky captured approximately $4.2 billion of the $100 billion incremental stablecoin market growth—roughly 4.2% of new stablecoin expansion during that period. Market share has improved from ~2.5% to ~3.1%, signaling what may be the first meaningful shift from multi-year contraction to renewed expansion.

This is why the supply chart is the starting point of any serious valuation exercise. It does not merely describe the past; it defines the decision tree for the future. If Sky can stabilize and grow its share of stablecoin supply—particularly in a market that could structurally expand for many years—then the protocol’s valuation can re-rate meaningfully. If it cannot, then no amount of narrative, buybacks, or yield engineering will compensate for the underlying reality that the core product is not compounding.

The rest of this analysis therefore builds on a single premise: Sky’s valuation depends primarily on the probability-weighted scenarios of stablecoin supply growth and market share capture. Everything else is secondary.

2. The Inflection Point: What Changed in 2025?

The inflection point for Sky is best understood as the culmination of a long transition toward a fundamentally different strategic model. 2025 marks the end of the restructuring phase and the start of a new regime: a system designed to position Sky as the stablecoin ecosystem capable of delivering the most attractive risk-adjusted remuneration in the market.

This matters because, historically, yield has been one of the most powerful catalysts for stablecoin adoption. The stablecoin market is not purely utility-driven; it is reflexive and incentive-sensitive. The clearest examples are well-known: Terra/Luna accelerated adoption through a heavily subsidized ~20% yield, while Ethena experienced a similarly explosive TVL expansion by offering temporarily exceptional yields through aggressive incentives and favorable market conditions. Ethena’s growth was strong enough at times to surpass Sky in stablecoin supply, reinforcing a hard truth: in the modern stablecoin landscape, higher yields can drive adoption faster than product narratives or brand recognition.

The most rational explanation for Sky’s recent supply recovery is therefore straightforward: Sky’s TVL expansion coincided with stablecoin yields moving back into the double digits. This is not an accident. The market has repeatedly demonstrated that, when investors are offered sustainable-looking high yield on a stable asset, capital migrates quickly.

However, the crucial variable is not whether yield can drive growth—it can. The real question is whether those yields are economically sustainable. Terra proved that structurally unbacked yields can be fatal. Ethena has shown that even sophisticated yield designs can become difficult to maintain at scale, especially when market conditions change, basis compresses, or incentives become too expensive relative to organic revenue.

This sustainability constraint is what makes the stablecoin growth battle particularly difficult, because the largest stablecoins in the market—USDT and USDC—do not pay yield to end users at all. Their growth has historically been driven by a different engine: trading utility and distribution dominance. They are used as base assets for spot and derivatives trading and serve as the primary settlement currency across centralized exchanges and large liquidity venues. In many cases, their issuers may share revenue with distribution partners (USDC is a good example), but that yield is not visible to retail holders. The user-facing product remains simple: “the stablecoin you need to trade.”

Sky has participated in that trading-based growth engine in the past—DAI was once a major settlement asset and swap counterparty. But today, the protocol does not appear to be pursuing the same distribution-first strategy at scale. In fact, one of the most revealing indicators of Sky’s current positioning is that the SKY token itself often has deeper liquidity against other stablecoins than against its own stablecoin system. That detail may seem technical, but it reflects a strategic reality: Sky is not currently winning the stablecoin distribution war on CEXs and trading venues in the same way legacy stablecoins do.

This is where Sky’s new model becomes strategically meaningful. If Sky is not going to win primarily through exchange settlement dominance, then it must win through a different wedge. And today, the most defensible wedge it appears to have is this:

Sky may be the only large-scale stablecoin ecosystem with a credible path to delivering persistent “extra yield” (alpha-like stablecoin returns) in a way that is structurally integrated into the protocol.

This is precisely the role that the new Stars architecture is designed to play. The Stars model is not merely a branding exercise—it is a system designed to industrialize the search for sustainable extrayield by allocating capital into structured strategies and yield-generating primitives. That is why the ecosystem is heavily focused on projects such as Spark, Grove, Keel, and other components of the emerging architecture. They are not ancillary products; they are intended to serve as the primary emission engines of stablecoin supply growth by providing yields that can remain competitive without relying entirely on inflationary subsidies.

Of course, this strategy introduces new risks. Yield does not appear from nowhere: it must be generated through exposure to risk premiums, structured strategies, counterparty dynamics, or duration and credit-like risks. Pursuing extrayield at scale inevitably increases complexity and introduces new points of failure. But the alternative is equally clear: without a compelling yield edge—or without a compelling distribution edge—stablecoin market share does not compound. That is what the 2022–2024 period demonstrated, when Sky’s supply stagnated while the stablecoin market expanded materially.

This is why the restructuring period has been so punishing for valuation. The protocol has historically been profitable and has invested heavily in its roadmap, yet it delivered no meaningful stablecoin supply growth for several years. In public markets, that combination—profitability plus investment, but no growth—typically results in valuation compression. Sky’s token price has been penalized not because the protocol lacks revenue, but because the market began to question its ability to translate investment into stablecoin market share expansion.

If 2025 truly represents the transition into a sustainable growth regime—where the Stars architecture can deliver durable extrayield and drive stablecoin expansion—then 2026 may become the first year in which that growth re-prices the asset. Sky is already highly profitable. What has been missing is not cash generation, but credible compounding in the core KPI: stablecoin supply. The recent reversal from ~$5B to ~$9B suggests the inertia may be shifting. And if that shift holds, the valuation framework must change with it.

An additional factor supporting Sky’s recent supply recovery is capital migration from Ethena following periods of liquidation stress and a concurrent decline in Ethena’s effective user-facing yields.
During episodes of market volatility, Ethena’s design has demonstrated sensitivity to funding conditions, basis compression, and liquidation dynamics, which can temporarily impair both perceived safety and headline returns. As yields compressed and risk perceptions increased, part of the capital that had previously been attracted by Ethena’s exceptional remuneration appears to have rotated into alternative stablecoin systems offering a more conservative risk profile.

Sky has likely been a natural beneficiary of this rotation. As a protocol with a longer operational history, deeper governance infrastructure, and a reputation for risk conservatism, Sky represents a credible “flight-to-quality” destination when aggressive yield strategies become less attractive. This dynamic reinforces the broader thesis: stablecoin supply is highly sensitive not only to absolute yield levels, but also to relative changes in risk-adjusted returns across competing ecosystems.

3. Sky as a Central Bank: Policy Rate, Credit Creation, and the Search for Sustainable Yield

To understand the growth logic of Sky’s new architecture, it is useful to view the ecosystem through a macro-financial lens. Sky is not simply issuing a stablecoin and distributing yield. It is increasingly behaving like a central bank and credit allocator within an emerging onchain financial system.

At the center of the model is what can be described as a base policy rate—a minimum yield level that the ecosystem aims to deliver to stablecoin holders. That policy rate is not free. It must be funded through productive deployment of stablecoin liabilities into strategies and credit channels capable of generating returns above the base rate. In that sense, Sky resembles a central bank that establishes an official rate and then extends credit to a network of entities—internal strategies, external borrowers, and structured financial primitives—that must earn higher rates in order to (1) pay the official yield, and (2) generate net revenue for the protocol through the margin.

This framing is critical because it clarifies the true strategic challenge: the “Stars” architecture is fundamentally a system designed to arbitrage Sky’s base rate. Each Star is not merely a product. It is a credit deployment engine: a vehicle whose purpose is to discover, scale, and industrialize yield opportunities that can support the base rate while preserving solvency and generating surplus.

However, sustaining this model is structurally difficult. Unlike early DeFi cycles where yield could be “manufactured” through inflation, Sky’s current approach is increasingly constrained by the reality of competitive return markets. Finding attractive yield purely inside crypto is not trivial.

3.1. Where does yield come from? A constrained opportunity set

Historically, one of the dominant yield sources inside crypto has been leverage demand—funding traders, basis trades, and structural borrowing needs. But this channel is highly cyclical and increasingly competitive. Leverage-driven yield compresses dramatically when volatility declines, when leverage appetite fades, or when market structure becomes more efficient. It also introduces pro-cyclicality: when markets turn down, leverage demand collapses at the same time as risk rises, creating precisely the environment where stablecoin ecosystems become fragile.

Outside of crypto, the most obvious yield source is exposure to traditional fixed income—Treasury bills, investment-grade credit, or structured corporate bond portfolios. But this is where competition becomes intense. The “real yield” trade has attracted extraordinary capital, and competition in tokenized fixed income is increasingly pointing toward one of the most efficient activities in traditional finance: credit intermediation at scale.

This implies a paradox: the more tokenization becomes mainstream, the more the onchain credit market may begin to resemble traditional finance in its efficiency and compressed spreads. In that regime, the remaining opportunities may concentrate in the margins—where either (a) traditional finance is not willing to lend due to regulatory constraints or risk preferences, or (b) where onchain infrastructure provides unique advantages that allow it to originate demand that banks cannot service efficiently.

3.2. The risk of adverse selection: what banks won’t finance

One of the key risks in this transition is the classic problem of adverse selection. If onchain credit markets compete directly with banks on high-quality borrowers, spreads may compress to the point where the risk-adjusted return no longer funds Sky’s base rate plus a margin. The residual opportunities may then become dominated by borrowers that banks do not want to finance—either because of higher default risk, weaker collateral structures, jurisdictional exposure, or informational opacity.

If that dynamic dominates, yield generation may become increasingly dependent on taking credit risk that is structurally inferior to what the banking system avoids. That would create a fragile growth model: supply expands, but solvency risk rises silently.

3.3. The counterforce: structural advantages of onchain credit

Yet there is also a powerful countervailing force. Onchain credit markets can offer structural advantages that traditional finance cannot easily replicate:

1. Lower structural cost base
   Onchain systems can operate with dramatically lower overhead than banks, particularly in distribution, servicing, and settlement.

2. Access to global demand
   Perhaps the most underappreciated advantage is the ability to serve jurisdictions that do not have deep, functional financial systems. Traditional banking systems struggle to profitably reach many parts of the world where credit demand is real but infrastructure is weak.

3. Speed and flexibility
   Onchain credit markets can structure and deploy capital faster, with more flexible collateral frameworks, and potentially more granular risk segmentation.

These structural advantages may generate new credit demand rather than merely competing for existing borrowers. In other words, onchain credit could become not just a substitute for bank lending, but an additional layer of financial inclusion and capital formation — especially if collateralization, transparency, and enforcement mechanisms evolve.

3.4. The “onchain economy” as a credit opportunity

Beyond traditional borrowers, the fastest-growing opportunity may be credit demand from the new generation of onchain-native technology companies and protocols. The emergence of onchain businesses, infrastructure providers, and tokenized real-world networks may create structurally new credit needs: working capital, treasury management, strategic financing, and collateralized borrowing within transparent frameworks.

If this segment grows, Sky becomes positioned not merely as a stablecoin issuer, but as a fundamental credit layer of a new financial system.

3.5. The real battlefield: risk management as a growth moat

This brings us to the most important strategic conclusion of the central-bank framing:

If Sky is attempting to become a scalable global credit allocator, then risk management becomes the core competitive advantage.

In traditional finance, the most powerful institutions are not those with the highest yield—they are those with the best risk-adjusted underwriting, the deepest liquidity discipline, and the strongest survival capabilities across cycles. If Sky can build an institutional-grade risk engine—one capable of scaling yield strategies and credit deployment without repeating the fragility of prior stablecoin experiments—then the protocol may be able to compound supply growth while preserving trust.

And that is ultimately the key constraint. Sky’s stablecoin can only grow if its liabilities remain credible across regimes. Yield can drive growth, but trust is what sustains it. The future of Sky, therefore, is not only about finding yield. It is about building an architecture that can repeatedly generate yield without compromising solvency, credibility, or long-term governance integrity.

In that sense, Sky’s 2025 inflection point may represent more than a recovery in TVL. It may represent the transition into a fundamentally different strategic posture: from a stablecoin protocol competing for DeFi relevance to a financial system attempting to compete for a meaningful share of the global credit market — where scale is large, competition is real, and risk management determines survival.

4 The Sustainable Yield Problem: Can the Base Rate Hold?

Sky’s new strategy implicitly depends on one central claim: that the ecosystem can offer a stablecoin yield that is structurally attractive relative to competitors, while remaining solvent and credible through market cycles. This is not merely a marketing proposition—it is a financial constraint. In the “central bank” framing, Sky sets an internal policy rate and then must repeatedly find and scale investment and credit channels whose returns exceed that rate plus a safety margin.

The difficulty is that stablecoin yield is not a natural free lunch. Every basis point of sustainable yield must come from one of three sources: (1) risk premia, (2) market inefficiencies, or (3) deliberate redistribution mechanisms. The long-term viability of Sky’s policy rate therefore depends on the degree to which those sources remain available at scale, and on whether the protocol can manage the risk embedded in each.

4.1. A taxonomy of yield sources: structural vs cyclical vs transfer

To model sustainability, yields must be decomposed into three categories:

(A) Structural yield
Return generated by durable sources that can persist through cycles. Examples include:

• short-duration government bills or high-quality credit instruments (if accessible at scale)

• long-term risk premia in lending markets supported by robust underwriting

• stable demand for credit from onchain-native businesses that is not purely speculative

Structural yield is the most valuable because it produces the closest equivalent to “cashflow,” and because it can be capitalized in valuation models similarly to a real-world financial franchise.

(B) Cyclical yield
Return generated primarily during favorable market regimes:

• leverage demand, basis trades, funding rate capture

• volatility-driven spreads and trader demand

• speculative demand for credit during bull cycles
  

Cyclical yield is not useless—it can be extremely profitable—but it is unstable. If Sky’s stablecoin expansion is mainly driven by cyclical yield, then stablecoin supply becomes correlated with bull-market conditions and may contract meaningfully when returns compress.

(C) Transfer-based yield
Return that is economically funded by other token holders, redistribution mechanics, or incentives rather than external cashflow:

• reward systems that rely on inflows, dilution effects, or differential participation

• “money transfer” models where non-participants subsidize participants

Transfer yield can be powerful as game theory, but it is the least sustainable in valuation terms unless paired with strong structural revenue. If yields are fundamentally transfer-based, then growth depends on continuous demand for participation and/or a persistent pool of non-participating holders who accept economic dilution.

4.2. The key sustainability metric: reward coverage

The core institutional question becomes:

Are Sky’s rewards funded primarily by real protocol revenue and externally generated yield, or are they funded by redistribution and subsidization?

A practical way to quantify this is with a simple framework:

Reward Coverage Ratio = (Protocol revenues + Net investment returns) / Rewards paid

• If the ratio is consistently above 1, the system is self-funded and compounding.

• If it is consistently below 1, the system relies on non-sustainable mechanisms (incentives, dilution, or temporary regime conditions).
  

This ratio should be tested over multiple market regimes. It is not enough to observe it during a bull cycle; it must hold during periods of low volatility, compressed basis, or stress in credit markets.

4.3. The “rate-setting” risk: the central bank trap

A central risk in the policy-rate model is that it can become politically and economically difficult to lower yields once the market has anchored on them. In traditional systems, central banks have credibility tools. In crypto, credibility is largely market-driven. If Sky sets yields too high relative to sustainable sources of return, it risks:

• compressing its own margin,

• taking more credit or market risk to defend the rate,

• or triggering outflows if yields drop, creating supply instability.

This is the central bank trap: the rate becomes the product, and maintaining it becomes the strategy—even when conditions deteriorate.

4.4. The risk frontier: why “extra yield” introduces non-linear fragility

The pursuit of extrayield is strategically rational, but the risk frontier becomes non-linear: small increases in target yield can require disproportionately large increases in complexity and risk exposure. That is why the Stars architecture is both the growth engine and the primary risk vector.

At scale, the relevant question is not “Can Sky generate yield?” It is:

Can Sky generate yield with disciplined underwriting and resilience, at a scale large enough to support stablecoin supply growth without compromising solvency?

This is where risk management becomes valuation-critical. Strong growth with fragile yield is not a bullish story—it is a delayed crisis.

5. Final Valuation Range: $0.15–$0.20 per SKY

Sky’s valuation ultimately depends on two measurable variables: (1) the ability to compound stablecoin supply and regain market share, and (2) the sustainability of protocol profits that can be credibly directed toward token holders. The Annual State of the Sky Ecosystem provides enough evidence to justify a meaningful re-rating versus the valuation regime that dominated the 2022–2024 contraction period.

First, Sky has entered what appears to be a clear inflection point. USDS supply has recovered from roughly ~$5B at the beginning of 2025 to approximately ~$9–10B by late 2025, while the stablecoin market expanded materially. This implies not only absolute growth, but also a return to positive market share dynamics — a critical shift after years of stagnation.

Second, the protocol is now a real cashflow business. The report indicates an annualized gross protocol revenue of ~$435M, net protocol revenue of ~$212M, and annualized protocol profits of roughly ~$168M. These are not speculative metrics; they represent a stable, monetizable economic engine.

Importantly, the system is explicitly designed so that approximately 75–100% of profits are allocated to token holders through systematic buybacks redistributed as staking yield, creating a clearer value-accrual framework than most DeFi protocols.

From a valuation perspective, a fair way to price Sky is to capitalize sustainable profits using a risk-adjusted multiple. For a high-margin DeFi cashflow asset with governance and regulatory risk, a 12–18x multiple on sustainable profits is a reasonable institutional range. Applying that multiple to ~$168M of annualized profits results in an equity value range of approximately $2.0B–$3.0B.

However, the supply growth inflection and the structural shift toward operating leverage justify a higher re-rating scenario in which profits expand toward ~$200M–$230M and the market assigns a 15–20x multiple, producing a valuation in the $3.5B–$5.0B range.

Using the SKY supply cap of 23.46B tokens, a $3.5B–$5.0B valuation translates into a token price range of roughly $0.15–$0.20 per SKY, which we view as a defensible fair-value band under a base-to-bull scenario where stablecoin supply continues to grow and profit allocation remains credible.

This range also implicitly reflects the key risks that justify a discount: the small capital buffer (~$32M), execution risk in scaling the Stars architecture, and the governance-dependent nature of tokenholder claims.

But if the current supply growth trajectory continues into 2026 and Sky’s operational leverage materializes, these risks may be progressively discounted, enabling a re-rating toward the upper end of the band.

Terminal Value (from 2028)

• Terminal FCF (2028): $1,045.8M

• TV = FCF × (1+g) / (r−g) = 1,045.8 × 1.03 / (0.20−0.03)

• Terminal Value (2028): $6,336.0M

• PV(Terminal Value): $3,666.7M
  

Equity Value & Implied SKY Price

• PV(Explicit FCF 2026–2028): $1,416.1M

• PV(Terminal Value): $3,666.7M

  • Capital reserves: $32.0M

• Equity Value: $5,114.8M

• Implied SKY price (23.46B tokens): ≈ $0.218 per SKY

Under a high-growth scenario where USDS supply reaches ~$50B by 2028, and assuming net revenue margins stabilize around ~2.3–2.35% with modest operational leverage, a discounted cash flow approach (20% discount rate, 3% terminal growth) implies an equity value of approximately ~$5.1B. Using the SKY supply cap of 23.46B tokens, this corresponds to an implied value of roughly $0.22 per SKY, supporting a fair-value band of $0.15–$0.20+ depending on execution and margin durability.

Ethereum is often described as a “world computer.” It is a convenient metaphor — but also one of the most damaging misunderstandings in the history of the protocol.

Calling Ethereum a world computer reduces it to an infrastructure for executing applications, competing in the same mental category as cloud providers and internet platforms. It frames the protocol as a decentralized AWS: a global machine whose main goal is to process as many transactions as possible, as cheaply as possible, as fast as possible.

But that is not what Ethereum fundamentally is.

Ethereum is, at its core, a digital open source state — an open, global, permissionless state layer that enables economic activity by creating private property in the digital realm, with a level of credibility and legal-like certainty that no previous system has been able to provide at scale.

Its rules are enforced by code, but its legitimacy comes from something deeper: the resilience of its architecture, secured by hundreds of thousands of validators distributed across jurisdictions, organizations, and individuals. Ethereum’s true breakthrough is not compute. It is the ability to establish a shared, neutral, and unstoppable state — a foundation for ownership, coordination, and economic agreements that can outlive companies, governments, and platforms.

This distinction matters because it changes everything: how we assess Ethereum’s strategy, how we judge the decisions of the Ethereum Foundation, and which metrics truly reflect progress versus noise.

This distinction matters because it changes everything: how we assess Ethereum’s strategy, how we judge the decisions of the Ethereum Foundation, and which metrics truly reflect progress versus noise.

If Ethereum is an Open Source State, then sustainability is not about maximizing throughput or extracting short-term revenue. It is about preserving credible neutrality, strengthening resilience, and expanding the protocol’s ability to support long-term value creation across an ecosystem that no single actor can capture.

That is the lens this article proposes — and the reason we must revisit the metrics that shape the narrative around Ethereum.

What a State Provides — and Why the Most Successful States Win

To understand what Ethereum can become — and what it must protect in order to remain sustainable — we first need to answer a simpler question:

What is a state actually for?

A state is not merely a government, a flag, or a bureaucracy. At its core, a state is an institutional technology: a system that enables large-scale coordination among people who do not know each other, do not trust each other, and may not even share culture or values.

The primary product of a successful state is predictability — a reliable environment where individuals and institutions can plan, invest, and cooperate over long time horizons. Economists call this the reduction of transaction costs. In practice, this is what makes complex economies possible.

A functioning state provides a bundle of services that can be grouped into five foundational layers.

1) Property Rights: Defining and Protecting Ownership

A state defines what can be owned, who owns it, and under what rules ownership can be transferred. This may sound obvious, but it is the foundation of modern economic life.

Without secure property rights:

• investment becomes irrational,

• credit becomes fragile or impossible,

• long-term planning collapses.

This is why many of the world’s wealthiest nations are not those with the most natural resources, but those with the most credible protection of private property.

The key here is not the existence of laws on paper, but the credibility of enforcement in practice. When people believe that ownership can be arbitrarily confiscated or politically redefined, capital flees — and the economic base erodes.

2) Contract Enforcement: Making Agreements Scalable

The second major function of a state is to enable contracts.

Contracts are what allow strangers to cooperate. They are what enable supply chains, lending, employment, insurance, and complex business relationships. In primitive economies, trust is personal. In advanced economies, trust becomes institutional — because agreements can be enforced even when parties have no relationship.

A state with strong contract enforcement provides:

• dispute resolution mechanisms,

• predictable commercial rules,

• consistent interpretation of obligations,

• and reliable protection of creditors and counterparties.
  

The economic implication is profound: contract enforcement turns commerce into a scalable, impersonal system. It transforms fragmented trust networks into global markets.

3) Security and Enforcement: The Backbone of Order

The uncomfortable truth is that states are, fundamentally, enforcement machines.

Property rights and contracts only exist if there is a mechanism capable of defending them. A state provides external defense and internal security: the ability to prevent private coercion, control violence, and maintain social order.

This is not merely about policing. It is about ensuring that individuals and institutions are not forced to rely on private enforcement, intimidation, or violence to protect their assets and agreements.

In other words:

Security is not a feature of an economy — it is a prerequisite for one.

4) Public Goods and Shared Infrastructure

Markets alone do not reliably produce certain kinds of goods that societies need in order to function and grow: infrastructure, standards, education, research, and basic coordination layers.

Successful states provide public goods that:

• increase productivity and connectivity,

• reduce systemic friction,

• and enable innovation to compound.
  

Here again, the distinction is not the size of the state, but its quality. Some states spend aggressively and produce little. Others invest in scalable infrastructure and build long-term prosperity. The difference is institutional capacity, governance quality, and resistance to corruption and capture.

5) Currency and Taxation: The Engine of Sustainability

Finally, states require sustainability.

They need resources to fund security, infrastructure, and institutions. This is why nearly every successful state develops:

• a unit of account (a currency),

• and a fiscal system (taxation or equivalent mechanisms).

A stable currency allows economic calculation. A credible fiscal system allows long-term investment and lowers the cost of capital. When monetary credibility collapses, planning becomes impossible; when fiscal credibility collapses, enforcement weakens and institutions decay.

Sustainability, therefore, is not simply about collecting revenue. It is about maintaining legitimacy, predictability, and capacity without becoming extractive.

And this is where many states fail.

Why Some States Succeed (and Others Don’t): The Design Principles

If states provide similar services, why do some generate extraordinary prosperity while others remain fragile, corrupt, or trapped in stagnation?

The difference is not ideology, nor the presence of resources. It is institutional design.

The most successful states tend to share a set of structural principles that make them resilient, credible, and difficult to capture.

1) Rule of Law: Rules Above Individuals

The defining feature of a mature state is that laws apply consistently — not selectively.

Rule of law means:

• the law is superior to individuals,

• enforcement is predictable,

• and rules are stable over time.
  

Without rule of law, the state becomes a personal power structure. When that happens, economic life becomes a political game rather than a productive one.

2) Credible Commitment: The Ability to Keep Promises Over Time

The most valuable feature of any state is its ability to credibly commit.

Investors, entrepreneurs, families, and institutions make decisions based on expectations of the future. If the state cannot credibly commit to maintaining rules — if it can change them arbitrarily — then long-term capital formation collapses.

A successful state is not necessarily “good.” It is credible.

Credibility is what creates trust without requiring optimism.

3) Institutional Neutrality: The State as Referee, Not Player

The moment a state becomes a participant instead of an arbiter, it begins to destroy the foundation of its legitimacy.

States that choose winners, protect insiders, or enforce politically-driven favoritism eventually become extractive. Their institutions serve power rather than society. Economic productivity becomes secondary to rent-seeking.

Neutrality is not a moral concept. It is an economic one.

4) Checks and Balances: Resistance to Capture

The best states assume that power will be abused — and design their institutions accordingly.

They implement mechanisms that make capture difficult:

• separation of powers,

• independent courts,

• distributed authority,

• transparency and accountability,

• free press or equivalent monitoring forces.
  

This is why successful states are rarely defined by perfect leaders. They are defined by systems that remain stable even under imperfect leadership.

5) Exit: The Ability to Leave as a Discipline Mechanism

This principle is deeply underrated.

Systems become abusive when people cannot leave. Exit options discipline power. They create a market for governance and reduce the temptation to extract excessively.

In nation-states, exit takes the form of emigration, capital flight, and competitive jurisdictions. In well-designed systems, the possibility of exit forces institutions to remain credible and restrained.

6) State Capacity (with Limits): The Ability to Execute Without Arbitrary Power

Strong states are capable states — they can enforce rules, collect revenue, and provide public goods effectively.

But capacity without limits becomes authoritarian. Capacity must be paired with accountability. The strongest states combine:

• operational competence,

• legal restraint,

• institutional stability.
  

7) Low Corruption and Sustainable Extraction

States must fund themselves. But extraction must be sustainable.

A state that taxes too aggressively, or extracts value through corruption and rent-seeking, destroys the very economic base it depends on. This is a recurring historical pattern. Over-extraction leads to lower investment, lower productivity, and eventually declining legitimacy.

The best states maximize long-term compounding, not short-term extraction.

This logic applies to all institutional systems — including digital ones.

The Core Insight

Put simply, a state creates value by turning a chaotic world into a predictable one. It enables coordination at scale by providing property rights, enforceable agreements, security, public goods, and sustainable economic infrastructure.

The most successful states succeed not because they do more, but because they do these things with:

• credible neutrality,

• strong enforcement,

• resistance to capture,

• and long-term predictability.

Once you understand this, you can begin to see Ethereum not as a decentralized computer, but as something far more consequential:

a global state layer for digital property and coordination — an Open Source State.

And that framing gives us an actionable way to evaluate Ethereum’s evolution: through the lens of institutional credibility, neutrality, resilience, and sustainable value creation.

Human Capital: The Prime Metric of an Open Source State

Human capital matters more than technology.

Protocols do not evolve by themselves. Roadmaps do not ship automatically. Security does not maintain itself. Every major advance in Ethereum’s history — from proof-of-stake, to rollup-centric scaling, to EIP-1559, to account abstraction research — was the outcome of human coordination: researchers, engineers, client teams, educators, governance participants, ecosystem builders, auditors, and community leaders working under imperfect incentives and incomplete information.

Ethereum’s long-term competitiveness therefore depends less on its current codebase and more on its ability to continuously attract, retain, and coordinate exceptional talent.

In fact, states — whether nation-states or digital states — do not win primarily because they are “more advanced.” They win because they can mobilize high-quality human capital and align it toward public goods production: infrastructure, security, dispute resolution mechanisms, and shared standards that benefit the entire society.

The hardest problem: optimizing for the common good

This is where state-building becomes non-trivial.

Individuals naturally optimize for their own goals: prestige, wealth, influence, career opportunities, ideological preferences, or even personal rivalries. In a state, the central challenge is to align those diverse motivations toward outcomes that serve the common good — without suppressing individuality or becoming authoritarian.

Successful states do this through:

• credible institutions,

• shared values,

• cultural norms,

• and incentive systems that reward contributions to public goods.

The same is true for Ethereum.

Ethereum’s most valuable “asset” may not be ETH, throughput, or market share — but the unique culture that has historically attracted builders who are willing to work on long-term infrastructure, open standards, and research-heavy public goods that do not immediately monetize.

If Ethereum loses the ability to coordinate talent toward these public goods, it will not matter how sophisticated the technology is: the state will decay.

Why culture and constitution matter

Talent does not coordinate efficiently in a vacuum. It requires a shared mission and constraints that define what is legitimate.

In nation-states, this takes the form of a constitution and core civic values. In open source states, it takes the form of:

• shared cultural norms (“credible neutrality”, “open innovation”, “minimal trusted parties”),

• governance legitimacy,

• and clear boundaries around what the protocol should and should not do.

A constitution is not merely a legal document — it is a coordination device. It reduces conflict by making some questions non-negotiable and providing a stable framework for everything else.

For Ethereum, the implicit constitution has historically included principles like:

• neutrality over favoritism,

• decentralization over convenience,

• long-term resilience over short-term efficiency,

• permissionless innovation over gatekeeping,

• and openness over capture.

If Ethereum becomes unclear on these values, or allows them to be overridden by short-term narratives, the system loses its ability to coordinate elite talent at scale.

The inevitability of many states

This also leads to a strategic implication that many crypto narratives ignore.

In some markets, network effects push toward a single dominant winner. But states are different. States are not mere platforms; they are value systems. They reflect cultures, preferences, ideologies, and institutional trade-offs.

Because cultures differ, the long-run equilibrium is likely a world of many states — including many digital states. Even if interoperability improves, we should not expect a single blockchain to govern all economic activity.

Therefore, Ethereum should not aim to win by becoming the cheapest or fastest execution environment. It should aim to win by becoming the most credible and resilient base layer for digital property and coordination — and by being the state that attracts the highest quality human capital, capable of building and maintaining the infrastructure that others depend on.

In the long run, the most successful states will be those that can coordinate the greatest human talent toward public goods — without being captured by narrow interests.

That is the real metric of state progress.

How do we measure “Human Capital” for Ethereum? (The practical metric framework)

Human capital is hard to measure, but we can build a useful proxy dashboard that captures its reality. The trick is to measure quality and coordination capacity — not just raw activity.

✅ A) Core Human Capital Metrics (High signal)

1) Core Protocol Talent Density

• Number and quality of active contributors to:

  • client teams (execution + consensus)

  • research groups

  • EIP authors and implementers
    

Why it matters:
This is the “civil service” of the state — the people who maintain its legal code and infrastructure.

What good looks like:

• high contributor diversity

• sustained throughput of protocol improvements

• no dependence on a single organization
  

2) Client Diversity & Independent Teams

• How many independent teams maintain:

  • execution clients (e.g., Geth, Nethermind, Besu, Erigon)

  • consensus clients (e.g., Lighthouse, Prysm, Teku, Nimbus)
    

• Share of each client on mainnet
  

Why it matters:
This is equivalent to institutional redundancy — the ability of the state to survive failures, bugs, or capture.

What good looks like:

• balanced market share

• multiple independent implementations

• strong incentives for new teams to emerge
  

3) Public Goods Funding Health

• How much funding goes to:

  • core dev work

  • security / audits

  • research

  • education and tooling

• And how stable that funding is
  
  

Why it matters:
A state needs a sustainable public goods budget.

What good looks like:

• diversified funding sources (not only EF)

• transparent allocation

• outcomes tied to measurable improvements
  

4) Retention and Migration of Elite Talent

• Where top researchers and builders go:

  • Are they joining Ethereum or leaving for other ecosystems?

• Proxy signals:

  • major contributors moving to other L1s

  • top teams choosing other ecosystems as default
    

Why it matters:
Talent flows are the “balance of payments” of a state.

5) Coordination Efficiency: “Time-to-Ship”

• How long does it take Ethereum to:

  • implement major upgrades

  • reach consensus on roadmap decisions

  • react to existential risks (security, centralization, censorship)
    
    

Why it matters:
States fail when they cannot act, even if they know what to do.

What good looks like:

• consistent delivery without compromising decentralization

• clarity in decision-making processes

• reduced governance deadlock
  

✅ B) Secondary Human Capital Metrics (Useful but noisy)

Developer activity on GitHub (total commits)

Useful but often inflated; should focus on meaningful repos.

Hackathon participation & grants count

Signal of interest, but not necessarily of long-term infrastructure quality.

Number of startups founded on Ethereum

Useful, but often hype-driven.

Funding and Meritocracy: How an Open Source State Pays for Elite Human Capital

If human capital is the prime metric of an Open Source State, then the next question becomes unavoidable:

How does the state sustainably fund and compensate the people who build and maintain its public goods?

This is not a secondary issue. It is one of the defining failure modes of both nation-states and digital states.

Traditional states tend to underpay their civil servants. They compensate with stability, prestige, and pensions — but rarely with truly competitive, market-driven remuneration. The result is predictable: the state often fails to recruit and retain the highest-quality talent for infrastructure, security, and institutional design. The best engineers, economists, lawyers, and operators go elsewhere.

For an Open Source State like Ethereum, this model would be fatal.

Ethereum’s long-term sustainability depends on continuously attracting elite builders to work on the least glamorous but most essential problems:

• protocol research,

• client engineering,

• security auditing,

• public infrastructure,

• standards and tooling,

• education and ecosystem coordination.
  
  

This work does not always generate immediate private returns. It is, by definition, a public good. If it cannot be funded — and if the people producing it cannot be rewarded competitively — the state loses capacity. And when a state loses capacity, it begins to decay.

The rare historical window Ethereum benefited from

For several years, Ethereum experienced a unique phenomenon:

Public goods creators were exceptionally well-compensated — not because the protocol extracted excessively, but because the ecosystem expanded dramatically and the value of ETH appreciated.

In other words, Ethereum’s state-building phase was subsidized by a positive feedback loop:

• talented builders created institutional and technical public goods,

• those goods increased Ethereum’s credibility and economic activity,

• that demand was capitalized into ETH,

• which expanded the “state’s balance sheet,”

• enabling further funding of talent and infrastructure.

This was a remarkable period: an Open Source State that could pay its builders better than many nation-states, and sometimes even better than traditional private sector alternatives.

But this window is not guaranteed to last.

The looming risk: declining fiscal capacity

The Ethereum Foundation (EF) is not an unlimited treasury. Its resources are finite and increasingly constrained relative to the growing demands of the ecosystem.

As Ethereum matures, the cost of maintaining state capacity rises:

• research becomes more complex,

• security demands increase,

• attack surfaces expand,

• governance becomes more politically sensitive,

• and competition among ecosystems intensifies.

At the same time, the EF’s ability to fund everything centrally becomes less credible.If this leads to a future where:

• fewer talented people work on core public goods,

• budgets shrink,

• and compensation becomes uncompetitive, then Ethereum’s state capacity will weaken — not because the technology failed, but because the human capital engine was starved.

And this is exactly how states decline in the real world.

Designing a Meritocratic Compensation Framework

The right model for an Open Source State is not a traditional bureaucracy. It should be closer to a market-driven system of public goods production — where talent is allocated efficiently and rewarded proportionally to value created.

That requires three structural innovations.

1) Turn public goods into measurable, contractible outcomes

Meritocracy requires measurement. But in public goods, measurement is hard.

The solution is not to abandon measurement, but to develop progressively better proxies for state value creation:

• security improvements,

• decentralization progress,

• client diversity,

• reduced censorship risk,

• better developer tooling,

• upgrades delivered successfully,

• reduction of systemic vulnerabilities,

• improved institutional neutrality.
  
  

This allows the state to create bounties and procurement contracts for well-defined outcomes rather than relying on permanent salaried roles.

In traditional states, procurement is where large fractions of the budget go — often inefficiently and corruptly. In an Open Source State, procurement can be global, transparent, and competitive.

2) Create open labor markets for state infrastructure

Instead of hiring a small, centralized team, an Open Source State should enable open competition among contributors:

• teams compete to deliver core infrastructure,

• funding flows to the best performers,

• new entrants can challenge incumbents,

• and the system continuously attracts global talent.

This is not just “grants.” It is a structured labor market with:

• standardized scopes,

• clear evaluation criteria,

• transparent deliverables,

• and renewal based on performance.

The goal is to align the labor market with public goods production while preventing gatekeeping by insiders.

3) Reward contributors with upside aligned to long-term value

A key advantage of digital states is that they can align compensation with long-term success — something traditional states struggle to do.

This can take the form of:

• long-term token-denominated compensation,

• vesting tied to measurable milestones,

• retroactive public goods funding (rewarding proven impact),

• or protocol-level funding mechanisms that scale with usage.

The objective is simple:
public goods builders should have upside comparable to private sector founders — because they are building the infrastructure of a state.

If compensation is capped at low bureaucratic levels, the state will always lose the talent war.

The paradox: meritocracy without capture

There is a major danger here: any funding system can be captured.

A meritocratic state must therefore combine:

• open competition,

• transparent evaluation,

• plural funding sources,

• and strong exit options (including alternative teams and forkability).
  
  

The goal is not perfect fairness. The goal is a system that continuously corrects itself and remains difficult to monopolize.

Why this matters for Ethereum today

Ethereum’s future cannot rely on the EF alone as the primary funder of state capacity.

As the protocol becomes the foundation for global economic activity, it needs an institutional evolution:

• from centralized funding (EF as the “treasury ministry”)

• to a distributed, market-based system of talent coordination and compensation.

If Ethereum fails to build that system, it will face a slow and silent decline:

• fewer high-quality contributors,

• increasing dependence on a narrow set of organizations,

• rising technical and governance risk,

• and a deterioration of the very neutrality and credibility that make Ethereum valuable.

In the long run, the most successful digital states will not be those with the best technology — but those that can sustainably coordinate, fund, and reward the best human capital in the world.

Ethereum must design itself to win that competition.

Funding the Open Source State: Why Donations Don’t Scale — and Why Ethereum Must Capture Economic Activity

If human capital is the most important input for Ethereum’s long-term success, then the next question is unavoidable:

where does the funding come from?

This is not a minor operational detail. It is a structural question that determines whether Ethereum can sustain state capacity — or whether it slowly decays into a volunteer-driven infrastructure that cannot compete for top talent.

The open source financing trap

Ethereum is deeply shaped by an open source ethos, and that ethos has produced extraordinary outcomes: permissionless innovation, global collaboration, and a culture of public goods.

But open source contains a persistent and dangerous misconception:

Open source is a development model. It is not a sustainable financing model.

Many open source communities drift toward donation-based funding because it “feels pure,” aligned with decentralization, and morally appealing. But donations are historically:

• unfair (they reward visibility more than impact),

• unstable (they collapse in bear markets),

• and non-scalable (they cannot support industrial-scale infrastructure).

This is not an ideological claim. It is an empirical one.

Donation models systematically fail to fund the full-time, elite talent required to maintain critical infrastructure — especially when that infrastructure becomes a global dependency.

The Linux paradox: a success in adoption, a weakness in funding

Linux is often presented as the ultimate open source triumph. And it is — as a distribution and adoption story.

But Linux is also a cautionary tale about sustainability.

Linux succeeded because it became the shared base layer of the internet, servers, and modern computing. Yet even as it became indispensable, its funding model did not scale proportionally.

Linux did not evolve into a system employing thousands of elite engineers full-time through a unified, sustainable funding mechanism. Instead, much of its development has historically depended on:

• fragmented corporate sponsorship,

• a relatively small set of key maintainers,

• and a large share of part-time, under-compensated volunteer labor.

This works — until it doesn’t.

It creates fragility. It concentrates responsibility. It exposes critical infrastructure to burnout, maintenance risk, and underinvestment. It also limits the ability to attract and retain the absolute best global talent on a full-time basis, because the upside is structurally capped.

Open source can win adoption and still fail the talent war.

Ethereum cannot afford that outcome.

Why Ethereum’s funding must come from economic activity — not compute

Ethereum is not merely a software project. If it is a state layer for digital property and economic coordination, then it needs what every state needs:

a tax base.

In a healthy state, funding scales with the economic activity the state enables. Roads, courts, defense, and public infrastructure are not paid through donations. They are paid through mechanisms that capture a fraction of the wealth and activity the state makes possible.

Ethereum should follow the same logic.

The funding of Ethereum’s public goods should not be tied to “compute” in the narrow sense. That framing reduces Ethereum to cloud infrastructure. It makes the network compete on the wrong axis: throughput and cheap execution.

Instead, Ethereum should aim to capture funding proportional to economic activity and value settlement, because that is what it truly provides:

• property rights,

• enforceable digital agreements,

• neutral settlement,

• and high-assurance economic coordination.

In other words:

Ethereum’s sustainable funding should come from its role as an economic state layer — not as a commodity compute provider.

Defending the premium is not extraction — it is sustainability

There is a fear within parts of the ecosystem that capturing value is inherently “extractive” or morally suspicious. But this is a category error.

A state that cannot fund its institutions cannot maintain credibility.
A protocol that cannot fund its public goods cannot remain secure or neutral.

Ethereum has a premium because it provides the strongest guarantees in the market: security, legitimacy, resilience, credible neutrality, and predictable settlement. That premium is not a bug. It is the foundation of sustainability.

Protecting that premium is rational.

It is similar to how Apple defends its premium not because it hates consumers, but because premium margins finance:

• better hardware,

• better software,

• better supply chain control,

• and long-term R&D investment.
  
  

Ethereum’s “premium” finances something even more important:

• the human capital needed to maintain the world’s most credible digital state layer.
  
  

There is no contradiction between open access and sustainable funding. In fact, sustainable funding is what protects open access over time.

The strategic risk: drifting back toward donations

Ethereum today faces a serious strategic risk: the gradual normalization of a donation-like model for funding its public goods.

This drift is often justified by open source ideology. It is presented as the “pure” path. But in practice it leads to a predictable outcome:

• shrinking budgets,

• fewer full-time contributors,

• growing dependence on narrow corporate interests,

• and deteriorating institutional capacity.

This is how open source becomes fragile.

Ethereum is too important to become a global dependency built on part-time volunteer labor and inconsistent donations.

The reality is simple:

• Ethereum needs industrial-scale public goods production,

• which requires industrial-scale funding,

• and that funding must scale with economic activity.

A state layer that refuses to capture value is not virtuous. It is undercapitalized.

And an undercapitalized state eventually loses its best talent — and with it, its ability to defend neutrality, security, and long-term legitimacy.

A core principle of the Open Source State

Open source should remain the distribution model. Forkability should remain the anti-capture mechanism. Permissionless participation should remain the cultural core.

But financing must evolve.

A sustainable Open Source State must design mechanisms that:

• reinvest a share of economic activity into public goods,

• fund full-time elite builders,

• and preserve the long-run institutional capacity of the state.

Anything else is a slow retreat into fragility — even if adoption remains high.

A) Tax Base Metrics (Economic Activity Under Ethereum’s “Jurisdiction”)

These metrics measure the equivalent of a state’s GDP and monetary velocity.

✅ 1) Total Value Settled (TVS) / Settlement Volume

What it measures: total economic value settled on Ethereum (L1 + settlement anchored to Ethereum).
Why it matters: this is the closest analog to a state’s economic activity and legitimacy as a settlement layer.
Healthy trend: long-term growth (adjusted for spam and wash).
Red flags: volume growth driven by manipulation, or migration away from Ethereum.

✅ 2) Stablecoin Supply + Stablecoin Settlement Share

What it measures: how much stablecoin liquidity lives and moves on Ethereum (L1 and L2s anchored to Ethereum).
Why it matters: stablecoins are the “money layer” of the digital state; their presence signals deep economic usage.
Healthy trend: rising supply + rising settlement share.
Red flags: stablecoin activity migrating to other ecosystems.

✅ 3) L2 Economic Activity Anchored to Ethereum

What it measures: the volume and value of economic activity in rollups that rely on Ethereum for settlement and/or data availability.
Why it matters: Ethereum’s fiscal future is rollup-centric; the state’s tax base increasingly lives in L2 jurisdictions that still depend on Ethereum.
Healthy trend: growth in rollup activity while maintaining Ethereum anchoring.
Red flags: rollups shifting to alternative DA/settlement layers.

⚠ 4) RWA (Real-World Asset) Onchain Activity

What it measures: size and growth of tokenized treasuries, credit, and other RWAs on Ethereum.
Why it matters: strong signal of institutional legitimacy and long-term settlement use.
Healthy trend: organic growth without excessive incentives.
Red flags: short-lived, incentive-driven spikes.

B) Capture Capacity Metrics (How Much Can Become Sustainable Funding?)

These metrics track Ethereum’s ability to convert economic activity into security and public goods funding.

✅ 1) Total Protocol Fees (L1 Execution Fees + Blob Fees)

What it measures: total fees paid to the protocol across L1 execution and EIP-4844 blobspace.
Why it matters: this is the closest analog to direct tax revenue — it’s how much economic activity is already “funding the state.”
Healthy trend: stable fee base diversified across use-cases (not only speculative peaks).
Red flags: fees collapse structurally or become too dependent on cyclical speculation.

Even though these fees do not fund the EF directly, they remain the best proxy for sustainable state-level funding capacity.

✅ 2) Fee Allocation: Burn vs Security Budget vs Potential Public Goods

What it measures: how economic value is currently allocated:

• burned (EIP-1559),

• paid to validators/stakers (security budget),

• and what could be redirected to public goods under future designs.
  
  

Why it matters: a state needs a reinvestment channel; burn-only narratives may weaken long-term state capacity.
Healthy trend: security budget remains strong + space opens for sustainable reinvestment mechanisms.
Red flags: value capture exists but no reinvestment into public goods emerges.

✅ 3) MEV as a Shadow Tax (Total MEV Extracted + Concentration)

What it measures: total MEV extracted from users and how concentrated it is across builders/relays/validators.
Why it matters: MEV functions like an implicit tax on economic activity — often unaccountable and prone to oligopoly.
Healthy trend: MEV becomes less concentrated, more transparent, and increasingly recycled into security/public goods.
Red flags: MEV grows faster than economic activity and becomes dominated by a few entities.

✅ 4) Blob Fee Revenue as the “Rollup Tax Base”

What it measures: total blob fee revenue, utilization rates, number of rollups posting blobs, and fee elasticity.
Why it matters: blobspace may become Ethereum’s primary fiscal base in a rollup-centric world.
Healthy trend: rising blob revenue without pricing out usage.
Red flags: blob revenue collapses when fees rise or rollups migrate to other DA layers.

⚠ 5) Issuance and the Security Budget (in $ Terms)

What it measures: issuance levels, net issuance after burn, validator returns, and total security budget in dollar terms.
Why it matters: defense is the first duty of a state; underfunded security eventually collapses neutrality and credibility.
Healthy trend: sufficient security budget with reasonable dilution.
Red flags: security budget becomes too low to sustain resilience, or excessive issuance undermines monetary credibility.

C) Reinvestment Metrics (Is the State Reinvesting in Public Goods?)

These metrics measure whether Ethereum is compounding state capacity or starving it.

✅ 1) Total Public Goods Funding (Annualized)

What it measures: total funding dedicated to core public goods:

• client teams,

• audits/security,

• core research,

• infrastructure/tooling,

• ecosystem coordination/education.
  
  

Breakdown by source:

• EF,

• Gitcoin / RPGF,
  
  

• corporate procurement,

• DAOs/treasuries,

• protocol-aligned mechanisms (if any).
  
  

Why it matters: this is the state’s institutional investment budget.
Healthy trend: stable or growing funding with diversified sources.
Red flags: declining funding and rising dependence on a single sponsor.

✅ 2) Donations Share vs Economic-Capture Share (Donation Drift Index)

What it measures: what percentage of public goods funding depends on voluntary donations versus structurally-linked economic capture (fees, automated funding, procurement).
Why it matters: donation reliance is historically unstable and fails to attract elite full-time talent.
Healthy trend: donations are complementary, not foundational.
Red flags: increasing reliance on donations to fund core infrastructure.

Suggested definition:
Donation Drift Index = (Donation-based funding / Total public goods funding)

✅ 3) Funding Predictability (Core Infrastructure Runway)

What it measures: the average runway of critical teams (months of funding secured), plus volatility across market cycles.
Why it matters: public goods cannot depend on bull markets.
Healthy trend: most critical teams have 18–36+ months runway secured.
Red flags: core teams operate with short runways, frequent funding crises, or rely on ad hoc grants.

D) Talent Competitiveness Metrics (Can Ethereum Pay Market Rates?)

States win by attracting the best builders; underpaying creates institutional decay.

✅ 1) Compensation Competitiveness Index

What it measures: a composite proxy of how competitive Ethereum public goods compensation is relative to:

• top tech salaries (FAANG equivalents),

• other L1/L2 ecosystems (foundations, labs),

• private sector alternatives (security, infra engineering).
  
  

Why it matters: if Ethereum cannot pay competitively, it loses the talent war.
Healthy trend: compensation remains competitive for elite full-time contributors.
Red flags: compensation becomes structurally lower than alternatives.

✅ 2) Full-Time Equivalent (FTE) Count in Core Infrastructure

What it measures: estimated FTE working on:

• client teams,

• protocol research,

• security/audits,

• critical tooling.
  
  

Why it matters: state capacity is ultimately human capacity.
Healthy trend: stable or growing FTE across cycles.
Red flags: gradual reduction of FTE while complexity increases.

⚠ 3) Contributor Concentration / “Bus Factor”

What it measures: how much core progress depends on a few individuals or entities.
Why it matters: concentrated capacity creates fragility and capture risk.
Healthy trend: diversified teams and redundant institutions.
Red flags: a few key individuals becoming single points of failure.

E) Risk & Fragility Metrics (Early Warning Signals)

These are “state decay indicators” — signals that the funding model is becoming brittle.

✅ 1) EF Share of Total Public Goods Funding

What it measures: how dependent the ecosystem remains on EF as the primary funder.
Why it matters: a mature state cannot depend on one treasury.
Healthy trend: EF share gradually declines as other mechanisms grow.
Red flags: EF remains overwhelmingly dominant or EF funding declines without replacement.

✅ 2) Donation Drift Index (Trend Over Time)

What it measures: whether reliance on donations increases over time.
Why it matters: donation drift is the open source failure mode.
Healthy trend: donation drift declines or stays low.
Red flags: donation drift rises while core needs grow.

✅ 3) Public Goods Underfunding Signals

What it measures: operational symptoms of underinvestment, such as:

• fewer major audits,

• declining bug bounty competitiveness,

• increasing critical incidents,

• delays in key upgrades.
  
  

Why it matters: underfunding shows up first as operational degradation.
Healthy trend: stable or improving security posture and delivery velocity.
Red flags: recurring funding crises and increasing operational failures.

The Currency of the Economic Zone: ETH, Monetary Stability, and Demand as State Policy

Every state, physical or digital, faces a foundational monetary question:

What is the currency of its economic zone?

If Ethereum is an Open Source State — a settlement layer for digital property and economic coordination — then ETH is not merely a speculative asset. It is the state’s fiscal backbone. The value of ETH determines the state’s capacity to fund public goods, attract elite human capital, and maintain long-term resilience.

This creates a reality that many in the ecosystem are uncomfortable acknowledging:

ETH’s valuation is not a vanity metric. It is state capacity.

A state whose currency collapses cannot fund institutions, cannot maintain security, and cannot retain elite talent. A digital state is no different.

Why ETH must be central to economic activity

If a meaningful share of Ethereum’s sustainable funding is meant to come from economic activity — rather than donations — then ETH must sit closer to the center of that activity.

That means increasing demand for ETH in ways that are structurally tied to the state’s “tax base”:

• settlement,

• capital formation,

• collateral,

• liquidity and reserve roles,

• and the payment rails of the ecosystem.
  
  

But this is not trivial.

Modern economies require relatively stable units of account. Most economic agents cannot operate efficiently in a currency whose purchasing power fluctuates wildly. This is why stablecoins have become the dominant medium of exchange in crypto: they are an economic necessity.

Ethereum therefore faces a difficult but solvable dilemma:

• ETH must be central to state capacity and sustainable funding,

• while stablecoins must be central to day-to-day economic activity.
  
  

The state needs both layers to work together.

A Two-Layer Monetary Model

A practical approach is to treat Ethereum’s monetary system as two-layered:

1) ETH as the reserve asset and fiscal backbone

ETH functions as:

• the state’s native asset,

• the security asset backing the validator set,

• the ultimate settlement collateral,

• and the medium through which many forms of value capture are anchored.
  
  

ETH is closer to what gold and sovereign bonds represent for nation-states: the reserve foundation of state credibility.

2) Stablecoins as the transactional layer

Stablecoins are the medium of exchange. They enable:

• wages,

• lending,

• commerce,

• accounting,

• risk management,

• and predictable economic coordination.
  
  

This is not a weakness. It is what mature monetary systems look like: one layer for reserves and credibility, another for transactional stability.

The strategic requirement for Ethereum is to ensure that the transactional layer remains aligned with ETH and contributes to ETH demand — directly or indirectly.

The ETH-Backed Stablecoin: Indirect Demand as a Transitional Strategy

If ETH cannot be adopted directly as the dominant currency of economic activity in the short run — because its volatility makes it difficult as a unit of account — then an alternative is to create a stable monetary layer that remains economically aligned with ETH.

The most obvious mechanism is an ETH-backed stablecoin.

An ETH-backed stablecoin can become the transactional unit of the economic zone, while ensuring that usage creates indirect demand for ETH through collateralization.

In other words:

• stablecoin usage increases,

• collateral requirements increase,

• ETH demand rises indirectly,

• and Ethereum’s fiscal base strengthens.
  
  

This model does not require forcing ETH into everyday commerce. It creates a bridge: a stable unit of account that reinforces the reserve asset.

It is also consistent with Ethereum’s values: it is open, permissionless, and grounded in transparent collateralization rather than centralized banking.

However, the design matters enormously:

• overcollateralization requirements,

• liquidation mechanisms,

• governance neutrality,

• censorship resistance,

• and systemic risk management.
  
  

This is not a trivial instrument — it is monetary infrastructure.

But if Ethereum is serious about becoming a durable state, it cannot avoid thinking in these terms.

The Unspoken Responsibility: ETH Price Is Institutional Capacity

Today, many decisions in the Ethereum ecosystem explicitly avoid discussing ETH price. The prevailing cultural norm is that “we don’t optimize for price.”

That ethos may feel intellectually pure, but it creates a strategic blind spot.

A mature state does not ignore the consequences of monetary policy just because it does not want to appear political. It is perfectly possible to avoid short-term price manipulation while still doing something essential:

systematically evaluating how each major decision affects long-term supply and demand for the currency.

Ethereum already has a relatively predictable supply system:

• issuance policy is known and constrained,

• burn dynamics are transparent,

• and there is high certainty around monetary mechanics.
  
  

That means the most important strategic variable is demand.

If demand for ETH weakens structurally, the entire state weakens:

• the security budget becomes fragile,

• public goods funding becomes constrained,

• and the ability to attract elite full-time contributors erodes.

Ignoring demand is not neutrality. It is negligence.

Blockspace, Price Floors, and the Laffer Logic of State Revenue

Ethereum’s economic model also faces a second-order problem:

How do you grow blockspace demand without collapsing blockspace value?

Over the last few years, Ethereum has dramatically expanded blockspace supply — first through efficiency improvements, and then through the rollup-centric roadmap (blobs and abundant data availability). In principle, this is necessary: a state must expand capacity to serve more economic activity.

But there is a hidden risk:

If supply grows so aggressively that blockspace becomes marginal and underpriced,
the system can collapse its own fiscal base.

This is a digital version of the Laffer Curve problem: the relationship between extraction and the health of the tax base is non-linear.

• Too much extraction drives users away.

• But too little extraction — especially via subsidized or near-zero pricing — can also be destructive, because it underfunds institutions and eliminates the economic signal that a scarce resource should produce.
  
  

A state needs not only demand, but sustainable pricing power over its public infrastructure.

If Ethereum treats blockspace as a free commodity rather than a scarce resource with economic value, it risks turning its most valuable fiscal lever into a low-margin utility. And low-margin utilities cannot fund world-class institutional capacity.

This does not mean Ethereum should maximize fees in the short term. It means Ethereum should maintain strategic awareness of:

• price elasticity,

• minimum viable fee floors,

• and the relationship between supply expansion and long-term demand for ETH as the reserve asset.

Ethereum should not fear defending its premium.

Premium is not greed. Premium is reinvestment capacity.

Practical Metrics: The Monetary and Demand Dashboard

To evaluate whether Ethereum is strengthening or weakening its monetary backbone, we can track a set of demand-centric metrics.

✅ ETH Demand Metrics

1. ETH used as collateral (total ETH collateral in DeFi, stablecoins, lending)

2. ETH locked in staking (and concentration of staking providers)

3. ETH-denominated economic activity (fees paid in ETH, ETH settlement flows)

4. ETH velocity (how often ETH changes hands relative to supply)
   
   

✅ Stablecoin Alignment Metrics

5. Share of stablecoin supply backed by ETH (directly or indirectly)

6. Growth of ETH-backed stablecoins vs fiat-backed stablecoins

7. Stablecoin settlement volume anchored to Ethereum (L1 + L2s)
   
   

✅ Blockspace Pricing Power Metrics

8. Fee floor stability (minimum fee levels over time, avoiding long-term zero pricing)

9. Blob fee revenue trend (as rollup tax base)

10. Price elasticity of usage (does demand collapse when fees rise?)

11. Subsidy dependence (how much usage is driven by incentives and near-free blockspace)
    
    

✅ State Capacity Metrics

12. Security budget in $ terms (issuance + priority fees + MEV distribution)

13. Public goods reinvestment rate (how much of economic activity is reinvested into core infrastructure)

The Laffer Curve of Ethereum: Why Underpricing Blockspace Can Be as Destructive as Overpricing It

In traditional states, one of the most important lessons of economic history is that fiscal policy is not linear.

Governments tend to assume that higher taxation always leads to higher revenue. But beyond a certain point, higher taxes shrink the economic base: people work less, invest less, evade more, or move capital elsewhere. Revenue eventually declines.

This dynamic is often summarized by the Laffer Curve: the relationship between tax rates and tax revenue is not a straight line — it is an inverted U-shape.

Ethereum, as an emerging Open Source State, faces an analogous problem.

https://paragraph.com/refresh?redirect=%2F%40cryptoplaza%2Fethereum-must-defend-its-premium-the-laffer-curve-perspective

The First Three Pillars of a State: Property Rights, Contract Enforcement, and Security (Ethereum Metrics)

Before discussing funding models, human capital, and fiscal sustainability, we must start with the foundational question:

Does Ethereum still provide the three core services that define a state?

Every successful state, physical or digital, rests on three primary pillars:

1. Property rights (who owns what)

2. Enforcement of rules and contracts (how agreements and constraints are enforced)

3. Security and credible force (how the system resists attack, coercion, and capture)
   
   

Without these pillars, everything else becomes irrelevant. No monetary system, no public goods funding, no human capital coordination matters if ownership is insecure, rules are unreliable, or security collapses.

Ethereum’s advantage has historically been that these pillars are exceptionally strong — and that they are defended through technology and decentralization rather than through political authority. But that strength must be monitored with real metrics.

1) Property Rights: Digital Ownership with Credible Finality

In a traditional state, property rights rely on courts, police, and legal interpretation. In Ethereum, they rely on:

• the protocol’s state transition rules,

• the consensus mechanism,

• and the legitimacy of finality.
  
  

Ethereum’s “property rights guarantee” is the ability to own and transfer digital assets with the highest known assurance in the world — not because laws say so, but because the state is extremely difficult to rewrite.

Core metrics for property rights

✅ A) Finality reliability

• Finality time distribution (how stable finality is over time)

• frequency of missed finality events

• reorg frequency and depth (ideally near-zero)
  
  

Why it matters:
Property rights are only as strong as the reliability of final settlement.

✅ B) Censorship resistance indicators

• percentage of blocks that exclude certain transactions (censorship proxies)

• OFAC-related compliance patterns (as a proxy for external pressure)

• inclusion delay distribution for “sensitive” transactions
  
  

Why it matters:
If property transfers can be censored, property rights are not universal.

✅ C) State access neutrality

• ability of any user to hold and transfer assets without permission

• wallet-level neutrality (no systemic blacklisting at protocol level)

• neutrality of core infrastructure providers (RPC, relays, builders)
  
  

Why it matters:
Property rights require universal access, not conditional inclusion.

Marginal / misleading property metrics

❌ daily transaction counts
❌ “number of NFTs minted”
❌ gas used as a proxy for property rights

These measure activity, not the quality of ownership guarantees.

2) Contract Enforcement: Reliable Execution Without Arbitrary Interpretation

A state is not only about owning assets — it is about making agreements enforceable. Ethereum’s smart contracts are its legal machinery: automated rules that execute without courts and without discretion.

But contract enforcement is only as good as:

• the consistency of the execution environment,

• the predictability of protocol changes,

• and the ability to preserve invariant rules over time.
  
  

Core metrics for contract enforcement

✅ A) Execution reliability

• client correctness metrics (consensus failures, critical bugs)

• incident rate affecting contract execution

• MEV-related execution integrity (front-running, sandwiching prevalence)
  
  

Why it matters:
Contracts must execute predictably under real adversarial conditions.

✅ B) Governance predictability / protocol stability

• frequency of breaking changes

• compatibility stability for core primitives

• “social layer intervention rate” (how often social coordination overrides protocol expectations)
  
  

Why it matters:
Rule stability is the rule of law of a digital state.

✅ C) Economic integrity of execution

• rate of failed transactions due to congestion

• execution cost volatility (gas volatility distribution)

• average execution latency under stress events
  
  

Why it matters:
Enforcement is not only correctness — it’s reliability under load.

Marginal / misleading enforcement metrics

❌ raw TPS
❌ total gas throughput
❌ “number of contracts deployed”

These are volume metrics, not enforcement quality metrics.

3) Security and Credible Force: The Ability to Defend the State

A state’s most basic duty is security: the ability to prevent coercion, maintain continuity, and resist capture.

Ethereum achieves this not through a monopoly of physical violence, but through:

• economic security (stake),

• decentralized validator distribution,

• client diversity,

• and the cost to attack.
  
  

If property rights and contract enforcement are the “law,” security is the “military and police” of the system.

Core security metrics

✅ A) Validator decentralization

• distribution of validators across entities

• staking concentration (top 5, top 10)

• geographic distribution (where available)

• concentration of block proposal rights
  
  

Why it matters:
A state cannot be neutral if defense is controlled by a few.

✅ B) Staking and LST concentration risk

• LST market share (liquid staking dominance)

• correlation between staking providers and governance influence

• dominance of a single operator (centralization risk)
  
  

Why it matters:
This is the “oligarchy risk” for Ethereum’s security apparatus.

✅ C) Client diversity

• execution client diversity (avoid monoculture)

• consensus client diversity

• correlation of major client failures with systemic risk
  
  

Why it matters:
A monoculture is a national security threat. Diversity is redundancy.

✅ D) Security budget in $ terms

• total rewards to validators (issuance + fees)

• MEV share of total block value

• cost to acquire or corrupt majority stake
  
  

Why it matters:
If the state cannot fund defense, it cannot remain sovereign.

✅ E) Censorship and coercion resistance

• relay and builder concentration (MEV supply chain centralization)

• rate of censored transactions

• diversity of block-building pipeline
  
  

Why it matters:
A captured block-building market becomes a captured state.

Marginal / misleading security metrics

❌ price of ETH as a standalone indicator
❌ “number of nodes” without quality weighting
❌ “hashrate-style analogies” without staking structure context

These can be noisy or manipulated.

The recent debate between Santiago Roel and Haseeb Qureshi is one of the most intellectually honest and important discussions we’ve seen in crypto valuation in years. It surfaces a question the market can no longer avoid:

Are Layer 1s fundamentally overvalued — or are we applying the wrong valuation model to something that is not a company, not infrastructure, and not even a platform in the traditional sense?

This debate did not emerge randomly. As Santiago himself noted:

“It’s time to talk about L1s because when markets go down, everyone starts talking about fundamentals.”

That observation is more revealing than it may seem. Narratives rarely precede price. They usually follow it.

Markets move first. Explanations come later.

And once a narrative gains traction, it becomes reflexive: it reinforces positioning, legitimizes exits, and pressures founders and protocols into strategic decisions that may or may not be structurally correct.

This is precisely where crypto finds itself today.

Markets as Predictive Systems, Not Storytelling Machines

One of the most underappreciated truths in investing is that markets often act as predictive mechanisms, revealing structural tensions long before consensus forms.

When L1 prices stagnate or fall despite regulatory clarity, ETF approvals, and institutional narratives, it forces a difficult question:

Is the market signaling overvaluation — or signaling a strategic misalignment inside the protocols themselves?

Santiago’s answer is clear: L1s are overvalued, full stop.
Haseeb’s response is equally clear: markets are pricing long-term exponential adoption, not current cash flows.

Both positions are internally coherent.
Both are incomplete.

The False Binary: “Overvalued” vs “Early”

The debate often collapses into a simplistic binary:

• Either L1s are wildly overvalued on price-to-sales metrics

• Or they are early-stage exponential technologies where traditional valuation doesn’t apply

But this framing misses the real issue.

The real question is not whether L1s are overvalued.

The real question is:

What kind of entity is an L1 supposed to be?

Because different entities deserve radically different valuation models.

The Infrastructure Trap: When L1s Compete Like AWS

Santiago is correct on one critical point:

We have invested over $100 billion in infrastructure, and blockspace is no longer scarce.

But what follows from that observation is more dangerous than it appears.

To remain competitive, most L1s — Ethereum included — have aggressively subsidized transaction costs, collapsing fees to near-zero. This was not organic efficiency. It was predatory pricing.

We are now in a generalized dumping phase across crypto infrastructure.

This is not unlike what happened in:

• Airlines

• Telecoms

• Cloud infrastructure

Industries where:

• Capacity outpaced demand

• Competition centered on price

• Margins structurally collapsed

If L1s define themselves as commodity compute providers, then Santiago is absolutely right: price-to-sales is the correct metric — and valuations are indefensible.

In that world, L1s don’t become Amazon.
They become telcos.

And telcos never captured the value of the internet.

Why the Amazon Analogy Breaks Completely

Both sides invoke Amazon. Both sides misuse it.

Amazon never:

• Generated massive revenue early

• Then deliberately collapsed pricing

• While losing monetization power

Ethereum did.

At its peak, Ethereum generated ~$10 billion in annualized revenue — not projections, not expectations, but realized fees — at a far earlier stage of adoption.

This matters.

Amazon never experienced a phase where it was too profitable to remain competitive.

Ethereum did.

And in response, Ethereum chose to suppress its own revenue to preserve ecosystem growth.

That makes Ethereum fundamentally unlike Amazon — and unlike almost any tech company.

Ethereum Is Not a Startup. It Is an Open-Source State

This is where the debate needs a new conceptual frame.

Ethereum is not:

• A SaaS company

• A cloud provider

• A traditional platform

Ethereum is closer to something historically unprecedented:

An investable, open-source, monetary jurisdiction.

This is what might best be described as Open Source Capitalism.

Ethereum accidentally discovered something no open-source project before it ever achieved:

• A native currency

• A credible monetary policy

• A capital market that prices governance decisions in real time

Linux never had that.
HTTP never had that.
SMTP never had that.

Ethereum does.

But here lies the danger.

Ethereum still behaves culturally like Linux — not like a state.

The Core Risk: Confusing Jurisdictions with Infrastructure

Santiago warns that margins in competitive industries go to zero.

That is true — for infrastructure.

But jurisdictions are not infrastructure.

Countries do not compete primarily on transaction costs.
They compete on:

• Legal certainty

• Monetary credibility

• Security guarantees

• Institutional trust

• Capital protection

And critically:

They issue currency.

This is where the “city” analogy breaks down.

Cities don’t issue money.
Countries do.

Ethereum is far closer to a monetary state than to a city or a cloud provider.

And yet, Ethereum’s strategy increasingly treats ETH like a utility token, not a sovereign currency.

That is why monetary premium is collapsing.

The Monetary Premium Problem

Today, ETH is often:

• Used briefly

• Immediately sold

• Held minimally

That is not how currencies of economic regions function.

In real jurisdictions:

• Economic actors must hold balances

• Obligations are denominated in the native currency

• Monetary demand is structural, not transactional

When ETH loses that role, valuation collapses into:

• Fee multiples

• Yield narratives

• Speculative optionality

Which is exactly the Cisco scenario Santiago fears.

Why “Speculation” Is Not the Problem

One of the most misleading claims in the debate is:

“No one uses this other than speculation.”

That statement fundamentally misunderstands finance.

Speculation is not a flaw.
It is the coordination layer of capital.

Price discovery, liquidity, leverage, and risk transfer are among the most value-creating mechanisms in modern economies.

Every developed nation correlates financial depth with GDP growth.

The issue is not speculation.

The issue is who captures its value.

Apps, Aggregators, and the Final Aggregator Question

Santiago argues — correctly — that user aggregators capture value.

But there is a deeper layer:

Jurisdictions are the final aggregators.

Apple captures value not only because it controls users — but because it controls:

• Distribution

• Rules

• Enforcement

• Currency (indirectly, via pricing power)

If L1s abdicate governance, monetary policy, and economic capture, then yes — value migrates upward.

But that is a strategic choice, not an inevitability.

The Real Fork in the Road

This debate is not about whether L1s are expensive.

It is about which category each L1 chooses to belong to:

1. Commodity Infrastructure

• Competes on price

• Valued on revenue multiples

• Margins compress

• Becomes AWS or a telco

2. Digital Jurisdictions

• Capture monetary premium

• Price governance, security, and trust

• Compete on institutional quality

• Valued like sovereign assets, not companies

The market is currently unable to distinguish between these two.

And many L1 teams are making that confusion worse.

The Question Both Sides Must Answer

To Santiago:

If Ethereum is merely infrastructure, why did it ever generate $10B in revenue — and why would a rational infrastructure provider voluntarily destroy that capacity?

To Haseeb:

If Ethereum is a jurisdiction, why does it continue to marginalize financial strategy, monetary premium, and economic capture as secondary concerns?

Because a state that refuses to collect sustainable taxes eventually collapses — no matter how open-source its ideology.

Conclusion: Overvalued — or Strategically Undecided?

Ethereum is not “overvalued” in isolation.

It is strategically unresolved.

If it becomes a global digital jurisdiction with a credible monetary role, it may be closer to the dollar than to Cisco.

If it continues to behave like subsidized infrastructure, it will be priced like one.

Markets are not dumb.

They are waiting.

And eventually, they will force the answer.

SKY inherits that entire monetary philosophy, but expresses it through a new unit structure and a post-Endgame governance framework. Understanding SKY’s supply today therefore requires understanding MKR’s past: why the cap existed, how it was broken during crisis, how it was repaired through deflationary policy, and why the migration to SKY aimed to preserve scarcity while enabling new incentive layers.

This article traces that supply history from the original MKR hard cap, through Black Thursday’s emergency minting, the long burn era that followed, and finally the MKR→SKY conversion at 1:24,000. It then analyzes SKY’s current supply regime—stable since June after an early emission episode—and what its holder structure implies about long-term alignment versus short-term float. The goal is simple: to show that SKY’s supply is not a fresh beginning, but the continuation of Maker’s core economic DNA.

1. The Origin: MKR’s 1 Million Hard Cap

Maker launched MKR with an initial supply of 1,000,000 tokens—a deliberately scarce governance asset meant to align risk management with tokenholder incentives. MKR wasn’t intended to be a “utility token” with flexible emissions. Instead, it was a recapitalization backstop: if the system generated surplus, MKR would be bought and burned; if the system ran a deficit, MKR could be minted and auctioned to restore solvency.

This design created a strong reflexive loop: MKR holders benefited from careful governance because good risk policy led to protocol surplus and thus MKR burns.

2. The Shock That Broke the Cap: Black Thursday and Emergency Minting

That deflationary story was interrupted by the most dramatic stress test in Maker history: Black Thursday (March 12, 2020). ETH’s price collapsed so fast that Maker liquidations failed to raise enough DAI to cover vault debt. The protocol ended up with roughly $4–6.6M of unbacked DAI (“bad debt”).

Maker’s solution was exactly what MKR was designed for: a Debt Auction. New MKR was minted and sold for DAI to recapitalize the system. The retrospective and post-mortems report that a bit over 20,000 MKR were minted and auctioned, raising about 5.3M DAI and restoring system solvency.

So, the hard cap proved “soft in emergencies”: MKR supply could expand only when the protocol needed to pay off debt and protect DAI’s peg.

3. Years of Repair: Surplus Burns and Supply Drift Back Down

After 2020, Maker spent years in a long repair phase. As the protocol matured and revenue grew, surplus auctions/buybacks burned MKR, steadily offsetting the Black Thursday dilution. Mechanically, this is the mirror image of debt auctions: surplus DAI is used to buy MKR and burn it, reducing supply.

By the time the Endgame rebrand and migration path to SKY was approved, MKR’s total supply was just above 1.0M again—around 1,005,577 MKR per CoinGecko-indexed data.
(So effectively: emergency minting pushed MKR above 1M, and years of burns pulled it back toward the original cap.)

4. The Migration: From MKR to SKY (1 MKR → 24,000 SKY)

Endgame introduced SKY as the successor governance asset, with a fixed conversion rate:

1 MKR converts into 24,000 SKY.

This ratio is now the canonical bridge for governance migration.

The intent wasn’t just rebranding. The larger unit supply makes SKY more flexible for staking incentives, rewards distribution, and long-term ecosystem design, while preserving MKR holders’ proportional ownership through the fixed exchange rate.

5. SKY’s Early Emission Episode: 600M Mint, Then a Halt

At the moment of transition, Sky governance approved an initial expansion of SKY supply: 600 million SKY were emitted, but after roughly two months the emissions were stopped (as per your summary of the governance timeline).

This short-lived issuance set the stage for the current policy: supply stability first, emissions only if explicitly justified.

6. Where We Are Now: Stable Supply and a Buyback-Not-Yet-Burning Regime

According to your Dune dashboard:

• Current SKY supply: 23,474,312,042 SKY

• This level has been stable since June.

• The June peak was 28,658,371,501 SKY, after which supply contracted and then stabilized.

Your charts also show that buybacks are happening but not yet burned, meaning they are not reducing supply today. This is consistent with Sky’s stated intention to begin systematic burns once the full “Star” architecture is deployed.

So the policy is:

1. Keep supply fixed in normal times.

2. Allow minting only in true emergencies (i.e., to cover protocol debt), mirroring MKR’s original backstop logic.

That keeps SKY explicitly aligned with Maker’s founding ethos: scarcity unless solvency is at risk.

7. Market Implication: A Sub-Billion Valuation Despite Large Units

Even with tens of billions of units, the stable supply narrative frames valuation cleanly. Using your current market cap estimate:

• Market cap ≈ $988,471,500

• i.e., still below $1B

So SKY is priced like a scarce governance claim on a large stablecoin engine despite its large nominal unit count.

8. Holder Structure: Delegation and Locking Signal Long-Term Alignment

A key part of the SKY supply story is who holds it and in what form. Your holder breakdown indicates that most SKY sits in buckets such as:

• Sky Lockstake Engine

• Sky Chief (delegated)

• Large long-term aligned clusters (e.g., MKR2SKY converters / governance infrastructure)

• Only a minority in liquid venues like CEXs.

That matters because delegated/locked balances typically reflect long-duration governance alignment, not short-term trading float. In other words, the effective circulating supply that can sell is likely much smaller than the headline total.

Closing Takeaway

SKY inherits MKR’s entire monetary philosophy:

• MKR began as a 1M fixed-cap governance asset.

• It proved resilient through Black Thursday, when ~20k MKR were minted to erase protocol bad debt.

• Over subsequent years, surplus burns pulled supply back toward the cap.

• Endgame then migrated governance to SKY at 1:24,000, preserving ownership while changing unit economics.

• After a brief 600M SKY emission, supply policy reverted to stability.

• Today SKY supply is stable (~23.47B), with burns expected only after the Star rollout, and minting reserved for emergencies.

In short: SKY is MKR’s scarcity-first DNA expressed in a modern, higher-granularity token.

We are entering a distinctly new phase in crypto markets—one where value is no longer subordinate to growth, and where return on deployed capital matters as much as narrative. That shift is being catalysed by two structural developments: first, the sweeping regulatory clarity emanating from the U.S., which effectively de-risked the notion that a token can legitimately deliver yield and not trigger severe regulatory consequences; and second, the maturation of many protocols which have scaled to institutional-grade volumes and are now transitioning from pure growth to monetisation and yield generation.

For an investor whose mindset is grounded in classic value fundamentals, this is an inflection point: where protocols that have been optimising growth may now need to focus on capture of value, distributions, governance alignment and defensive features. This is the context in which we must evaluate UNI (the token of the Uniswap protocol).

2. Uniswap’s Historical Growth Story: Growth over Yield

Uniswap has for years followed a growth-over-yield model: high trading volumes, relentless expansion, minimal returns to token holders. It is analogous to what Meta Platforms (formerly Facebook) did in its early phase: build scale, capture user attention, defer revenue optimisation because that would arguably limit the growth trajectory. In crypto terms, Uniswap’s architecture — decentralised exchange, automated market maker, liquidity pools — has thrived. But the question now is: what about the value capture for token holders?

The cost of capital is real. If one allocates capital into a protocol today that generates no yield, the opportunity cost – and the risk premium demanded – increases. For crypto assets, which endure high beta and cyclicality, the ability to generate a stream of returns (e.g., via fees) is a powerful defense mechanism in downturns. It is far easier to sustain investor patience—and token price stability—where yield is present, whereas absence of yield leaves valuation entirely predicated on hope of multiple expansion.

3. The Value-Capture Thesis: Trading Fees → Token Returns

In the case of UNI/Uniswap the critical toggle is the activation of the “fee switch” — i.e., enabling the protocol to capture a share of trading commissions and then channel those proceeds to token holders (either directly via distributions or indirectly via token burn or treasury accumulation). This is no longer theoretical. Governance documents for Uniswap specifically identify this path: e.g., one proposal frames UNI as “a dividend-accruing financial asset, supported by protocol revenue if the Fee Switch is activated”.

Let us walk through the numbers in your scenario: Suppose the protocol adopts a trading fee of 0.01% on monthly volume of US$150 billion. That fee would produce US$15 million in one month or roughly US$174 million annualised. If the fee was 0.05%, the annual number would approach ~US$870 million. For a protocol whose incremental cost of operations is negligible (given existing infrastructure), this is high margin cash flow. If token holders capture a meaningful portion of this via distribution or buy-back/ burn, the valuation uplift could be significant.

Assuming steady growth over the coming years (driven by tokenisation of real-world assets, on-chain institutional flow, multi-chain expansion), a conservative multiple of, say, 10× free cash flow (for a regulated yield-bearing crypto asset) would place UNI’s fair market value in the tens of billions—not hundreds of millions. According to our valuation models, the potential ceiling for Uniswap’s market capitalization under a monetized scenario could reach around US$50 billion — a figure consistent with our order-of-magnitude analysis.

4. Governance, Divergence & Risk: Why the Token Still Trades as an Option

Despite the promising value capture path, the UNI token today does not fully reflect this. Why? Because governance has been ambiguous, control remains concentrated, and the mechanism of fee capture remains unactivated. The governance system of Uniswap is indeed available via UNI token holders, delegation, timelock and proposals. But the reality is more nuanced.

Three major governance critiques stand out:

a) Corporate-capture risk and centralisation
The project is developed by Uniswap Labs (and supported by the Uniswap Foundation) which retains the primary web-app, controls the default interface, claims the 0.25% fee from its own web channel. This means the “brand” and revenue stream is partially decoupled from token-holder ownership. As you note, if the company unilaterally captures revenue without token holder participation, the value accrual to UNI is impaired.

b) Fee-switch inertia and regulatory uncertainty
While governance documents make provision for it, the fee switch has remained inactive for years. The reason? Regulatory risk, voting apathy, and lack of urgency. The article “How Uniswap’s Governance Model Works” flags that a key proposal (fee switch) was debated but not implemented because of regulatory concerns. Trends Wide+1 Until the mechanism is toggled, token-holders remain reliant on hope rather than cash flows.

c) Token governance participation and alignment friction
Low turnout, high thresholds, and large delegates dominate votes. A recent academic study of delegation in Uniswap’s DAO showed patterns suggesting that behind the veneer of decentralisation, large VC-adjacent addresses receive more delegations and could exert outsized influence. arXiv For a value investor, this means execution risk: even if the model is valid, realising token holder capture requires meaningful governance discipline—non-trivial given the owner base.

Collectively, these governance factors turn UNI today into something closer to an “option” on future fee monetisation rather than a cash-flow yielding asset. Thus the market applies a discount—both for execution risk and governance risk.

5. Valuation Framework & Price Implications

From a value investing perspective we should build a three-scenario valuation: Base case (low monetisation), Medium case (fee switch at modest level), and Bull case (fee switch fully activated + sustained growth).

• Base case: No fee switch still; UNI continues to trade on multiple expansion only, say US$3 billion enterprise value (roughly current).

• Medium case: Fee switch at 0.01% on current volumes, ~US$174 million annual cash flow, token-holder capture of say 50% = US$87 million. At a conservative 12× multiple = ~US$1.04 billion. Scale this by growth (e.g., 2× volume in 3 years) = ~US$2 billion.

• Bull case: Fee switch at 0.05% or higher, volumes expand from US$150B/month to US$300B/month over a few years, annual fee pool ~US$1.8 billion, token-holder share ~US$900 million. At 20× multiple (given yield asset premium) = ~US$18 billion. If growth continues further with real-world asset tokenisation, one could model US$50 billion.

Accordingly, if the governance hurdle is cleared and fee capture is activated, the current token price could embed a meaningful upside—potentially several multiples higher. But if governance stalls or capture is blocked, the valuation will languish near base case.

6. Strategic Investor Implications: What to Monitor

From a hedge fund advisor’s lens, the investment thesis for UNI should hinge on key catalysts and risk events:

Catalysts to watch:

• Formal proposal passing the “fee switch” and activation of revenue capture.

• Transparent token-holder distribution mechanism (buy-back, burn, dividend).

• Growth in monthly trading volumes, especially via tokenised assets on Uniswap, demonstrating secular upward trajectory.

• Regulatory clarity/goodwill that dramatically reduces risk of fee distributions being treated as securities.

Risks:

• Governance capture by insiders delays or redirects fee capture away from token-holders.

• Regulatory setbacks (e.g., if fee distribution triggers classification as securities).

• Competitive compression of DEX fees or migration of volume to non-fee protocols.

• Execution risk: even if fee switched on, token-holder share could be diluted or re-invested rather than distributed.

For a value investor, a position in UNI makes sense only if one believes the governance pendulum will swing in favour of token-holder capture, and that volume growth will continue unabated. Without that conviction, the valuation remains speculative.

7. Governance Critique and Final Thoughts

To be candid: my view is that Uniswap’s governance has under-delivered relative to the protocol’s scale. A protocol processing hundreds of billions in volume deserves a token that fully reflects value capture, yet to date the design has fallen short of this promise. The vesting of control with Uniswap Labs’s web-app channel, the slow activation of the fee switch, and the low active participation in governance all suggest mis-alignment. Until token-holders possess clear rights to revenue streams and until governance execution evidence accumulates, the UNI token remains mis-priced relative to its potential—but also subject to meaningful risk.

In short: If you believe that the transition from growth-at-all-costs to monetisation is real — and that crypto protocols will increasingly resemble regulated infrastructure rather than pure speculative bets — then UNI is a compelling value asset at the cusp of a potential reinvention. But if you stay sceptical about governance and capture, then the current price is fair and the upside limited.

8. Conclusion: From Option to Dividend-Bearing Infrastructure

The crux: UNI is today more akin to a call option on fee capture from a globally-scaled platform. If that option is exercised—if governance aligns, fee capture is activated, and token-holder return flows commence—then the token could move from speculative to income-generating infrastructure, with commensurate valuation uplift. For value-oriented institutional investors in crypto, that is precisely the moment to pay attention. Because once yield becomes visible, the discount on crypto valuation may compress, shifting the paradigm from “growth narrative” to “cash-flow reality”

.

After the Dencun upgrade (EIP-4844) introduced blobs — Ethereum’s new data-availability market for Layer-2 rollups — the network achieved one of its greatest technical milestones in years: a ten-fold improvement in scalability.
But economically, Dencun also created an imbalance.

The new blob market functioned too well from an efficiency standpoint and too poorly from a pricing one. Within days of launch, blob fees collapsed to near zero, remaining there for months. Rollups could publish large amounts of data essentially for free, while Ethereum burned almost nothing from blob usage.
This meant the network had massive throughput but almost no economic capture — a form of demand that no longer contributed meaningfully to ETH’s monetary policy.

EIP-7918, titled “Blob base fee bounded by execution cost,” is the first proposal that directly addresses this imbalance. Rather than changing blob supply or bandwidth, it reintroduces a dynamic price floor tied to the execution base fee — ensuring that blob users always pay at least a relevant fraction of what computation on L1 costs.
In short, it restores economic gravity to the blob market.

1. The Technical Core: A Dynamic Reserve Price

How the Proposal Works

Under EIP-4844, blob pricing follows an EIP-1559-style auction:

• If demand exceeds the target number of blobs per block, the blob base fee rises.

• If demand is below target, it falls — with no lower limit.

Because demand for blobs is dominated by execution costs (not by the blob fee itself), this mechanism can easily “lose traction”: even large changes in blob base fee barely affect user behavior, so the algorithm keeps lowering the fee until it effectively hits 1 wei.

EIP-7918 modifies this logic. It introduces a reserve condition inside the function calc_excess_blob_gas():

if BLOB_BASE_COST * base_fee_per_gas > GAS_PER_BLOB * base_fee_per_blob_gas:
    # Do not subtract target_blob_gas

Translated into plain English:

When the execution gas cost of storing a blob (via BLOB_BASE_COST * base_fee_per_gas)
exceeds the current blob base fee, the protocol stops lowering the blob fee further.

This effectively sets a minimum price for blobspace equal to:

Thus, the blob base fee can never fall below one-sixteenth of the execution base fee, maintaining a proportional link between the two markets.

Example

If the execution base fee is 10 gwei, then the minimum blob base fee becomes:

At 131,072 gas per blob, that’s ≈ 0.0000819 ETH per blob — a small but economically meaningful cost floor.

2. Motivation: Fixing a Broken Auction and Paying for Compute

The motivation behind this EIP is twofold.

2.1 Fixing Fee Inelasticity

When blob consumers’ total cost is dominated by execution gas (for example, the cost of verifying a rollup’s proof), reducing the blob base fee has almost no effect on their demand.
The demand curve becomes vertical — perfectly inelastic — and the fee mechanism loses control.
This leads to a pathological state: the base fee drifts toward 1 wei, yet demand doesn’t respond, and when usage spikes again, it takes hours for the mechanism to readjust.

The reserve price restores elasticity to the market: once the base fee can no longer drop below the execution-cost floor, it once again influences user behavior and converges more smoothly toward equilibrium.

2.2 Internalizing Compute Costs

Every blob imposes computational work on the network:

• Nodes must verify KZG proofs to ensure data availability,

• PeerDAS (EIP-7594) increases verification workloads through per-cell sampling and batching,

• These operations consume CPU and memory even if the blob fee is negligible.

By tying the minimum blob fee to the execution base fee, EIP-7918 ensures that blob users pay at least a small fraction of the market rate for compute, aligning incentives and helping maintain node sustainability.

3. The Economic Mechanics — Supply, Demand, and Burn

Supply: Unchanged, But Now With a Real Price Floor

The proposal doesn’t alter the quantity of blobspace (the number of blobs per block), only the minimum unit price.
This means supply remains constant — around six target blobs per block, potentially increasing in future BPO updates — but the marginal price is prevented from collapsing.

Demand: Slightly Lower, But More Efficient

Because blobs will no longer be effectively free, rollups will optimize batching and avoid wasting blobspace.
However, the impact on total demand is expected to be minimal: even at a 0.00008 ETH minimum, blobs remain far cheaper than using L1 gas directly.

In practice, the change discourages inefficient behavior without deterring legitimate usage.

Burn and ETH Value Capture

The largest impact is on Ethereum’s burned fees.
Currently, blobs contribute less than 0.1 % of total ETH burned — essentially zero.
With EIP-7918, they would begin contributing meaningfully again, since every blob now guarantees a minimum burn linked to execution gas.

4. Quantitative Scenarios

Even under moderate conditions, blobs could rise from 0.1 % to 1–3 % of Ethereum’s total burned ETH — an order-of-magnitude improvement over the post-Dencun baseline.

5. Comparison to the Dencun Shock

5.1 Before Dencun (Pre-4844)

All rollup data was posted directly to L1, competing for execution gas.
Rollup transactions accounted for 10–20 % of total gas usage and therefore of burned ETH.
Ethereum captured strong value from L2 activity, though at the cost of high congestion.

5.2 After Dencun

Blobs decoupled data posting from execution gas, creating a new market with abundant supply and almost no demand pressure.
Blob fees collapsed, and the blob market contributed virtually nothing to ETH burn.
Ethereum became highly scalable, but economically “hollow”: blockspace was full, yet fee income fell sharply.

5.3 With EIP-7918

The new floor doesn’t restore pre-Dencun levels — and it shouldn’t.
Its purpose is to stabilize, not reverse, Ethereum’s rollup-centric design.

In relative terms:

Thus, EIP-7918 represents a partial restoration of value capture — not a regression, but a recalibration that ensures the blob market contributes to Ethereum’s fiscal health.

6. Why a Partial Recovery Is the Right Choice

Ethereum’s strategy isn’t to make L1 expensive again; it’s to maintain sound incentives across layers.

• If blob fees were raised too high, rollups would lose competitiveness and migrate less data to Ethereum, undermining the scaling model.

• If blob fees remain at zero, L1 becomes a subsidized resource, hurting ETH’s long-term monetary sustainability.

EIP-7918 finds the middle ground:

• Cheap enough to sustain L2 growth,

• Expensive enough to signal scarcity and cover node costs,

• And adaptive, since the floor automatically scales with the execution base fee.

This design preserves economic discipline without sacrificing scalability — exactly the kind of monetary engineering Ethereum has been refining since EIP-1559.

7. Broader Market Implications

7.1 For Layer-2 Rollups

Rollups will face a small but steady cost floor for blob posting.
The economic impact is marginal — fractions of a cent per transaction — but the predictability improves UX and fee estimation.
More importantly, it prevents “race-to-zero” dynamics that could lead to network-level inefficiencies or unfair competition.

7.2 For Validators and Node Operators

By linking blob fees to execution gas, nodes are compensated more proportionally to the resources they expend verifying blobs and proofs, especially with the heavier workloads introduced by PeerDAS (EIP-7594).

7.3 For ETH Holders

A stable source of burn from blobs marginally strengthens ETH’s deflationary bias and enhances fee diversity — reducing dependence on execution-layer activity alone.

8. Economic Scenarios for ETH

Scenario 1 — Execution-Led Regime (Low Congestion)

Blob floor active but mild. Burn increases modestly (≈ +0.3 %).
ETH impact: neutral to slightly bullish due to more stable fee income.

Scenario 2 — Balanced Regime (Medium Congestion)

Blob floor meaningfully contributes 1–2 % of total burn.
ETH impact: moderately bullish, improved monetary capture.

Scenario 3 — Congested Regime (High Fees)

Execution base fee high → blob floor rises proportionally → L2s pay more → strong burn.
ETH impact: bullish, as both execution and blob burns climb together.

Scenario 4 — Demand Saturation (Stagnant Blob Usage)

Blob floor rarely active, burn unchanged.
ETH impact: neutral, but improved stability still a net positive.

Most likely outcome: Scenario 1 → 2 transition, yielding gradual recovery of blob-related burn without disrupting the L2 ecosystem.

9. Macroeconomic Reflection — Fixing Dencun’s Asymmetry

The core issue after Dencun wasn’t technological but macroeconomic:
Ethereum scaled supply (blobs) far ahead of demand, collapsing its marginal pricing power.
EIP-7918 addresses that imbalance elegantly: it anchors blob pricing to the market value of computation, re-coupling blobspace to the network’s main economic variable — the execution base fee.

This transforms Ethereum’s dual-market design into a coherent two-gear system:

• Execution gas: drives core computation and L1 state transitions.

• Blob gas: scales data throughput, but remains tethered to execution value.

By binding these together, the protocol re-establishes a healthy feedback loop between resource consumption and economic contribution.

10. Conclusion — Re-Introducing Discipline to Scalability

EIP-7918 doesn’t make blobs expensive. It makes them honest.
It ensures that scaling Ethereum doesn’t mean decoupling it from its monetary foundation.

The proposal:

• Prevents blob fees from collapsing to zero,

• Ensures blob users pay at least a fraction of real compute costs,

• Stabilizes the blob fee market and reintroduces elasticity,

• Adds 1–3 % of sustainable burn to Ethereum’s economy,

• And aligns long-term incentives between L1 and L2.

In Perspective

Dencun gave Ethereum unprecedented scalability but stripped its economic feedback.
EIP-7918 gives it back — not by limiting growth, but by re-anchoring prices to real costs.

The result is a more balanced, more predictable, and more sustainable Ethereum economy:
one that scales without forgetting that scalability must still pay its own way.

Ethereum’s scalability roadmap has long been defined not just by how much it scales, but how and where it does so.
Layer 2s (L2s) pursue volume and cost efficiency; Layer 1 (L1) safeguards trust and finality.

EIP-7935 — “Set Default Gas Limit to 60M” — embodies this distinction.
It proposes increasing Ethereum’s default gas limit per block from 36M to 60M, a +66.7% rise in execution capacity.
The goal isn’t to make Ethereum cheaper, but to make it more capable and stable under load, ensuring that essential activity can always find blockspace on L1 without risking network degradation.

The Proposal: Expanding L1 Execution Capacity

Technical Overview

EIP-7935 coordinates all execution layer (EL) clients to update their default block gas limit to 60 million, effective in the Fusaka upgrade (late 2025).
This follows extensive testing across client combinations and devnets to confirm that:

• Execution and consensus clients remain stable at 60M gas,

• Block propagation and gossip stay well within safe network thresholds (below 150M gas worst-case limits),

• And no pathological block structures threaten consensus performance.

In practice, this is a default configuration change, not a consensus rule — validators and client defaults will naturally converge toward the new limit over time.

Coordination and Context

The change aligns with other Fusaka proposals:

• EIP-7825 (Transaction Gas Cap) ensures that no individual transaction exceeds ~16.7M gas, allowing 3–5 transactions to fill a 60M block safely.

• EIP-7642 (eth/69) improves network efficiency and synchronization, enabling clients to handle larger blocks with less overhead.

Together, they reflect a shift toward scaling L1 safely, focusing on throughput consistency rather than raw expansion.

Economic Interpretation: Supply, Demand, and Value Flow

The Supply Side – More Blockspace

Increasing the gas limit increases L1 blockspace supply by two-thirds.
If demand remains constant, the base fee (EIP-1559) will fall — a natural result of less congestion.
If demand expands proportionally, the base fee stabilizes; if it grows faster, congestion (and burn) rises again.

This creates a three-dimensional trade-off between capacity, revenue (burn), and user experience (UX).

The Demand Side – The Inelastic Layer

Ethereum’s L1 demand is structurally inelastic.
Users and protocols that operate directly on mainnet — liquidators, DAOs, high-value DeFi, governance frameworks — are price insensitive because they need L1’s trust and atomicity.

Conversely, price-sensitive demand has already migrated to L2s:

• Rollups, gaming, and consumer transactions enjoy cheap execution there,

• While Ethereum L1 has evolved into a premium settlement layer — a scarce and high-value environment.

Empirically, demand elasticity on L1 is low (ε ≈ –0.2 to –0.4).
In other words, lowering fees doesn’t dramatically increase usage; it just makes existing users’ activity cheaper.

Why Lowering Fees Doesn’t Necessarily Mean Growth

Reducing the cost of L1 execution doesn’t unlock untapped demand — because that demand already lives on rollups.
Instead, it reduces the effective “tax” paid by existing users who were willing to pay high fees anyway.

That can be beneficial if congestion was blocking essential operations (liquidations, oracle updates, governance executions).
But if capacity exceeds need, the economic capture of Ethereum — its burn and validator revenue — declines without a compensating rise in activity.

This is where the philosophy of L1 economics diverges from L2:

Ethereum’s base layer doesn’t compete on volume; it competes on credibility.

Elasticity Scenarios and Macro Outcomes

The most plausible scenario is between A and B, leaning toward A:

• L1 usage remains roughly constant,

• Base fees fall modestly,

• Burn stays stable or slightly lower,

• Validator tips and MEV decrease slightly,

• UX improves (less spiking, faster confirmations).

The outcome is economically neutral but systemically positive — Ethereum becomes more reliable, not necessarily more profitable.

Comparison with the Blob Fee Market (EIP-4844)

A key concern is whether the 60M gas expansion could trigger a “blob effect”:
a rapid capacity increase leading to a collapse in fee revenue — as happened with blob prices post-Dencun.

But the analogy doesn’t hold:

The 60M gas limit is an incremental optimization, not a subsidy.
It should lower congestion volatility, not crater fee income.

Strategic Rationale: Stability as Economic Strength

From a macro perspective, this proposal reinforces Ethereum’s role as a trust premium network:

1. Improved reliability for critical operations
   High-value protocols (L2 sequencers, oracles, bridges) gain predictable execution times even during market stress.

2. No dilution of value capture
   As long as blocks remain largely full, total burn stays steady — preserving ETH’s monetary discipline.

3. Better alignment between L1 and L2
   L1 remains the security backbone; L2s absorb elastic retail demand.
   The division of labor becomes clearer, strengthening the multi-layer economy.

Broader Economic Interpretation: Efficiency, Not Subsidy

EIP-7935 doesn’t “make Ethereum cheaper” — it makes it more efficient at its current role.

• Short term: Slightly lower base fees, smoother UX, modestly lower validator income.

• Medium term: Higher throughput stability, more predictable block economics.

• Long term: A stronger equilibrium between capacity, security, and monetary value.

By optimizing supply without flooding the market, Ethereum preserves the scarcity premium of its blockspace — essential to sustaining ETH’s burn-driven deflationary model.

Conclusion: Reliability Is the New Scalability

Ethereum L1 is not designed to be cheap — it is designed to be trustworthy.

Raising the gas limit to 60 million makes the base layer more resilient, not more commoditized.
It acknowledges that most cost-sensitive users already live on L2s, and that L1’s true value lies in credibility, composability, and final settlement.

The economic effect is neutral-to-slightly-positive:

• Base fees decline modestly,

• Burn remains stable,

• The network becomes more predictable,

• And ETH’s long-term value as the collateral of the crypto economy is reinforced.

EIP-7935 thus represents a measured expansion — one that scales reliability, not speculation.
It continues Ethereum’s maturation into a monetary system where efficiency, discipline, and security define economic strength.

Ethereum’s development philosophy has long prioritized technical progress — scalability, decentralization, and security — while rarely addressing how these protocol upgrades affect ETH’s economic equilibrium.
Each major change, from EIP-1559 to Dencun and now Fusaka, reshapes the relationship between supply and demand for ETH, yet the Foundation’s upgrade process largely omits any financial assessment of these shifts.

The upcoming Fusaka upgrade and its key component, PeerDAS (EIP-7594), mark another critical step in Ethereum’s scaling roadmap. PeerDAS introduces a new networking protocol that enables nodes to verify data availability through sampling rather than downloading full blobs. This innovation allows Ethereum to raise its per-block blob limit — increasing throughput for Layer 2 (L2) rollups while preserving security and decentralization.

But from a financial standpoint, PeerDAS could also amplify a troubling dynamic: expanding supply (blockspace and data capacity) ahead of real demand, which risks eroding the economic value captured by ETH itself.

The Blob Fee Market: A New Market That Isn’t Paying Off

When EIP-4844 (Proto-Danksharding) launched with Dencun in early 2024, it introduced a dedicated blob fee market for rollups. The idea was simple: rollups would post their compressed transaction data to Ethereum L1 as blobs, paying fees in ETH for data availability — a new source of network revenue and potential ETH burn.

Initially, blob fees surged. The market was active, utilization high, and fees per blob reached meaningful levels. But this excitement was short-lived.

The Data Speaks

Recent Dune Analytics dashboards show that:

• Blob submission fees have fallen dramatically since April 2024.

• The blob base fee has collapsed, often nearing the protocol minimum.

• Utilization of blob space remains far below the target.

In practice, blob submissions — once seen as a future fee engine — now contribute negligible revenues to Ethereum. The network successfully became cheaper and more scalable for rollups, but failed to convert that success into financial value for ETH holders.

PeerDAS and the Economics of Oversupply

PeerDAS improves technical efficiency by allowing nodes to verify blob data through sampling. This reduces per-node bandwidth and storage requirements, enabling Ethereum to safely raise the blob target per block (from 9 → 15 → 21 under Fusaka’s BPO1 and BPO2 upgrades).

However, this increase in supply collides with a stagnant demand curve.

Supply Expansion Without Demand Growth

The current blob market is already underutilized. Increasing blob capacity again — without a proportional increase in rollup demand — will likely:

• Push blob fees even lower,

• Reduce ETH burned through blob transactions, and

• Further weaken the monetary premium of ETH.

This dynamic mirrors classic supply-side inflation: a growing capacity of blockspace and data availability with insufficient usage to sustain prices. In economic terms, Ethereum is front-loading supply, hoping that future adoption will justify it.

The Illusion of Growth

From a technical viewpoint, more blobs per block look like progress. From a financial viewpoint, it resembles overproduction in a market with price-inelastic demand. The equilibrium shifts to lower prices — great for users and rollups, but detrimental for ETH as a value-accruing asset.

Ethereum is scaling ahead of demand, not because of demand — and the fee market reveals it.

Value Capture and ETH’s Monetary Equilibrium

ETH’s economic value depends on two key channels:

1. Demand for ETH – as gas for transactions, collateral for staking, and fee currency for L2 submissions.

2. Supply reduction – through burning of base fees (EIP-1559) and net issuance after staking rewards.

If blob submissions are cheap and infrequent:

• Less ETH is demanded for fees;

• Less ETH is burned to offset issuance;

• The token’s real yield to holders and stakers declines.

Ethereum, paradoxically, is becoming a cheaper and more efficient settlement layer, but one that captures less of the value it enables. The growing success of L2 ecosystems (Base, Arbitrum, Optimism, zkSync) has not translated into ETH demand or fee revenue, because the cost of interacting with L1 — the price signal that underpins ETH’s monetary role — has collapsed.

Technical Efficiency vs. Economic Efficiency

Technically, PeerDAS is a masterpiece of protocol design:

In other words, PeerDAS makes Ethereum technically leaner but economically thinner.
The total data availability throughput may multiply, but the value captured per unit of throughput — denominated in ETH fees burned — is shrinking.

Ethereum’s Strategic Blind Spot

The Foundation’s roadmap continues to treat economic analysis as secondary.
Each EIP is rigorously reviewed for security, implementation, and decentralization, but never for its impact on the token’s financial equilibrium.

This is a strategic blind spot. Monetary equilibrium — the balance between ETH supply (issuance minus burn) and demand (fees and staking) — is what ultimately determines ETH’s value.
Neglecting it risks turning Ethereum into a high-throughput public utility that benefits users but not the asset that secures it.

Policy Implications: When to Scale, and When Not To

From a financial perspective, scaling should not be unconditional.
It should respond to utilization thresholds — expanding capacity only when demand consistently exceeds supply (e.g., >80 % of blob target for several epochs). Otherwise, every new increase dilutes scarcity and compresses fees.

Possible mitigations:

• Dynamic scaling policy: blob capacity increases only when network utilization sustains high levels.

• Fee floor or adjustment factor: introduce a minimal base fee to preserve burn value.

• Demand linkage mechanisms: align L2 fee markets or sequencer staking with ETH demand (e.g., require ETH bonding or partial payment in ETH).

These mechanisms would allow Ethereum to maintain its long-term scalability vision without undermining the monetary soundness of ETH.

Conclusion: Scaling Without Value Is Not Sustainable

PeerDAS and the Fusaka upgrade represent real technical progress — the network becomes lighter, faster, and more scalable. But economically, Ethereum is drifting into an equilibrium of abundant capacity and vanishing fees.

Scalability without value capture turns Ethereum into a utility, not a capital asset.

If the network continues to expand blob supply without binding it to genuine demand, ETH risks losing its reflexive monetary properties — the self-reinforcing loop between usage, fee burn, and scarcity.
Ethereum’s challenge for the coming era is not how to scale, but how to ensure that scaling strengthens the asset that secures it.

Ethereum today stands as the largest and most dynamic ecosystem in the crypto world. It is arguably the most decentralized project after Bitcoin — though decentralization itself is such a nuanced concept that, in some dimensions, Ethereum may actually surpass Bitcoin. This decentralization, while a tremendous achievement, also brings a major challenge: how to define a coherent, long-term strategy in an ecosystem with no central authority.

The Ethereum Foundation — and, to a great extent, figures like Vitalik Buterin — have managed this delicate balance with remarkable success. The Foundation’s strategic direction has served as an anchor for thousands of independent actors, aligning innovation with a shared ethos. That said, Ethereum’s evolution has leaned heavily toward technical excellence while leaving its economic identity largely undefined.

Ethereum has become a technological marvel — a living, breathing open-source project on the scale of the Internet itself — yet it still struggles to articulate its monetary purpose. The network’s developers have spent years perfecting scalability and security, but much less time discussing what ETH means as money.

The “New Oil” Fallacy

For years, ETH has been described as the “new oil” of the digital economy — a narrative that framed it as the essential fuel of Web3 activity. This idea fit regulatory realities: by positioning ETH as a digital commodity rather than a financial asset, Ethereum avoided being classified as a security. It was a pragmatic move that allowed ETH to trade on the CBOE alongside Bitcoin and helped it maintain legal protection under U.S. law.

But what was once a clever legal framing has now become an economic trap. Because ETH is not oil — it is not merely consumed and burned. It is saved, staked, lent, borrowed, and used as collateral. It functions as the monetary base of the digital economy. ETH doesn’t just power activity; it denominates it.

And unlike oil, Ethereum must evolve. Oil doesn’t need developers. Gasoline doesn’t need governance. But Ethereum does. Treating ETH as a commodity implies that it can remain static, that its infrastructure can persist indefinitely without coordinated investment or maintenance. That belief is dangerously unrealistic.

If Ethereum is a digital nation, then it must sustain public goods, invest in its infrastructure, and attract top-tier talent — the digital equivalent of maintaining roads, institutions, and universities. To imagine otherwise is to build a city and expect it to thrive without upkeep.

1. The Cost of Standing Still: Evolution vs. Stagnation

The “oil” metaphor invites complacency. Commodities don’t innovate; they simply exist. But Ethereum cannot afford to stand still. It must continually attract the best minds in cryptography, distributed systems, and economics. Its leadership in blockchain technology depends on relentless innovation, not static perfection.

A “nation” that stops funding its research, infrastructure, and education eventually loses its competitiveness. Similarly, if Ethereum fails to reinvest in its technical and community foundations, other ecosystems will capture its momentum — not because they are better, but because they are evolving faster.

2. The Flight of Talent

Recently, one of the most influential figures within the Ethereum Foundation departed. Though individual reasons vary, the pattern is revealing: it is difficult to retain talent in an organization whose stated mission is to dissolve itself.

The “subtraction” philosophy — the idea that the Foundation should eventually disappear — is intellectually elegant but practically self-defeating. No organization can attract or retain high-caliber talent if its ultimate goal is obsolescence.

Moreover, the Foundation’s treasury is finite and denominated in ETH, which fluctuates with market cycles. Selling ETH during bear markets reduces reserves precisely when they are most needed. As a result, the Foundation has been forced to focus on cost control at a time when the ecosystem’s growth demands the opposite: more hiring, more coordination, and more investment.

There have been proposals to allocate a small portion of network fees to a Foundation treasury, yet these have been rejected — often for admirable reasons, such as avoiding agency problems or excessive centralization. But if the alternative is underfunding the very infrastructure that sustains Ethereum, then new mechanisms must be considered.

3. The Real Cost of Saying “Fees Don’t Matter”

One of the most common arguments within the community is that Ethereum’s transaction fees — its “revenues” — don’t matter, because Ethereum isn’t a company and shouldn’t be valued as one.

That’s true. Ethereum is not a corporation. Its goal is not to generate profits for shareholders.

But to claim that fees don’t matter is like claiming that taxes don’t matter for a country’s survival. Fees are not about profit; they are about sustainability. They are what fund the nation’s roads, maintain its defense, and ensure its services continue to operate.

In Ethereum’s case, fees represent economic activity and demand. They are the network’s heartbeat. When fees drop to near zero, it signals not prosperity but fragility — a network subsidizing activity without capturing any value from it, like a state offering everything for free while its treasury runs dry.

Ethereum doesn’t need to extract value like a business, but it must maintain an economic equilibrium. Otherwise, the network becomes like a nation with no tax base, forced to issue more of its currency (ETH) to cover basic needs — a recipe for long-term devaluation.

4. Respecting ETH as a Currency

Within the Ethereum community, discussions about ETH’s price have long been taboo, often dismissed as speculative. Yet ETH’s market value directly impacts every citizen of the Ethereum economy — from developers to DeFi protocols.

Major upgrades like Dencun, which dramatically reduced demand for ETH by lowering fees, illustrate this disconnect. The change was celebrated as a technical triumph but economically it meant that the network’s “currency” lost demand overnight, devaluing the holdings of everyone who treats ETH as savings or capital.

When the Foundation and developers ignore the monetary consequences of technical decisions, they inadvertently send a message: holding ETH is a civic act, not an economically rational one. But no economy can thrive on civic virtue alone.

If ETH is to serve as the base currency of the on-chain world, its holders must be rewarded — not penalized — for supporting the system. In traditional terms, if confidence in a currency falters, central banks raise interest rates to restore value. In Ethereum, however, we’ve flirted with the opposite — negative staking yields and narratives that discourage holding. That is not monetary prudence; it’s monetary self-sabotage.

5. The Illusion of Free Growth: Subsidizing the Network

The Dencun upgrade, by drastically reducing transaction costs, also eliminated a key source of economic sustainability. Ethereum now subsidizes nearly all activity on the network. This is like a nation reducing taxes to zero to stimulate economic growth — effective in the short term, disastrous in the long run.

Ethereum’s historical data shows that even during times of high fees, demand remained strong. The network’s value proposition is not its cheapness but its neutrality, security, and credibility. A moderate fee structure that maintains these qualities is far more sustainable than an artificially low one that erodes the system’s self-sufficiency.

Lowering fees to improve scalability is admirable, but lowering them to zero destroys the very mechanisms that allow the system to maintain itself. A healthy economy doesn’t grow by eliminating its revenue — it grows by increasing its productivity and redistributing the gains.

Ethereum’s Layer 1 should not surrender this role. The base layer must evolve and remain economically viable — not become a subsidized public utility that eventually collapses under its own weight.

A Nation Without Taxes, A Treasury Without Power

All these factors point toward a single reality: Ethereum has become a nation without taxes. Its citizens are active, its economy vibrant, but its government — the Foundation — is underfunded and its monetary policy remains misunderstood.

The paradox is that Ethereum’s greatest strength, its decentralization, could also become its greatest weakness if it prevents the ecosystem from developing sustainable funding and governance mechanisms. A digital nation cannot thrive without institutions capable of maintaining the public goods on which its prosperity depends.

Reframing the Narrative: ETH as the Digital Dollar

To move forward, Ethereum must abandon the “new oil” metaphor and embrace its true role as the digital dollar — the base currency of the on-chain world.

ETH is not fuel; it is money. It is the reserve asset, the store of value, and the settlement medium for an emerging digital economy. It doesn’t just power transactions; it denominates trust.

This shift in narrative is not cosmetic — it is existential. Commodities are consumed. Currencies endure. Treating ETH as a commodity limits its potential to be the backbone of decentralized finance. Recognizing it as a currency opens the door to sustainable governance, funding, and long-term growth.

Conclusion: The Path Forward

Ethereum’s paradox — a currency that thinks it’s a commodity — has worked until now, but it will not sustain the next era. Without a bold reflection on its economic model, Ethereum risks becoming like a once-thriving city that slowly decays: its infrastructure outdated, its treasury empty, its talent dispersed.

Ethereum must evolve not only as a protocol but as an economy — one capable of funding itself, rewarding participation, and maintaining its digital commons.

ETH must stop pretending to be oil.
It is the digital dollar — and the sooner we accept that, the sooner Ethereum can fulfill its true potential as the foundation of the Internet’s economy.

For more than a decade, the Bitcoin–Gold comparison has structured one of the most fascinating narratives in modern finance.
Bitcoin, the “digital gold,” represented the dematerialization of scarcity —the idea that value could exist purely in code, detached from atoms. Gold, on the other hand, was the ancient store of value: tangible, inert, yet timeless.

The usual argument —which I have often used myself— was that Bitcoin solved the physical limitations of gold: it was divisible, portable, and transferable at the speed of light. Gold, by contrast, required vaults, borders, and trust.

But what happens when gold itself becomes digital?
The tokenization of gold may well be one of the most transformative and underestimated innovations of this decade. It is not merely about digitizing ownership —it’s about reintroducing gold as bearer money in the digital realm.

II. From Bullion to Bytes: A Brief History of Gold as Bearer Money

For centuries, gold’s power lay in one simple principle: possession equaled ownership.
A Roman aureus, a Venetian ducat, or a British sovereign was a bearer instrument —its mere custody conferred title. No intermediaries, no registries, no permissions.

Gold coins were the first truly global medium of exchange, circulating across empires and centuries. The solidus of Byzantium, the florin of Florence, and the escudo of Spain all functioned as portable stores of value precisely because the metal itself carried its worth.

This sovereignty ended gradually with the rise of paper claims, bank reserves, and digital ledgers.
The bearer money age faded, replaced by a system where possession became conditional —mediated by banks, custodians, and centralized databases.

III. Tokenization: Restoring the Bearer Nature of Gold

The tokenization of gold represents a return to bearer money, but now in a digital form.
When gold is issued as a token on a public blockchain, it can once again be held, transferred, and verified by possession.

The difference between holding an ETF and holding a tokenized ounce of gold is profound:

• An ETF share is a claim —a line in a centralized database, reversible and permissioned.

• A gold token on a public chain is a bearer asset —ownership is embedded in the token itself, transferable peer-to-peer, final on settlement.

As with stablecoins, the key is the network.
A tokenized gold that circulates on public, permissionless blockchains —like Ethereum or Tron— regains the ancient property of sovereign possession. The blockchain becomes the new vault, cryptography replaces physical custody, and every user becomes their own banker.

By contrast, if tokenized gold exists only inside closed systems, accessible through KYC-gated platforms or private ledgers, then we have simply replicated the existing financial model: a digitized claim, not digital gold.

IV. Public vs. Private Tokenization: The Sovereignty Divide

This distinction mirrors the one we explored in The Renaissance of Bearer Money:
When a digital asset depends on permission, identity, or institutional validation, it ceases to be true bearer money.

🪙 El Renacimiento del Dinero al Portador: Cómo las Stablecoins están recreando el Efectivo Digital

I. El dinero al portador: una idea antigua con nueva relevancia Durante siglos, el dinero físico fue una tecnología de soberanía.

https://www.linkedin.com

In the context of tokenized gold:

• Public network tokenization (e.g., Tether Gold, PAX Gold)

  • Circulates freely on decentralized networks.

  • Transfers are final, direct, and independent of the issuer.

  • Anyone with a wallet can own and move it.

  • It behaves like digital bearer gold.

• Private or permissioned tokenization (bank platforms, KYC-only systems)

  • Transactions require authorization and compliance checks.

  • Ownership depends on platform records, not on-chain proof.

  • The asset cannot circulate peer-to-peer.

  • It behaves like a digital gold account, not gold itself.

In other words, the degree of sovereignty is determined not by the token, but by the network it lives on.
Tokenization on public chains revives the ancient power of gold as money by possession, while tokenization on private systems merely extends the reach of financial intermediation.

V. Expanding the Market: Gold for the Many

Historically, access to gold as an asset was limited to institutional channels: ETFs, futures, or bank vaults.
For the average person —especially in emerging economies— owning and verifying physical gold was cumbersome, expensive, and often unsafe.

Tokenized gold changes this dynamic completely.
For the first time, any individual can hold a verifiable, divisible, and transferable form of gold. It brings the monetary sovereignty of bullion into the smartphone era.

The parallels with the medieval gold coin are striking: just as the florin facilitated trade across Europe, tokenized gold could now enable frictionless cross-border transactions, savings, and remittances.

VI. Between the Dollar and Bitcoin: The New Monetary Triangle

From a macro-financial lens, tokenized gold now occupies a unique middle ground:

• Like the Dollar (USDT, USDC), it offers stability and liquidity.

• Like Bitcoin, it offers direct, borderless custody.

• Yet unlike both, it is backed by a tangible, inflation-resistant asset with millennia of trust.

This positioning could make tokenized gold a new monetary pillar —a hybrid store of value for digital economies that crave both stability and sovereignty.

Perhaps we are seeing the early formation of a digital gold standard, where savings and transactions flow through gold-backed, bearer-style tokens instead of fiat or volatile cryptoassets.

VII. Gold in DeFi: The Next Great Use Case

If 2024 was the year of tokenized Treasuries and stablecoin dominance, 2025 could mark the rise of GoldFi —the integration of gold into decentralized finance.

Imagine collateralized lending, liquidity pools, or savings protocols built around gold-backed tokens.
This would transform gold from a passive store of value into an active participant in the digital economy —earning yield, enabling credit, and circulating as programmable collateral.

In such a world, the ancient metal would not just preserve wealth; it would generate and mobilize it, reclaiming its role as the foundation of trust in a decentralized monetary system.

VIII. Conclusion: The Return of Digital Bearer Gold

Between the Dollar’s digital ubiquity and Bitcoin’s digital independence, tokenized gold emerges as the quiet third force.
It restores the bearer principle that defined money for millennia —the ability to own value by holding it, without permission or mediation.

If Bitcoin reimagined sovereignty through code, and stablecoins redefined liquidity through networks, tokenized gold combines both legacies —anchoring the digital age to the oldest form of value humanity has ever trusted.

Perhaps, after all, the aureus is being reborn —not in mint, but in code.

Ethereum’s supply side has become relatively predictable. With issuance now stabilized and the burn mechanism providing a continuous counterbalance, changes in supply are slow and easy to model. Demand, on the other hand, is far more dynamic, heterogeneous, and fragmented across multiple layers of activity — from validators and DeFi participants to speculators, users, and institutional actors. Understanding who demands ETH, why, and how that demand evolves over time is essential to explain price formation beyond simplistic narratives.

This article marks the beginning of a weekly series that aims to measure and interpret the evolving demand for ETH. By taking a more micro-oriented perspective, the goal is to uncover how different actors — builders, investors, protocols, and retail participants — contribute to Ethereum’s economic activity and how their collective behavior translates into market demand for the token.

In this first installment, we’ll establish the basic premise: the price of ETH emerges in the market as the equilibrium between constant supply and variable demand. Since Ethereum’s issuance is currently steady, changes in price must be primarily understood through shifts in token demand — both in terms of buying pressure and selling activity — across these different groups of participants.

The Organic Demand: Ethereum as a Computational Commodity

The most fundamental and organic form of demand for ETH comes from its use as the native asset required to execute smart contracts and transfer value on the network. Every operation on Ethereum — from a simple token transfer to a complex DeFi interaction — consumes computational resources, and the right to access those resources must be paid in ETH.

This type of demand can be measured both in ETH units (the total gas spent) and in USD terms, which reflect the economic value of the network’s activity. Ethereum, at its core, is a protocol that offers limited computational capacity — a constrained execution space — whose price is dynamically determined through a real-time auction mechanism known as the gas market.

As demand for block space increases, users compete by bidding higher gas fees to ensure inclusion in upcoming blocks. This competition drives up the USD-denominated demand for ETH, primarily for two reasons:

1. Network Capacity Growth: As the protocol gradually expands its throughput (via scaling solutions and layer-2 integrations), it enables more transactions and smart contracts to be executed per block, effectively increasing the total demand for ETH-denominated gas.
   
   

2. Price of Scarce Block Space: When the available capacity becomes congested, the cost per unit of block space rises sharply. This scarcity — derived from Ethereum’s strong commitment to decentralization and security — filters demand, ensuring that the highest-value economic activities are the ones consuming the majority of on-chain resources.
   
   

In this sense, Ethereum’s computational layer behaves like a scarce digital commodity. Its demand elasticity depends on the value generated by the applications running on it: when DeFi, NFTs, or onchain social protocols thrive, ETH’s utilization rises; when activity cools, demand subsides accordingly.

The Dencun Upgrade and the Shock to Ethereum’s Demand Structure

One of the most consequential protocol decisions in Ethereum’s recent history took place with the Dencun upgrade, which introduced a mechanism that dramatically reduced the cost of block space, particularly for Layer 2 networks. This change created a profound shock in ETH demand, one that gradually manifested in the asset’s price performance throughout 2024.

The rationale behind this upgrade was clear: to support the expansion of Layer 2 activity by making data availability on Ethereum cheaper and more scalable. In principle, this change should also have made Layer 1 activity more attractive, as lower fees can stimulate additional on-chain usage. However, what actually occurred was that Layer 1 activity remained relatively stable while its revenue collapsed. Meanwhile, Layer 2 networks experienced significant growth. This sudden repricing of block space produced a sharp contraction in ETH-denominated demand, and the token ultimately underperformed the broader market during a bullish phase, creating a negative feedback effect that rippled across the entire Ethereum ecosystem.

It is particularly notable that the Dencun upgrade was activated on March 13, 2024 — the very day Ethereum reached its yearly price peak. From that moment, while the network’s scalability and efficiency improved, the market began to reprice ETH’s economic role. As transaction costs fell sharply and the effective demand for block space in ETH terms weakened, the token entered a period of relative underperformance despite the broader bullish momentum across digital assets. This coincidence underscores how protocol-level improvements can generate short-term macroeconomic shocks in token demand, even when they strengthen the network’s fundamentals in the long run.

In practice, this move collapsed the marginal price of Ethereum’s block space, raising important questions about whether the protocol might, in effect, be subsidizing Layer 2 activity. While the intention was to foster growth across the broader Ethereum ecosystem, it is worth questioning how far fee reductions can go before they cease to stimulate meaningful additional demand.

The evidence so far suggests that Layer 2 demand has proven relatively inelastic. These networks were already capable of sustaining high transaction costs because their underlying economic activity — trading, DeFi, and gaming — could absorb them. As a result, the sharp fee discount introduced by Dencun may have gone well beyond what was necessary to drive adoption, potentially undermining the long-term sustainability of the Layer 1 ecosystem.

The risk is not primarily about validator revenue, but rather about the macroeconomic feedback loop that connects Ethereum’s on-chain demand with its token price. A sharp contraction in ETH-denominated demand leads to lower fees, which can translate into weaker token performance. This, in turn, affects the financial resilience of projects and treasuries across the ecosystem — many of which hold a large portion of their reserves in ETH.

In that sense, the Dencun upgrade revealed an unintended vulnerability: by optimizing for accessibility and lower costs, Ethereum may have temporarily destabilized its own demand base, triggering a deflationary cycle in token valuation that rippled through the entire network economy.

The Monetary Demand for ETH: The Reemergence of Monetary Demand DATs as the True Foundation of ETH’s Value

After the Dencun upgrade, Ethereum’s transactional demand — the organic need for ETH to pay for block space — weakened considerably. As the cost of executing transactions and posting data to the main chain collapsed, the economic activity within the ecosystem decoupled from direct demand for ETH itself. This shift left the token increasingly dependent on its role as a monetary or store-of-value asset, rather than as a pure utility token.

The sharp decline in ETH’s price following Dencun had a profound psychological and financial impact. It raised serious doubts about the token’s ability to preserve value over time, even as the network achieved unprecedented scalability and efficiency. This paradox highlighted a crucial insight: success at the protocol and ecosystem level does not automatically translate into token appreciation. Layer-2 activity, though booming, does not necessarily create equivalent demand for ETH — especially when that activity is insulated from Layer-1 gas consumption.

In essence, Ethereum demonstrated that network growth and token value are not perfectly correlated. A thriving ecosystem built on top of Ethereum may still coexist with a weakening monetary demand for ETH if the token is no longer the primary medium of exchange, collateral, or fee settlement within that expanded environment. This divergence will likely remain one of the central dynamics to monitor in the next phase of Ethereum’s economic evolution.

This monetary dimension of ETH found partial support through the emergence of institutional investment vehicles such as Digital Asset Trusts (DATs), which provided a new channel for large investors to gain exposure to the asset. These products helped sustain a baseline level of demand, reflecting growing recognition of ETH as a long-term digital monetary asset.

As illustrated in the chart, early 2025 marked a decisive turning point in Ethereum’s demand structure. While the direct, transactional demand for ETH — the one linked to on-chain activity and gas consumption — continued to decline, an unexpected and powerful wave of monetary demand emerged through Digital Asset Trusts (DATs).

This new demand has been the key factor behind ETH’s price recovery. Although ETFs have contributed by broadening access, it was the creation and rapid expansion of DATs that truly anchored Ethereum’s valuation during a period when the asset was under heavy selling pressure. These vehicles have allowed institutional investors to gain regulated exposure to ETH, effectively transforming it into a recognized monetary asset class.

The data shows that Strategic Entities and DATs now hold over 12.8 million ETH, representing more than 10% of total supply — a concentration that began forming at the start of 2025, perfectly in sync with the broader market rally. This accumulation not only provided much-needed liquidity support but also restored confidence in ETH’s monetary role, positioning it once again as a yield-bearing, scarce, and institutionally credible digital asset.

This phase also marked a strategic shift within the Ethereum Foundation, which began to actively defend ETH’s economic narrative for the first time. By developing a clearer communication and positioning strategy, the Foundation sought to reconnect Ethereum’s technological progress with its perception as a long-term store of value.

Yet beneath this apparent stabilization lies a deeper imbalance. Ethereum’s protocol-level revenue, derived mainly from transaction fees and burn mechanisms, remains insufficient to sustain continuous innovation and ecosystem funding. Most of the network’s growth is now taking place on Layer 2s, where activity generates minimal direct ETH demand.

This reality exposes a structural paradox: Ethereum’s ecosystem can expand while its native token’s utility demand erodes. The success of the protocol and the prosperity of the layers built upon it no longer guarantee demand for ETH itself. Today, it is the strength of DAT-driven monetary demand — not utility demand — that supports ETH’s valuation. For Ethereum’s economy to remain sustainable, the next stage must focus on reconnecting ecosystem growth with intrinsic demand for the token that secures and powers it.

Ethereum as a Productive Asset: The Limits of Staking Economics

Another key dimension in Ethereum’s demand structure is its role as a productive asset — one that can generate yield through staking. Over time, the percentage of ETH staked has grown steadily, now exceeding 30 million ETH, as seen in the chart. This expansion reflects the maturation of the network’s consensus layer, but also raises critical questions about the sustainability and attractiveness of staking itself.

The Ethereum Foundation once expressed concern that staking participation could grow excessively, to the point of threatening network decentralization. In fact, internal discussions even considered the idea of introducing negative real yields to discourage further concentration. Yet the reality has been quite different. Despite the ongoing increase in staked ETH, the actual yield — around 2% — has not proven attractive enough to justify holding an illiquid position for most participants.

Even in liquid staking protocols, where users receive derivative tokens (such as stETH or cbETH), liquidity remains limited. Exiting large positions still requires accepting a discount, since secondary markets lack the necessary depth to absorb redemptions without slippage. In practice, this means that even “liquid” staking carries an embedded illiquidity premium, reducing its appeal as a productive investment.

Moreover, the Dencun upgrade also impacted staking returns indirectly. Lower network fees reduced the burn rate and, consequently, the deflationary yield that had previously enhanced the attractiveness of ETH staking. This shift weakened the productive case for ETH — the narrative that staking not only secures the network but also offers a sustainable return.

At one point, the Foundation appeared willing to sacrifice staking profitability in favor of long-term protocol stability — a strategy that, if fully implemented, could have posed serious systemic risks. Fortunately, those proposals now seem to have been postponed or abandoned. Still, the challenge remains: redefining ETH’s value as a productive asset in a post-Dencun environment where fee revenue and token burns have both declined.

Revisiting the fee structure and reward mechanisms could be crucial to restoring ETH’s attractiveness as a productive asset. For Ethereum to maintain its economic balance, it must find a model that rewards validators fairly while preserving decentralization and aligning staking incentives with network health.

ETH as a DeFi Asset: From Collateral Demand to Structural Opportunity

Another critical layer of ETH demand comes from its role as a core asset in decentralized finance (DeFi). Ethereum remains the foundation of DeFi’s collateral architecture, and in protocols such as Aave, ETH continues to be the primary underlying asset, representing a large share of total deposits and borrowings. This makes DeFi one of the most visible sources of active demand for ETH, especially during expansionary market phases.

However, this form of demand is highly cyclical and leveraged. In periods of volatility — such as the sharp market correction of October 10 — leveraged positions can quickly unwind, triggering large-scale liquidations and creating intense selling pressure on ETH. This characteristic makes DeFi-based demand powerful during bull markets but fragile in downturns.

A more sustainable form of ETH demand arises in non-leveraged protocols, where the token’s use is tied to genuine liquidity or trading activity rather than credit expansion. Uniswap serves as a prime example: ETH functions as a base asset in countless liquidity pools, sustaining continuous on-chain demand independent of market leverage. This type of utilization contributes to structural liquidity and economic stability across the ecosystem.

Where ETH demand has lagged most, however, is in the stablecoin sector. Decentralized stablecoins were once expected to create a constant source of collateral demand for ETH, yet adoption has fallen short. Many newer projects have shifted toward using alternative collateral types — such as liquid staking derivatives or real-world assets — reducing ETH’s direct role in this segment.

This gap represents one of the greatest medium-term opportunities for Ethereum. A new generation of stablecoin architectures, built on robust ETH collateral models, could reignite structural demand for the asset while reinforcing Ethereum’s monetary base. If ETH can once again become the preferred collateral for decentralized money, it would restore a critical feedback loop between the network’s activity and the token’s value.

Reassessing Dencun: How the New Proposals Aim to Restore Ethereum’s Balance EIP-7769 & EIP-7691

The debates surrounding EIP-7762 and EIP-7691 go far beyond the technical nuances of blob pricing or throughput. At their core, these proposals represent an attempt to recalibrate Ethereum’s economic equilibrium after the disruptive effects of the Dencun upgrade.

When Dencun introduced blobs via EIP-4844, it achieved a remarkable goal: dramatically reducing rollup data costs and enabling scalable Layer 2 growth. However, this success came at an unintended price. By collapsing the cost of block space, Ethereum effectively decoupled on-chain activity from ETH-denominated demand, weakening one of the key monetary anchors of the protocol. The sharp decline in base fee revenue and burned ETH contributed to a phase of monetary contraction — one that left the token vulnerable even amid record ecosystem activity.

Now, with EIP-7762 proposing a higher minimum blob base fee and EIP-7691 seeking to adjust blob throughput, the network is implicitly confronting the question of sustainability. These adjustments are not about restricting rollups, but about restoring an economic gradient between Layer 1 and Layer 2 that ensures value continues to flow upward — to the protocol and its native asset.

In this sense, these EIPs can be viewed as part of a second phase of Dencun: a phase of reflection and rebalancing. The community is recognizing that cost efficiency alone cannot be the ultimate goal; the protocol must also maintain healthy feedback loops between network usage, ETH demand, and validator incentives.

If implemented carefully, EIP-7762’s recalibration of blob base fees could shorten price discovery cycles while ensuring that rollups contribute proportionally to mainnet economics. Similarly, EIP-7691’s exploration of higher blob throughput — paired with supporting mechanisms like EIP-7623’s calldata repricing — may achieve greater scalability without eroding the protocol’s financial integrity.

Ultimately, these proposals reflect a broader maturation of Ethereum’s economic governance. After Dencun, the conversation is shifting from scalability at all costs to sustainable scalability — a model where efficiency, security, and economic health coexist. The outcome of these debates will shape not only Ethereum’s data layer but also the long-term viability of ETH as both a productive and monetary asset.

Conclusions: Mapping Ethereum’s Demand and the Road Ahead

Ethereum’s price is shaped not by its predictable supply, but by the interplay of multiple demand forces — organic, monetary, productive, and DeFi-based. Each tells part of the story of how ETH captures value from the ecosystem it powers.

The post-Dencun period revealed the fragility of this balance. Ethereum can grow more scalable and useful while its token weakens — unless the protocol’s economics are continually recalibrated. The rise of DATs has stabilized ETH for now, but true sustainability will depend on rebuilding direct, structural demand through gas usage, staking incentives, and collateral utility.

This article inaugurates the Ethereum Demand Weekly Tracker, a series dedicated to analyzing these evolving dynamics. By tracking how each component of ETH demand shifts over time, we can measure the real health of Ethereum’s economy — not only as a network, but as a financial system built on its native asset.

But perhaps the problem is not perception — it’s design. The truth may be that this so-called undervaluation is endogenous, not accidental. It stems from a long sequence of strategic and governance choices that have systematically redirected value away from the token, weakening its economic reflexivity and undermining the incentives to hold it.

From the earliest iterations of Maker’s fee model and surplus management to Sky’s reward structures, capital allocation, and the architecture of its Stars and Agents, the same pattern persists: a remarkable focus on protocol resilience and ecosystem growth, but often at the expense of tokenholder alignment. The result has been a system that functions beautifully as infrastructure — but poorly as an investment.

This article challenges the common “undervaluation thesis.” Instead of assuming the market is wrong, we will explore how past design choices have disincentivized investment in MKR and now SKY, and how that could be reversed through a clearer alignment between protocol success and token value accrual.

The Shifting Token Supply: From Scarcity Signal to Monetary Ambiguity

One of the earliest and most significant shifts in the Maker → Sky transition came from the change in its monetary design.
The original MKR supply cap of 1,000,000 tokens served as a clear and powerful signal for investors: scarcity and long-term value alignment. It was a visible, quantitative anchor — easy to communicate and easy to model.

That anchor has been lost. During Sky’s evolution, the governance community approved what effectively amounted to an open-ended issuance, with an initial framework allowing for up to 600 million new SKY per year — a move later reversed, but not before the narrative damage was done. The current total supply, 23,462,665,147 SKY, stands just below the intended “round” issuance target of 24 billion, but far above what the fully deflationary path implied by MKR burn would have delivered. In fact, had the previous MKR burn mechanism been honored in full, the outstanding supply today would likely sit below 21 billion SKY.

This means that, even though the unlimited minting framework was repealed, new SKY tokens have effectively been issued, offsetting part of the prior MKR burn and executing a de facto capital expansion. From a corporate finance perspective, this is not necessarily negative — many companies issue new equity to fund growth — but it changes the signal. It tells the market that the project needs investment, not that it is in a position to return value to investors.

For a protocol whose value proposition relied on credibility, predictability, and disciplined monetary policy, this shift from scarcity to elasticity eroded one of its strongest fundamentals. It weakened the token’s narrative reflexivity: when price no longer reflects scarcity, it stops being a credible store of expected future cash flows.

Let me share with you an analysis of the SKY issuance strategy. Given that interest rates can be modified, it clearly depends a lot on the strategy the project follows. Currently, if I’m not mistaken, the DSR yield is negative for the project, but it’s compensated because only a part of the DAIs are deposited. I believe it would be more profitable to incentivize the use of new USDs externally because it has more profitability for the protocol. Although, of course, delivering a yield is an import…

MakerDAO Endgame: Launch Season [endbook1] Endgame is a fundamental transformation of MakerDAO that improves growth, resilience and accessibility, with the aim of scaling the Dai supply to 100 billion and beyond. This post provides the latest updates of the Endgame features that will be launched in the short- and long term. It is the last Endgame Overview post before Endgame Launch. Endgame will deliver the best and easiest place to save up money and get interesting token rewards in SubDAO to…

To follow the governance vote on whether to keep Sky or recenter the Maker brand, I’m preparing a proposal that clarifies tokenomics and other key questions. Deflationary Tokenomics This proposal would change the core token (Regardless of whether the outcome is MKR or SKY) to strictly deflationary tokenomics. No more token emissions would ever be able to occur in normal conditions, and the total supply would only be able to go down over time as the burn engine permanently removes tokens from ci…

Proposed Conclusion: Toward a Credible Issuance and Buyback Policy

If Sky is to rebuild credibility with long-term investors, it needs a clear and transparent issuance discipline. The current token supply should not be treated as an incidental byproduct of protocol evolution, but as a deliberate policy variable — one that signals how value will be shared between the system and its holders.

A straightforward corrective path would be to acknowledge and gradually reverse the effective over-issuance that occurred during the transition period. The reference should not be the arbitrary 24 billion target, but rather the counterfactual supply that would exist had the original MKR burn been preserved — likely somewhere below 21 billion SKY. A medium-term goal to converge toward that level would send a powerful message of fiscal coherence and long-term alignment.

Equally important is the treatment of buybacks. Buybacks without burns can temporarily support demand, but if the tokens later re-enter circulation to fund expenses, they neutralize their own impact. In traditional finance, this would be equivalent to a company repurchasing shares only to re-issue them months later.

A credible capital-return policy requires a formal burn commitment — a governance rule stating that all buybacked tokens are permanently retired, and that no new issuance will be authorized while burns are active.

This dual framework — a supply reduction roadmap toward the “real” post-burn level and a hard commitment to burn future buybacks — would restore a sense of monetary integrity. It would also give investors a simple and verifiable metric: how many SKY exist, not how much has been spent on buybacks.

In a system that has often prioritized complexity over clarity, that single number could once again become the most powerful signal of trust.

The Surplus Buffer Illusion: Growth Without Free Cash Flow

In traditional corporate terms, the surplus buffer is the closest analogue to free cash flow — the portion of profits that can truly be retained, redeployed, or returned to investors. It is the protocol’s most direct indicator of whether it is genuinely profitable, or merely circulating capital within its own ecosystem.

By that measure, Sky’s position is fragile. The surplus buffer is expected to reach –150 million USD, even as the protocol records nominal income from Spark token distributions and other Genesis-related assets. This mirrors a pattern familiar in corporate finance: companies that seem to create enormous “paper value” while their cash reserves steadily shrink.

A useful analogy is a growth-stage tech conglomerate that reports rising valuations in its subsidiaries while its core operations bleed cash. On paper, the balance sheet looks strong; in reality, it is funding expansion through its own reserves, not through organic profitability. Sky’s situation is similar: its books may reflect asset growth via internally issued tokens, but the protocol’s cash position and liquidity cushion are eroding.

This dynamic compromises not only the project’s investability, but also its security.
A healthy surplus buffer functions as the first line of defense in any stress event — a reserve that guarantees solvency and operational continuity. If that capital were abundant, part of it could be distributed to tokenholders, signaling financial strength. The fact that it must instead be channeled into new Stars and incubation efforts indicates that the system is still in a capital-hungry phase, not a self-sustaining one.
In other words, Sky is not yet paying dividends; it is still raising rounds.

Even with temporary boosts from token distributions — such as Spark’s — the structural picture remains clear: the protocol continues to consume capital faster than it produces it. And because much of that “income” is denominated in tokens whose market value is declining, the risk is twofold — financial and systemic. As liquidity drains from the buffer, the protocol’s ability to absorb shocks or fund emergency buybacks diminishes, directly reducing its security margin.

Proposed Measure: Reframing the Buffer as a True Cash Flow and Security Metric

To restore financial discipline and reinforce safety, Sky should redefine and operationalize the surplus buffer as a real liquidity reserve, separating accounting gains from defensive capital.

Three policy steps could achieve this:

1. Segregate Realized vs. Unrealized Income: Only recognize realized, liquid inflows (e.g., stablecoin profits, interest) as part of the surplus buffer. Token allocations from internal agents should remain off-balance until monetized.

2. Establish a Minimum Security Coverage Ratio: Require that a defined percentage of the buffer — e.g., 1% — be held in immediately liquid, non-volatile assets. This creates a tangible financial firewall for the protocol.

3. Suspend Buybacks When Net Buffer Is Negative: Repurchasing tokens while relying on unmonetized holdings undermines both value and resilience. Buybacks should resume only after the buffer is sustainably positive in real cash terms.

These adjustments would turn the surplus buffer into both a profitability benchmark and a security indicator, ensuring that capital allocation reflects not just growth ambitions, but also long-term solvency and investor trust.

The Staking Paradox: When Rewards Dilute the Asset They Aim to Support

One of the most consequential recent design shifts in Sky’s economic model has been the transition from USDS-denominated staking rewards to SKY-denominated rewards — the so-called Sky-to-Sky mechanism.

In theory, this move was meant to strengthen alignment: paying staking rewards in the governance token itself reinforces its centrality and directly ties participation to ownership.
In practice, however, it risks replicating the same reflexivity problem that has long weakened Maker and now Sky — rewarding loyalty by inflating the very asset it seeks to support.

Under the previous framework, the staking system distributed USDS generated from protocol income — effectively sharing real, realized cash-flow with tokenholders. The shift to rewards paid in newly issued SKY reverses that dynamic.

The protocol now uses recently minted governance tokens to simulate yield, rather than distributing earnings derived from actual profits. In other words, the apparent yield does not reflect the protocol’s operational performance, but rather the monetary expansion of its own governance asset.

This transforms what should have been a profit-sharing mechanism into a dilution mechanism, eroding the very scarcity and value foundation that staking is supposed to reinforce.

This turns what should be a dividend mechanism into a monetary expansion tool, diluting existing holders and disconnecting rewards from genuine profitability.

The rationale — to fund larger daily buybacks (up to 300k USD) without cutting nominal yields — may seem efficient, but it introduces a deeper contradiction. Buybacks and rewards denominated in the same asset neutralize each other: the protocol buys SKY to support price, then re-emits SKY to pay stakers. The net result is circular value flow with little net reduction in supply.

Unless those buybacks are permanently burned, the mechanism merely transfers short-term liquidity rather than creating lasting value.

This approach also weakens the signaling power of the token. Instead of representing a claim on the protocol’s productive output — the on-chain equivalent of free cash flow — SKY increasingly reflects an internal subsidy mechanism designed to maintain participation. That may support governance activity, but it discourages investment. Rational investors prefer tokens that capture yield from the protocol’s external success, not from new issuance.

Proposed Measure: Re-Anchoring Rewards in Real Earnings

To restore economic reflexivity and align staking with actual performance, Sky could adopt a dual-phase reward structure that distinguishes between monetary and productive yield:

1. Reintroduce USDS-Based Rewards: Distribute staking income exclusively from realized protocol profits — stablecoin interest, fees, or cash inflows — rather than minting SKY.

2. Burn All Buybacked SKY: Establish a governance commitment that any token repurchased in open-market operations is permanently burned, ensuring supply contraction equals value creation.

3. Adopt a Variable Yield Formula: Peg staking APY to protocol profitability — rising when the surplus buffer grows, contracting when it declines. This transforms staking into a transparent profit-sharing tool, not a monetary faucet.

4. Separate Governance Incentives from Financial Rewards: Governance participation can still be rewarded with non-transferable credits or reputational weighting, but should not rely on new token issuance.

A sustainable staking framework must reinforce the store-of-value function of the token, not erode it. By grounding rewards in realized income and hard-coding supply discipline, Sky could replace circular incentives with a genuine cash-flow-based investment case — the foundation for long-term credibility and valuation recovery.

Fragmented Value Capture: The Cost of a Multi-Token Ecosystem

One of the most subtle yet impactful consequences of Sky’s architectural evolution has been the progressive fragmentation of value across a growing number of entities — Stars, Agents, Executives, and their respective tokens.
What began as an effort to modularize risk and encourage specialization has, paradoxically, diluted the economic reflexivity that once tied the protocol’s success to its governance token.

Under Maker’s earlier design, MKR holders captured protocol value directly through a clear loop: stability fees and liquidation income accrued to the system surplus, which then flowed back to MKR via buybacks and burns. The model was simple, elegant, and easy to price.

In the Sky architecture, by contrast, that value chain is now multi-layered. Each new Star or Genesis Agent issues its own token, retains a share of its profits, and distributes another portion via yield or liquidity incentives. In theory, Sky holders benefit indirectly — through treasury holdings or protocol-level fees — but the link is indirect, delayed, and difficult to quantify.
The result is that much of the system’s economic energy escapes into satellite tokens before it can reinforce SKY’s valuation.

From a corporate analogy, Sky increasingly resembles a holding company with majority stakes in high-risk startups. The group may look impressive on paper, with a portfolio of ventures and cross-ownership, but its cash flow to shareholders is minimal. Each subsidiary retains earnings for growth, leaving the parent entity rich in notional value yet poor in distributable returns.

The case of Spark illustrates this perfectly. Despite being one of the ecosystem’s flagship projects — and one that has already generated substantial nominal value — existing investors have not captured any of that upside.
Most of the Spark tokens distributed to the protocol have been sold to fund further investment, rather than shared with current SKY holders.
Moreover, the governance vote against allocating a portion of these tokens to existing investors sent a clear signal: ownership of SKY does not grant access to the project’s new investment opportunities.
This decision, while defensible from an operational perspective, further disincentivizes holding the token, as it strips away one of the few tangible mechanisms through which investors might participate in the ecosystem’s internal growth.

A more balanced approach would have been to split the initial Spark token allocation between the intra-entrepreneurial team and the existing shareholders — those who effectively financed the protocol’s incubation capacity through years of governance, liquidity, and capital exposure.
Such a structure would have recognized that investors and builders are joint contributors to value creation, not separate constituencies.

Proposed Measure: Re-centralizing Value Accrual to SKY

To restore coherence and investor alignment, Sky’s governance could adopt a structured value-consolidation framework:

1. Define a Clear Profit-Sharing Hierarchy: All Stars and Agents should allocate a fixed percentage of their net profits (e.g., 20–30%) back to the Sky Treasury in stablecoins or liquid assets — not in their own tokens.

2. Standardize Token Flow Mechanisms: Require that all internal distributions to SKY (buybacks or treasury inflows) follow identical rules and occur on predictable schedules, so investors can model aggregate returns.

3. Restrict Cross-Token Dilution: Limit the issuance of new sub-tokens unless they create accretive value for SKY holders; every new agent token should include a transparent value-capture clause linking it back to SKY.

4. Include Shareholders in Genesis Allocations: Future Star launches should reserve a defined share (e.g., 10–20%) of initial token supply for existing SKY holders — distributed either directly or through staking-based claims.

5. Publish Consolidated Financials: Just as a public company produces consolidated statements across subsidiaries, Sky should report unified metrics: total protocol revenue, realized profits, cash reserves, and SKY buybacks.

Re-centralizing value accrual does not mean abandoning modularity — it means ensuring that fragmented growth still compounds into the parent asset.
Only by sharing the upside of its internal ventures can Sky transform from a funding platform into a true on-chain investment ecosystem where holding SKY once again represents a real claim on collective success.

Governance Drift: When Decentralization Becomes Managerial, Not Financial

Over time, one of the most striking evolutions in Maker and later Sky has been the transformation of governance from a mechanism of ownership into a bureaucratic layer of management.
While decentralization has achieved impressive operational sophistication — with councils, foundations, working groups, and star-level entities — it has come at the cost of economic alignment.

Governance in its current form resembles that of a technocratic consortium more than that of a capital-driven organization. The discourse revolves around parameters, budgets, and operational mandates, rather than around returns on capital, value per token, or profitability metrics.
In traditional corporate governance, shareholders elect directors to represent their economic interest; in Sky, governance participants increasingly act as operators and contractors, not as owners.

This shift has subtle but far-reaching consequences.
First, it breaks the feedback loop between governance and valuation. If voting power no longer correlates with financial outcomes, holding SKY becomes a form of civic participation rather than an investment.
Second, it blurs accountability: decisions about issuance, spending, or strategic priorities can be justified as “ecosystem growth” without clear benchmarks for capital efficiency.
Finally, it entrenches a managerial culture that prioritizes funding new initiatives over generating distributable profits — a pattern visible in the perpetual expansion of grants, agent funding, and operational budgets, even as the surplus buffer turns negative.

Beyond these structural issues, the lack of strategic guidance compounds the problem.
Sky operates without explicit financial targets, growth benchmarks, or forward-looking statements about expected performance. There is no formal guidance on revenue growth, capital deployment, or ROI across the ecosystem’s ventures.
This absence of clear objectives makes it nearly impossible for investors — or even internal participants — to assess whether the protocol’s strategies are actually working.

In traditional markets, even high-growth companies provide earnings guidance or long-term projections to help investors form expectations and valuations. In Sky, the vacuum of guidance has turned governance into an inward-facing process. For years, discussions have focused on technical and structural evolution rather than on measurable outcomes. The result is a system that may be building extraordinary infrastructure, but without a shared understanding of how, when, or how much value this infrastructure is meant to generate.

In valuation terms, the absence of guidance effectively removes the ability to build a forward-looking model — the foundation of any investment case. Without targets, investors cannot measure progress; without measurement, accountability becomes impossible.

The result is a protocol that is exceptionally well governed in procedural terms, yet opaque in its strategic direction and unmeasurable in its performance.

Proposed Measure: Refocusing Governance on Capital Efficiency, Guidance, and Accountability

To restore the link between governance, ownership, and valuation, Sky could adopt a value-oriented governance model grounded in financial transparency and forward-looking discipline.

1. Define Governance KPIs in Financial Terms: Replace abstract metrics like “ecosystem growth” with measurable financial indicators — net protocol profit, return on treasury capital, token supply contraction, and security buffer coverage.

2. Introduce Annual Guidance and Performance Reports: Each year, governance should publish a set of financial and operational targets — including expected protocol revenues, funding allocations, and profitability milestones — followed by periodic evaluations of actual performance.

3. Align Voting Power with Long-Term Stake: Introduce vesting-weighted voting or loyalty multipliers so that governance influence accrues to those with durable exposure, not transient speculation.

4. Create a Governance Dividend Mechanism: Dedicate a fixed share of realized profits (e.g., 10–15%) to direct distributions for active, long-term voters — turning governance into a productive act of ownership.

5. Require Economic Justification for Treasury Spending: Every major allocation (e.g., to Stars, grants, or liquidity programs) should include a projected ROI, a payback horizon, and a follow-up assessment of execution.

Providing guidance is not about centralizing control — it is about creating a shared frame of expectations between the protocol and its investors.
Without it, there is no baseline for analysis, no accountability, and no valuation anchor.
By institutionalizing guidance and measurable outcomes, Sky could evolve from an internally self-referential system into a financially transparent, externally investable network — one that balances decentralization with strategic clarity.

Conclusion: From Misalignment to Value Recovery

After years of evolution, experimentation, and internal reinvention, Sky finds itself at a defining crossroads.
Its architecture is more sophisticated than ever — a complex, modular ecosystem with vast potential to become the backbone of a decentralized financial infrastructure. Yet the token that represents its core, SKY, has not reflected that success.
The market discount is real, but it is not unjustified. It is the rational outcome of a design that has, for too long, prioritized structure over signal, process over profit, and governance over ownership.

But this does not mean the situation is irreversible.
The same design flexibility that diluted SKY’s economic reflexivity also gives the protocol the tools to restore it.
If the measures outlined in this analysis — disciplined issuance, a transparent surplus buffer, real-yield staking, value consolidation across Stars, and guidance-driven governance — are implemented, Sky could transform its narrative from undervalued by design to revalued by discipline.

The pieces are all there:

• A functioning on-chain economy with strong technological fundamentals.

• An ecosystem of Stars capable of generating real revenues.

• A treasury large enough to sustain strategic investment.
  What is missing is financial coherence — a clear articulation of how these strengths translate into long-term value per token.

Reintroducing a credible issuance policy would reestablish scarcity and restore trust.
Anchoring the surplus buffer in real cash flow would prove profitability.
Grounding staking in genuine income and enforcing burn commitments would make every buyback count.
Sharing the upside of new ventures with existing holders would turn Sky into a true investment ecosystem.
And providing clear, periodic guidance would give investors the visibility they need to believe again.

The undervaluation thesis, in that sense, is not wrong — it is merely premature.
The market is waiting for evidence that Sky can bridge the gap between innovation and value capture, between vision and return.
That bridge will not be built by marketing or speculation, but by monetary integrity, capital discipline, and transparent execution.

If Sky embraces these principles, it could become not only the most advanced governance experiment in DeFi, but also a benchmark for sustainable value creation.
In doing so, it would finally justify the faith of those who have supported it through years of transformation — proving that the token’s undervaluation was never structural, only temporary.

The starting point for valuing Spark is its fully diluted market capitalization (FDV) — the total implied value of all SPK tokens at current market prices, regardless of their vesting status. In decentralized protocols, this figure offers a more comprehensive lens than the circulating market cap, since a significant portion of tokens is often reserved for long-term growth incentives, ecosystem development, or team allocations.

In Spark’s case, the total token supply amounts to 10 billion SPK, distributed across users (65%), ecosystem initiatives (23%), and the team (12%). Although only around 1.9 million tokens are currently in circulation, most of the supply is already allocated and will gradually unlock over time. As a result, the fully diluted valuation (FDV) — currently estimated at $350 million — provides a more accurate reflection of the protocol’s underlying economic value.

Using FDV as the reference point allows us to analyze Spark as a mature, self-sustaining financial entity rather than a project in its early liquidity stage. It captures the long-term expectations embedded in its tokenomics and offers a fairer benchmark for comparing profitability ratios, capital efficiency, and yield generation with other DeFi protocols.

Q3 Results: Strong Profitability and Efficient Capital Deployment

Spark’s first full quarter of independent operations delivered a net profit of $12.1 million, a remarkable achievement for a protocol that only launched its own P&L structure in July 2025. Annualizing this figure suggests a potential $48 million in yearly net profit, placing Spark among the most profitable protocols in the DeFi ecosystem.

At a fully diluted market capitalization (FDV) of $350 million, this implies a price-to-earnings ratio (P/E) of:

A P/E of around 7x is exceptionally low for a protocol growing at this pace, especially when compared with both traditional fintech companies and on-chain competitors, where valuations typically range from 15x to 30x forward earnings.

Other key metrics reinforce Spark’s financial strength:

These figures show that Spark is not only generating substantial gross revenue ($53M in Q3) but also converting a significant share of it into net profit — something few protocols achieve without heavy dilution or unsustainable incentives.

The combination of strong cash flow generation, high margins, and a P/E ratio below 10x suggests that Spark may currently be undervalued relative to its fundamentals. If its growth trajectory and yield generation capacity remain stable, Spark could evolve into one of the most efficient and cash-rich protocols in the DeFi landscape.

Spark’s consolidated statement of earnings for Q3 2025 reveals a powerful growth trajectory and increasing operational efficiency. Total gross revenue reached $53.0 million, driven primarily by yield generation across Morpho vaults ($13.9M) and SparkLend ($14.7M). These two segments together accounted for over 50% of total quarterly income, reflecting Spark’s ability to capture sustainable returns through lending and structured vault strategies.

The quarter also highlights the protocol’s diversified yield sources — with meaningful contributions from Maple ($10.6M), Ethena ($4.6M), and the USDS and DAI vaults, both generating over $5 million each. This diversification provides a strong hedge against market volatility and underscores Spark’s positioning as a multi-platform yield aggregator rather than a single-product protocol.

Monthly trends indicate growing profitability:

• July: small net loss (–$1.25M), reflecting initial ramp-up and setup costs.

• August: positive net income of $4.18M, showing quick efficiency gains.

• September: further growth to $9.19M, confirming operational scalability.

This sequential improvement demonstrates Spark’s ability to compound yield without proportional increases in cost, a rare dynamic in DeFi operations where high growth often comes with heavy incentives.

Adjusting for the Grant: Understanding Underlying Profitability

While Spark’s Q3 headline results show a net profit of $12.1 million, it’s important to note that this figure includes a one-time grant of $5 million recorded in September. This grant, likely aimed at supporting ecosystem development and initial liquidity growth, temporarily boosts net income and inflates profitability ratios for the quarter.

If we adjust for this non-recurring item, Spark’s normalized net profit would have been approximately $7.1 million, implying an annualized run rate of around $28–30 million. Under this adjusted scenario:

• The P/E ratio rises from 7.3x to roughly 12.0x, still attractive but more reflective of operational performance.

• The net margin would decrease from 22.9% to around 13.5%, showing that while Spark remains profitable, its underlying margins are less exceptional without the one-off income.

• The Return on Treasury would normalize from 31% quarterly to roughly 18%, still a strong figure given the protocol’s early stage.

This adjustment is essential to distinguish core operational profitability —driven by yield generation and lending efficiency— from extraordinary income related to ecosystem funding. Spark’s true strength lies not in one-off injections, but in its ability to produce consistent returns through decentralized money market operations and efficient capital rotation.

Growth Dynamics and the Road Ahead

The evolution of Spark’s allocated assets provides valuable insight into the protocol’s next phase of development. After a rapid expansion throughout the first half of 2025, total assets under management have stabilized around the $3 billion level since August, signaling a transition from accelerated growth to a more mature phase of capital deployment.

This plateau is not necessarily negative — it often marks the moment when a protocol consolidates its base, optimizes yields, and focuses on capital efficiency rather than pure volume growth. However, it also sets the stage for Spark’s next strategic challenge: understanding the sustainability and composition of that growth.

One of the clearest trends in recent months is the decline in deposits into Ethena, which had previously been one of the major yield sources within the Spark ecosystem. This slowdown likely reflects a reduction in interest rates or reward incentives, prompting capital to rotate toward more efficient or better-yielding opportunities within Spark’s suite of products.

In contrast, SparkLend has emerged as the leading destination for deployed capital, consolidating its role as the protocol’s primary engine of yield generation. The fact that SparkLend continues to attract and retain liquidity amid shifting market conditions suggests strong confidence in its stability, risk management, and competitive yields.

Overall, the coming months will be defined by how Spark manages this transition from rapid growth to sustained performance — balancing capital allocation across its vaults, maintaining competitive yields, and deepening integrations that can reignite growth without sacrificing profitability.

Conclusion: A Solid Entry Point in a Growing Sector

Spark stands out as a protocol with strong fundamentals and a clear path toward sustainable profitability. When compared to both DeFi peers and traditional financial institutions, its valuation multiples remain remarkably low — suggesting that, despite its rapid growth, Spark still trades at a discount relative to its intrinsic potential.

At a time when many DeFi protocols are struggling to maintain efficiency or justify their valuations, Spark combines real earnings, diversified yield generation, and disciplined capital management. This makes its current valuation levels appear not only justified but potentially attractive as a solid entry point for long-term positioning.

The main challenge going forward will be how Spark continues to scale in an increasingly competitive environment — one where new lending and restaking platforms are fighting for the same liquidity. Yet, the broader context remains highly favorable: if we assume Spark maintains its current market share within the stablecoin ecosystem, the projected expansion of the sector — from roughly $300 billion today to a potential $4 trillion in the coming years — implies an enormous growth runway ahead.

Currently ranked fifth globally by total assets under management (AUM), Spark has already secured its place among DeFi’s most relevant protocols. If it succeeds in preserving this market share as the overall stablecoin economy expands, the upside potential relative to its current valuation could be substantial. In that sense, Spark may represent one of the most attractively valued opportunities within the top-tier DeFi landscape today.

The Subtraction Philosophy

The subtraction philosophy that guides the Ethereum Foundation was conceived with noble intentions. It was built on the principle that no single organization should control a decentralized protocol. Over time, the Foundation would “subtract” itself from the equation—delegating responsibilities, minimizing influence, and allowing the network to function autonomously.

This roadmap envisions an endgame where Ethereum becomes fully ossified—a self-sustaining, neutral infrastructure requiring little or no human coordination. From a purely ideological standpoint, this is elegant. From a pragmatic standpoint, it may be fatal.

The Commodity Trap

A fully ossified Ethereum risks becoming what it was never meant to be: a static open-source project like Wikipedia, sustained by donations rather than driven by growth. The Foundation’s limited treasury and lack of recurring revenues reinforce this destiny. But Ethereum is not a digital encyclopedia—it is the foundation of a new global economy.

If we accept the analogy of Ethereum as a nation, then a nation without a budget cannot survive. There has never been a country that evolved without at least a minimal structure to fund its innovation and defense. In a world where technological competitiveness defines survival, Ethereum cannot afford to lack the best technologists in the world continuously improving its infrastructure.

Economic Neutrality vs. Systemic Sustainability

Ethereum’s economic design reflects the same idealism that drives its governance model. The decision to reduce ETH’s demand—by minimizing fees and burning a portion of them—was intended to maximize network growth and user accessibility. Ironically, it led to one of the largest declines in the asset’s value, as the protocol’s own demand collapsed.

If ETH is the currency of this digital economy, reducing its purchasing power erodes the financial resources of every participant in the ecosystem. It’s the equivalent of a nation whose currency suddenly loses its value—everything else collapses along with it.

The False Sense of Neutrality

True neutrality does not emerge from the absence of human participation but from the proper design of incentives and governance. Ethereum does not need to vanish into abstraction; it needs to evolve into a sustainable system—one capable of funding, compensating, and coordinating its best contributors while maintaining decentralization and fairness.

The network fees that today sustain validators could also support a broader ecosystem of engineers and researchers, ensuring that Ethereum continues to innovate instead of merely preserving itself.

Redefining Ethereum

Perhaps it’s time to redefine what Ethereum truly is. Not a commodity. Not a gasoline. But a digital nation—an economy with a mission, a culture, and a shared purpose. Its currency, ETH, should not only secure the network but finance its evolution.

The Foundation’s subtraction may have been the right first step to ensure decentralization. But the next step must be addition—of sustainable funding, of human ingenuity, and of a renewed sense of collective purpose.

In a recent fireside chat hosted by Anthony Y. from Artemis, Sam MacPherson, co-founder and CEO of Spark, provided a deep look into how Spark is reshaping institutional access to DeFi credit markets within the Sky (formerly MakerDAO) ecosystem.

The Central Bank Analogy

MacPherson explained Spark through a simple yet powerful analogy:

• Sky operates like a central bank—it issues the USDS stablecoin and provides liquidity to its subDAOs.

• Spark, in turn, acts as a commercial bank, borrowing capital from Sky at wholesale rates and deploying it into real opportunities across DeFi, CeFi, and RWA (Real-World Assets).

This layered structure allows Spark to function as the operational arm of Sky—closer to markets, partnerships, and end users—while maintaining stability and scale at the protocol level.

The Institutional DeFi Market

At the heart of Spark lies SparkLend, now the second-largest money market on Ethereum. Unlike many DeFi protocols that list an endless array of collateral types, SparkLend focuses on institutional-grade assets—BTC, ETH, LSTs, LRTs—and provides cross-margin stablecoin borrowing.

This disciplined approach appeals to institutional players seeking efficient, large-scale credit lines. For example, PayPal recently deployed $1 billion in PYUSD liquidity into SparkLend, a partnership that combines PayPal’s stablecoin distribution power with Spark’s on-chain lending infrastructure. Borrowing rates as low as 2.99% make SparkLend one of the most competitive on-chain credit facilities.

A New Model for Stablecoin Growth

Traditional DeFi incentives often rely on token emissions or temporary yield boosts, but Spark’s model is targeted and scalable. Through its partnership with PayPal, Spark can directly deploy liquidity into pools like Curve’s USDS/PYUSD pair, ensuring that borrowers and liquidity providers can operate with confidence and minimal slippage.

This represents a structural evolution—liquidity as a service for stablecoin issuers—offering predictable outcomes without wasteful incentives.

What’s Next: The Spark Roadmap

MacPherson outlined several major developments for the next 6–12 months:

• Savings V2: A cross-chain yield product exporting the Sky Savings Rate (currently 4.75%) to stablecoins like USDT, backed by Spark’s $3–4B liquidity layer.

• Institutional Fixed-Rate Lending: A new integration with Morpho V2 to offer fixed-rate loans—an in-demand feature for institutional treasuries.

• Spark Mobile App: Upcoming support for payments and card functionality, extending Spark’s reach beyond DeFi users.

• Stablecoin Liquidity as a Service: Expanding the PayPal model to other stablecoin issuers seeking to bootstrap deep on-chain liquidity efficiently.

Key Takeaway

As MacPherson noted, “Stablecoin lending isn’t an easy business.” Success requires distribution, infrastructure, and real partnerships. Spark’s model—pairing Maker’s credibility with a market-oriented commercial strategy—positions it as the institutional bridge between DeFi and traditional finance.

In essence, Sky mints stability; Spark deploys opportunity. Together, they form a vertically integrated ecosystem built for the next wave of institutional adoption.

The result: a remarkable display of technical resilience, yet also a stark reminder of the structural risks embedded in the most sophisticated layers of decentralized finance.

Today, USDe stands as the third most important stablecoin in the market, behind USDT and USDC, with expanding integrations across both DeFi and CeFi.
Its scale and reach now make Ethena one of the most critical systemic risks within the entire ecosystem.

⚙ 1. The Ethena Model: Yield in Exchange for Structural Risk

Ethena’s core value proposition lies in offering a higher yield than traditional stablecoins —a return derived from funding rates in perpetual derivatives markets.

The protocol maintains delta-neutral positions: long on spot assets like BTC or ETH, and short through perpetual futures. This setup captures the positive funding rate differential as yield.

However, this mechanism introduces a key fragility:
when funding rates turn negative, returns evaporate, and the protocol must absorb the loss. Since Ethena offers users a fixed yield, these fluctuations can compress margins and introduce short-term solvency risk.

In practice, funding rate dislocations rarely persist —arbitrage and market liquidity usually restore balance. However, during this recent event, those few hours of negative rates were enough to push the system into its most extreme operational conditions to date. The protocol includes mechanisms to unwind or rebalance its derivative positions and reinvest collateral into alternative strategies, allowing it to adapt to shifting market conditions and mitigate prolonged funding stress

🌊 2. The Event: Market Meltdown, Liquidations, and Price Dislocations

The market-wide liquidation wave that hit on Friday was brutal:
over 1.6 million traders were liquidated, and $20 billion in open interest vanished within hours.

In that context, USDe briefly depegged to $0.66 on Binance, while on-chain liquidity pools such as Curve, Uniswap, and Fluid showed far smaller deviations —around 30 bps, similar to USDC/USDT spreads during high volatility.

During the peak of stress:

• Ethena’s mint and redeem functions remained fully operational, processing over $2 billion in redemptions within 24 hours.

• No downtime occurred across the system.

• Collateral oracles and proof-of-reserve feeds from Chaos Labs and Chainlink continued to function as expected.

This performance underscores Ethena’s operational robustness: as long as redemption liquidity exists, the peg can be restored by arbitrage even under extreme market pressure.

G | Ethena

@gdog97_

While we share these suggestions privately with any partner we work with across both DeFi and CeFi, want to surface this publicly so there is zero doubt going forward on what we view as appropriate oracle design and risk management for USDe:

298

11:18 • 12 oct 2025

🧩 3. Risks Exposed: Dependencies and Design Boundaries

Still, the event revealed several structural vulnerabilities that cannot be ignored:

1. Dependence on Centralized Exchanges

Ethena executes part of its hedging through Binance, which temporarily halted operations during the crisis.
While Binance later announced compensation for affected users, the incident exposed counterparty and operational risk that the protocol cannot fully control.

2. Execution Risk in Extreme Conditions

If negative funding persists, Ethena might need to unwind hedges quickly. In such conditions, liquidity slippage and execution losses can compound rapidly, eroding capital buffers.

3. Oracle and Collateral Valuation Risk

As @gdog97_ noted, hardcoding USDe = USDT makes sense for temporary dislocations, but not for permanent collateral impairment.
The proposed solution is dynamic oracle behavior tied to on-demand Proof of Reserves (PoR), allowing trusted entities like Chainlink or Chaos Labs to verify whether a deviation is transient or structural in real time.

🔍 4. The Response: Transparency as a Survival Mechanism

In response to the market turmoil, Ethena Labs published an extraordinary Proof of Reserves update, outside of its usual weekly schedule:

“USDe Proof of Reserves are typically provided on a weekly basis by third-party attestors including Chaos Labs, Chainlink, Llama Risk, and Harris & Trotter.
Following recent market events, each confirmed that USDe remains overcollateralized by approximately ~$66M. Maximum transparency.”

This statement helped restore market confidence and set an important precedent for proactive disclosure and accountability in DeFi —a stark contrast to the opacity that characterized the collapses of 2022.

Ethena Labs

@ethena_labs

USDe Proof of Reserves are typically provided on a weekly basis by 3rd party independent attestors including leading firms such as Chaos Labs, Chainlink, Llama Risk and Harris & Trotter.

On request from the community, we have provided a Proof of Reserves outside of the regular

1,331

14:29 • 11 oct 2025

🧠 5. Lessons Learned: Resilience Proven, Not Guaranteed

The recent episode was one of the three or four most extreme events in crypto history, both in terms of volatility and systemic stress.
Ethena not only survived —it did so while honoring all redemptions and maintaining liquidity under pressure.

But this should not be mistaken for invulnerability.
Ethena’s design remains highly sensitive to derivative market conditions, funding dynamics, and exchange uptime.
Its resilience has been proven in practice, but its stability still depends on the integrity of external systems it cannot fully control.

🧭 6. Conclusion: The Price of Efficiency

Everything suggests that Ethena has successfully passed its first major stress test, showing a level of resilience and responsiveness rarely seen in a protocol so closely tied to derivative markets.
Its yield model, operational robustness, and proactive transparency have demonstrated a level of maturity that sets a new standard within decentralized finance.

However, the real confirmation will come in the weeks ahead.
While the recent independent audit of Ethena’s reserves provides strong reassurance about the health of its balance sheet, continuous monitoring will be essential to verify that the system remains stable as market conditions evolve.

This episode is both a validation and a reminder:
innovation always carries cost, and for algorithmic or synthetic stablecoins, the ultimate challenge is not merely to maintain a peg —
but to sustain trust through volatility and prove that stability is not only architectural, but enduring.

Another key challenge will be to see whether this massive deleveraging —which led to the redemption of around $2 billion worth of stablecoins— ushers in a period of lower funding rates. Such a shift could reduce the stablecoin’s yield appeal and potentially limit its growth in the coming months.

The real lesson is that innovation in DeFi rarely fails for lack of sophistication —it fails because efficiency itself pushes the boundaries of risk.
Ethena’s model embodies this paradox: the more optimized and capital-efficient a system becomes, the narrower its margin for error.
True resilience in decentralized finance will come not only from designing smarter architectures, but from learning how to absorb volatility without breaking the trust that sustains them.

🪙 Postscript

Binance has announced case-by-case compensation for users affected by Friday’s volatility in markets for USDe, BNSOL, and WBETH —acknowledging degraded performance during peak liquidations.
Such responses are positive signs of accountability but also underscore how fragile the execution layer of global crypto markets remains, even for the largest actors. https://www.theblock.co/post/374278/binance-to-compensate-some-users-after-several-markets-depeg-there-are-no-excuses

In a single day, over $9.55 billion in open interest was erased from crypto markets.
According to CoinGlass data, this included $8 billion in long positions and $1.55 billion in shorts. The largest liquidations hit Bitcoin and Ethereum — over $2.6 billion combined — as the market plunged violently following new U.S. tariffs on China.

Prices fell off a cliff. Bitcoin crashed from above $122,000 to nearly $102,000 before clawing back. Over 1.5 million traders were liquidated in 24 hours. Exchanges like HTX saw individual positions worth $87 million wiped out in seconds.

What looked like a geopolitical headline about trade and tariffs became, in practice, one of the most violent deleveraging events in crypto history — and a reminder of how volatility is monetized.

While millions were wiped out, a single whale reportedly profited around $190 million shorting BTC and ETH on Hyperliquid. That’s the other side of the same coin: when markets panic, someone’s liquidity crisis becomes another’s opportunity.

Flash Crashes: From Wall Street to DeFi

These events aren’t new. Markets have always been prone to panic, leverage, and overreaction.
In October 1987, the Dow Jones collapsed 22% in a single day, the largest one-day drop in history. The 2010 “Flash Crash” saw nearly a trillion dollars erased from U.S. equities in minutes, only to recover within hours.

The cause? Automated systems and leveraged exposure feeding on themselves.
When algorithms sell into falling markets, they accelerate the decline, triggering margin calls and stop-losses that cause even more selling. Feedback loops, amplified by speed and leverage, create what physicist Didier Sornette once called “critical points” — moments when markets behave like physical systems collapsing under pressure.

After 1987, regulators introduced circuit breakers — temporary trading halts designed to interrupt these feedback spirals. They’re not perfect, but they slow things down enough for human judgment to re-enter the equation.

Crypto, on the other hand, doesn’t believe in circuit breakers.
It’s a market with no pause button, no central clearing house, and no timeouts. When liquidation thresholds are hit, smart contracts execute automatically. It’s pure market physics — fast, transparent, and merciless.

The Mechanics of a Liquidation Cascade

To understand the business of volatility, you must understand the mechanics of liquidation.

Leverage creates fragility. In crypto, traders often borrow against their assets, using Bitcoin, Ether, or stablecoins as collateral. When prices drop, the value of that collateral declines. If it falls below a critical ratio, liquidation bots automatically sell the position to cover the debt.

Each forced sale pushes prices slightly lower, triggering more liquidations, which push prices lower again.
This negative feedback loop — leverage feeding on itself — is what transforms a normal correction into a full-blown cascade.

In centralized exchanges, this process happens inside proprietary engines. In DeFi, it’s all on-chain. Protocols like Aave, Maker, or Compound execute these liquidations transparently, and anyone can see the liquidation thresholds in real time. That transparency creates its own form of competition — liquidation bots racing to claim the collateral first, and opportunistic traders positioning themselves ahead of key triggers.

When the market finally hits its breaking point, only algorithmic buyers — market makers and quant strategies — can react fast enough to scoop up discounted assets. For everyone else, the move is already over.

Volatility becomes a profit function, not a byproduct.

Volatility as a Business Model

In theory, volatility reflects uncertainty. In practice, it’s an entire industry.

• Exchanges earn more when volatility spikes — trading fees soar as volume explodes.

• Market makers capture wider spreads as liquidity evaporates.

• Quant funds thrive on mean reversion and high-frequency arbitrage.

• Options desks and volatility vaults extract premium from traders desperate to hedge.

Every flash crash, every liquidation event, every panic-driven move creates revenue.
It’s not chaos — it’s structured extraction.

This doesn’t mean the system is unfair by design. It means the incentives are asymmetric. Those who can react, hedge, or leverage information about liquidation thresholds have a structural advantage. Those who can’t — retail traders, fundamental investors — end up being the liquidity that others monetize.

Volatility has become an asset class of its own — one traded, engineered, and optimized by algorithms.

Who Really Wins From Chaos?

The uncomfortable truth is that modern markets — both traditional and decentralized — are built to reward speed, not conviction.

Long-term investors usually sit on the sidelines during violent crashes. They hold their positions, or worse, are forced to sell in panic. Meanwhile, volatility traders — armed with capital, bots, and precise data — extract billions in profits from short-term swings.

It’s a zero-sum game during those few hours: what some lose through liquidation, others gain through arbitrage.

And yet, the broader economy loses. Each cascade drains liquidity, erodes trust, and discourages long-term capital from staying in the market. Volatility may enrich a few, but it impoverishes conviction.

DeFi’s Transparency: A Double-Edged Sword

One of DeFi’s defining features is transparency — every position, collateral ratio, and liquidation level can be seen on-chain.

This is both empowering and dangerous.
On one hand, it allows sophisticated traders to monitor where the “liquidation walls” are — the precise price levels where massive forced sales will trigger. On the other hand, it gives those same traders a roadmap to push the market toward those levels.

When liquidity thins out, a single large sell order can nudge prices just enough to trigger cascading liquidations. Once the dominoes start falling, the self-reinforcing nature of leverage takes over.

For long-term investors, this transparency can feel like a trap — they can see the risk forming, but they lack the tools to act on it.
For algorithmic players, it’s a treasure map.

Extractive vs. Constructive Volatility

Not all volatility is bad. Markets need movement to find fair prices and allocate risk. The problem arises when volatility becomes extractive — when it serves mainly to transfer wealth from weaker hands to stronger algorithms.

This is the difference between volatility as price discovery and volatility as profit mechanism.

In extractive systems, the same volatility that clears leverage also drains productive capital. Instead of fueling innovation or supporting long-term projects, liquidity gets recycled through liquidation bots, arbitrage loops, and fee structures.

That’s the paradox: DeFi, the most open financial system ever built, still reproduces some of the extractive dynamics of Wall Street — just faster and with better transparency.

Designing Tools for Long-Term Investors

So the real question is: can we turn volatility into something constructive?

There are at least three promising directions:

1. On-Chain Liquidity as a Shock Absorber

Automated Market Makers (AMMs) distribute liquidity continuously across price curves. When deployed at scale, this makes it harder to move prices violently, since liquidity exists at multiple price levels. Expanding on-chain liquidity — particularly from long-term holders — could make markets more resilient and less prone to cascades.

2. Grid and Range Strategies for Retail

Traditional “grid trading” systems, which buy incrementally as prices fall and sell as they rise, could be integrated into DeFi as automated vaults. This would allow everyday investors to accumulate assets during panic and sell into recovery — capturing the same volatility premium that market makers enjoy.

3. Volatility Vaults for Fundamentals

Imagine a new class of vaults that automatically deploy stablecoins into liquidity pools or structured products when volatility spikes. These “long-term volatility harvesters” could help investors earn from chaos rather than suffer from it, democratizing what has so far been an institutional edge.

Liquidity, Conviction, and Time

Volatility is not going away.
But we can decide who benefits from it.

If long-term investors remain passive — holding but not participating in liquidity provision — then volatility will continue to be captured by high-frequency and extractive strategies.

If instead, they can lend their liquidity intelligently, earning fees and spreads during market stress, volatility can become a source of yield rather than destruction.

This shift requires infrastructure: transparent, composable, user-friendly systems that allow investors to automate their responses to volatility without becoming day traders. It’s about building resilience into the code itself.

Towards a Fairer Volatility Economy

The ultimate challenge for DeFi is not just transparency, but alignment.

We’ve built systems that make market mechanics visible — now we must build systems that make them fairer.
That means turning volatility from a weapon of extraction into a tool of participation.

Every crash is a stress test. Each shows the limits of leverage, liquidity, and human patience. But they also show something else: a massive, recurring transfer of capital that could, in a better-designed system, be shared among those who believe in the long-term value of the ecosystem.

Volatility is not the enemy. It’s the pulse of the market.
But like energy, it can be wasted or harnessed.

Conclusion: Building a Market That Learns

Markets evolve by learning. After 1987, equities built circuit breakers. After 2010, they built better safeguards against feedback loops.

Crypto is still in its adolescence — fast, open, and brutally efficient. Its challenge now is to evolve from transparency to intelligence: building systems that not only display risk, but also distribute opportunity.

The business of volatility will not disappear. But it can be redesigned.
If DeFi succeeds in doing that — turning volatility into a collective asset rather than a private advantage — it could transform market chaos into one of its most powerful engines of inclusion.

Volatility doesn’t have to be something that happens to us. It can be something we build with.

by Jesús Pérez