Ethereum's innovator's dilemma: valuation and usage have peaked—what will retain new applications next?
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Ethereum's innovator's dilemma: valuation and usage have peaked—what will retain new applications next?
Unless Ethereum undergoes fundamental changes in community and organizational operations, its relative advantages in valuation and usage have already peaked.
Navigating Web3 tides with focused insightsAuthor: JAY
Translation: TechFlow
So, how will Ethereum evolve next? In this article, I discuss modular blockchains, database design, and引用 GCR's perspective to attempt to answer this question.
The innovator's dilemma can be summarized as: "Successful companies often fail to adapt to shifts in paradigms, especially around technological innovation. The reason is they over-focus on perfecting what made their products successful, rather than exploring unfamiliar or newer ideas."
In the world of blockchain and smart contracts, we've made significant progress over the past few years. Now, a million-dollar—or more accurately, $250 billion—question is: What lies ahead for Ethereum?
Through this article, I will argue that Ethereum has already peaked both in 1) valuation relative to all crypto assets (ETH.D); and 2) relative usage and adoption. I will begin by exploring the concept of modular blockchains, compare it with traditional database design principles, and then tie everything back to Ethereum and its future.
Modular Blockchains
Today, there’s a more principled way to think about what constitutes a well-functioning blockchain and a rational approach to decoupling (and scaling) core components. This is the monolithic vs. modular debate.
The core idea behind blockchain modularity is that there are four fundamental functions:
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Execution: Determines the state “after” a transaction. If I send tokens to a specific wallet, the execution layer decides the relevant balances before and after the transaction.
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Settlement: Determines whether submitted transactions are “valid.” After sending tokens, if the balance is xyz, settlement verifies whether xyz is correct.
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Consensus: Determines the final state after a bundle of transactions. This layer establishes 1) the correct order of a given sequence of transactions, and 2) the final state after processing them.
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Data Availability (DA): To enable any of the above three functions, there must be an accessible prior state and end state. DA provides the current state to the execution layer and updates it according to the final consensus outcome.
As with any engineering problem, a "perfect" blockchain only makes sense when the use case is clearly defined. This framework enables more specialized blockchain designs—blockchains built for high-throughput gaming have fundamentally different requirements from those aiming to become a global decentralized ledger. This way of thinking strongly reminds me of database design principles, particularly the debate between SQL and NoSQL.
Database Design
Databases have existed decades longer than blockchains. The consensus around their design is that there is no such thing as a perfect database. Like most engineering problems, everything involves trade-offs.
The framework for building scalable databases always starts with: “What is the use case?” Before making decisions, I ask several key questions:
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What is the rough read-to-write ratio? On apps like Telegram or Slack, reads and writes are similar in volume, while on Twitter, reads outnumber writes by several orders of magnitude.
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In distributed systems, there’s the concept of consistency versus availability. In other words: Do we care more about inaccurate data or application downtime? This again depends on context. For fintech applications, consistency (accurate data) is far more important.
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How critical is stale vs. fresh data? How does this relate to read/write load? Does our database allow us to implement strategies to handle concurrent writes and reads? For example, how do we prevent the classic double-spend problem when my wife withdraws cash from my bank account at the same time I’m swiping my debit card?
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What are the read patterns? Do you need flexible access to data, or is it usually pre-defined? Are you performing many joins across different datasets?
Beyond technical considerations, it’s also important to understand:
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How many engineers are proficient in this technology? How many actually want to build with it?
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If we want to fork the underlying code and customize it, is there active support available?
The Future of Ethereum
Now, let’s tie it all together—there is no perfect blockchain. Good engineering is about trade-offs; there’s no one-size-fits-all solution. So, how did Ethereum become such a “dominant” platform? Why is Ethereum priced as if it were the perfect blockchain? And finally, where is Ethereum headed next?
How Did Ethereum Become Such a “Dominant” Platform?
Four years ago, Ethereum was the go-to choice for building smart contract platforms. Compared to all others, it had superior developer tools like Hardhat, CryptoZombies, etc. It also had a loyal user base, and its chain and token were considered “decentralized.” At the time, centralized blockchains were more likely to be scams. ETH was also cheaper, meaning lower gas fees.
Today, developers have many more smart contract platforms to choose from, each with unique trade-offs. While scams still exist, they’ve significantly declined compared to four years ago, as more talent and capital enter the space.
The reasons for Ethereum’s past success are precisely why it may fail in the future. There was a time when Ethereum was the only viable smart contract platform for developers. Legitimate use cases (DeFi, NFTs) gave ETH a massive head start. But now, the focus has shifted toward value accumulation (“ultra sound money”) and competing with Bitcoin as the default internet-native store of value (“flippening”).
This desire to simultaneously serve as a smart contract platform and a decentralized “ultra sound money” introduces significant friction for marginal users and developers (higher gas costs, network congestion). As Confucius (and GCR) said: “The man who chases two rabbits catches neither.”
Where Is Ethereum Headed Next?
Users will go where applications exist and costs are reasonable, while application developers tend to be more cautious and long-term oriented. Their overhead is much greater than that of individual users. Developers will build on platforms where their applications have long-term growth and scalability potential.
Look at Ethereum today: average transaction speed is 15–20 TPS, and gas fees frequently spike to $200. Applications on Ethereum face clear limitations—they must involve very few interactions. For example, lending protocols work well on Ethereum because I might interact with them only a few times per year.
But if I'm an app developer planning to scale to 100,000 or 1 million users with higher interaction frequency, building on Ethereum becomes unfeasible.
This is becoming increasingly evident as credible alternatives emerge:
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FriendTech was built on Base L2
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The Pacman and Blur teams are considering launching their own L2s
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DYDX uses its own application-specific chain
The modular blockchain framework offers a set of trade-offs that blockchains can choose from. We’re now entering a phase where blockchain infrastructure supporting various points along this trade-off curve is beginning to emerge.
Finally, and most importantly, incentives.
As Charlie Munger always said: “Show me the incentive and I’ll show you the outcome.” The incentive structure for building on Ethereum is inferior compared to existing alternatives on other blockchains. Venture capital firms and new L1 teams have strong interests in cultivating robust, thriving ecosystems. As an investor, I’d ask: when tokens are so diluted and ecosystems so crowded, why should my team build on Ethereum? Why not foster app development on a blockchain where I have skin in the game and the L1 valuation is much lower?
Replies in this tweet make things crystal clear.
ETH is no longer on the efficient frontier of blockchain design. Regardless of where you want to sit on the trade-off curve, there are better smart contract platform options available—with superior incentive structures as well. Unless Ethereum undergoes fundamental changes in how its community and organization operate, its relative advantage in valuation and usage has peaked.
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