This article follows a previous piece that began detailing how Ethereum echoes the Bitcoin Blocksize Wars.
Bitcoin Cash, the last serious iteration of the major Bitcoin hard fork attempts, was underway in 2017. Alternative cryptocurrency network Ethereum was also rising for the first time, on the back of initial coin offering (ICO) hysteria.
Although Bitcoin Cash’s market value briefly flippened Ethereum in late 2017, it’s clear today that the network effects around Ethereum are much greater than Bitcoin Cash.
In some ways, Ethereum is the next logical iteration of the Bitcoin hard fork attempts.
After all, many big block supporters are also fans of Ethereum.
Big block caucus embraces Ethereum
Coinbase, which heavily supported the various Bitcoin block size hard fork proposals, started throwing its weight behind Ethereum all the way back in 2016, when co-founder Fred Ehrsam published ‘Ethereum is the Forefront of Digital Currency’ on the official Coinbase blog.
Chief exec Brian Armstrong also revealed he had more ETH than BTC in a 2017 interview with Fortune. Coinbase’s non-custodial storage offering, known as Coinbase Wallet, originally launched as an Ethereum-only wallet called Toshi.
Not to mention, SegWit2x lead maintainer Jeff Garzik was building Metronome (a BTC competitor issued as an ERC-20 token on top of Ethereum) while he was working on SegWit2x.
Even Ethereum inventor Vitalik Buterin made it clear he sympathized with the big blocker camp on more than one occasion.
In the aftermath of SegWit2x’s failure to gain consensus, many Bitcoin companies — from Coinbase to Blockchain to Bitpay — opted to integrate a multitude of Bitcoin alternatives rather than build out Bitcoin’s multi-layer approach to scaling.
This illustrates that these companies have a much higher time preference than the average Bitcoin holder or Bitcoin Core contributor when it comes to growth.
To this day, Bitfinex appears to be the only exchange, wallet, Bitcoin app, or financial service to integrate all three Bitcoin layer-two networks in Lightning, Liquid, and RSK.
And this makes sense. At the time, Ethereum was especially well-suited to handle cheap transactions and more varied use cases due to greater availability of block space, combined with a more flexible base chain scripting language.
Ethereum’s governance model also leverages hard forks, which renders the system more malleable at the base layer.
This makes Ethereum attractive to companies that may want to see the protocol changed for their benefit in the future (as many Bitcoin companies attempted to do with Bitcoin and failed).
It’s possible many of the companies that signed onto the New York Agreement were more concerned with growing their userbases, rather than retaining Bitcoin’s underlying value proposition of decentralization.
So, Ethereum has served as a key tool in allowing those entities to expand their businesses after they failed to get their way on the Bitcoin network.
‘Blockchain not Bitcoin’
As illustrated by the Bitcoin Blocksize Wars, it’s desirable for a digital cash system to be credibly neutral at the base monetary layer.
There’s a wide variety of factors that call Ethereum’s credible neutrality into question, beyond the hard fork associated with The DAO in 2016:
- its reliance on Infura for users to interact with the network,
- the upcoming move to proof-of-stake,
- issues related to miner extractable value.
Ethereum’s preference of hard forks over soft forks for network upgrades is another. More generally, there’s also flaws in the fundamental architectural design of the system.
Despite these concerns regarding lack of base chain neutrality, Ethereum has also experienced transaction fees even higher than Bitcoin at its 2017 peak.
What’s gained by Ethereum’s base layer tradeoffs
Galaxy Investment Partners chief Mike Novogratz correctly pointed out in multiple interviews: Ethereum has benefited from the three main crypto memes over the past year or two: decentralized finance (DeFi), stablecoins, and non-fungible tokens (NFTs).
However, these use cases are similar to the on-chain coffee payments at the center of Bitcoin’s block size war, in that you don’t gain much by building them out on the base blockchain layer (see an in-depth explanation of this point here).
It’s not that these use cases are not possible on Bitcoin. It’s that a structural decision has been made to build them on secondary layers on top of the base Bitcoin blockchain.
From this perspective, the argument that ETH should have value because it does things that Bitcoin cannot is extremely misleading.
Much like there was an Ethereum bubble built around ICOs in 2017 (and a Bitcoin hard fork bubble built around on-chain coffee payments), there’s now another bubble built around more use cases that don’t make sense at the base layer.
When you remove the fluff of these use cases, Ethereum’s lack of utility becomes clearer.
These sorts of technology-focused use cases are reminiscent of the “blockchain not Bitcoin” argument popular on Wall Street around 2015. They may be problematic when it comes to value accruing to the ETH token.
In many ways, it feels like I’m writing a different version of the “Why SegWit2x Makes No Sense” op-ed I wrote in the summer of 2017 — a few months before some of its key proponents abandoned the plan.
There’s an obvious difference between Bitcoin hard forks and a completely separate network that started from scratch.
However, the key argument I outlined in that piece pushes secondary network layers for functions that don’t need the high levels of decentralization and censorship resistance found at Bitcoin’s base layer.
That notion applies quite well to the current state of the Ethereum ecosystem.
While it may take some time, I suspect the market will eventually treat Ethereum much like it treated SegWit2x.
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