Ethereum merged successfully! Destroying 15 misconceptions surrounding Ethereum

Ethereum often receives many bad reviews.

"Ethereum is trying to do too many things at once."

"Ethereum's supply is unpredictable."

"Deflation is not a good thing."

Today, with the Ethereum merger completed on schedule, now seems like a good time to break down some of the misconceptions surrounding Ethereum.

15 common arguments against Ethereum

Ethereum’s transition from proof-of-work to proof-of-stake has been planned for over 7 years.

It's been a long journey, but today it's finally here.

The mission of Ethereum is to be the settlement layer of the Internet of Value. This is an ambitious goal. Naturally, proponents and naysayers have been buzzing and skeptical for years as people learned about this emerging technology.

Given the events of this historic week, we wanted to dispel some of the bad views we've seen.

Here are 15 of the worst things about Ethereum from Ethereum Foundation researcher Justin Drake.

1. "The merge will never happen"

"The merger will never happen" is clearly a falsifiable statement - and it has been proven false!

At around 2:00 pm on September 15, 2022, Beijing time, the merger of Ethereum was successful.

2. “Ethereum will never succeed”

From the genesis block, to EIP 1559, to mergers, the saying "Ethereum will never succeed" has a long history.

It has long been believed that Ethereum will not be able to complete its roadmap. However, Ethereum has proven time and time again that despite receiving hundreds of billions of dollars in funding, it can, and does, grow.

People also confuse Ethereum with its technology stack: consensus layer, execution layer, and data availability layer. In reality, Ethereum strives to be greater than the sum of its parts, some of which may not be complete. Its mission is to be the settlement layer for the Internet of Value, and early indications are that Ethereum will succeed.

The last big feature in the roadmap is high-bandwidth data availability for rollups, also known as "sharding".

The sharding research is done, and once the merge is done, developers can focus on implementing it, starting with proto-danksharding .

In addition to about 100 consensus researchers and developers, ethereum now has hundreds of application engineers working on pushing ethereum's execution capabilities to the limit through a combination of optimistic rollup and zk rollup.

It's not the flashiest timeline, but Ethereum will succeed.

3. “Ethereum is trying to do too many things at once”

Over the years, many applications have been built on Ethereum - from DAOs, to ICOs, to DeFi, to NFTs.

Therefore, people claim that Ethereum is constantly changing its narrative based on the current meta (to be mentioned later).

But strictly speaking, these are applications built on Ethereum. This is not Ethereum itself, Ethereum is the settlement layer for digital value.

To use an analogy, it's like saying the Internet is trying to do too much. The Internet is the digital communication layer of the world, and it has various applications on it, including video streaming, social media, email, e-commerce and many more.

Ethereum settles economic transactions on the Internet - nothing more.

4. Ethereum cannot be both a currency and a smart contract platform

Critics often argue that ethereum is trying to be both a settlement layer and a currency. It can't have both if it wants to be successful.

Instead, it needs to focus on one of those things. If you want to be sound money, be sound money. If you want to be a settlement layer, be a settlement layer.

But actually quite the opposite.

If you want to be successful in one, you need to be successful in both.

the reason is simple. In order for billions of people to trust Ethereum as a secure settlement layer for global economic activity, you need trillions of dollars of economic security.

Why?

With 13.7 million ETH staked, an attacker could launch a 51% attack on the network by purchasing approximately $21 billion in ETH. A large nation-state could carry out such an attack, shaking confidence in Ethereum as a global settlement layer. We need trillions of dollars of economic security so that no country can control Ethereum.

Regardless of whether the consensus mechanism is PoW or PoS, a high level of economic security can only be achieved by allowing the native currency of the settlement layer to accumulate a monetary premium.

Currency and settlement are not binary - if you want to be a global settlement layer, you need a native currency worth trillions.

5. The supply of ETH is unlimited

Unlike Bitcoin, Ethereum's monetary policy does not have a hard-coded supply cap.

Additionally, there is a perpetual tail issuance, creating the misconception that the supply of ETH will tend towards infinity.

But thanks to EIP-1559 in June 2021, this is no longer the case.

Before EIP-1559, tail ETH issuance could push the ETH supply to infinity. But with EIP-1559, the base gas fee that was previously paid to miners is now destroyed.

This new burn rate balances ETH issuance and creates a balanced supply in the long run, with burns and issuance fully offset.

As the supply grows, Ethereum issuance (PoW and PoS) grows sub-linearly, while the burn rate grows linearly. This simple model guarantees supply equilibrium and prevents the supply from growing uncontrollably to infinity.

Interestingly, there is also an argument that the liquid ETH supply will not grow to infinity before EIP-1559.

This is because a portion of ETH (say 0.1%) is lost every year, for example due to lost private keys. Peter Todd has an article emphasizing that even if the upper limit of 21 million is removed and tail issuance is used to fund long-term Bitcoin security, Bitcoin will still have an upper limit.

The same goes for Ethereum, other things being equal!

6. ETH supply is unpredictable

A common argument against ETH is that the supply is unpredictable. Specifically, its monetary policy is changed over the years through a social layer (more on this later) rather than programmatically (such as Bitcoin halving every four years).

This is a fact and a generally accepted point. The goal of the entire crypto space is unbiased monetary policy. Kill the humans and let the robots call the shots. Fortunately, this is what happened on Ethereum within a few hours.

Monetary policy from the social layer (resulting in a "manual" reduction in issuance from 5 ETH/block to 3 ETH/block, 2 ETH/block) will be eliminated in favor of a market-driven, programmatic monetary policy will be adopted.

By merging, the future supply of ETH depends on two market-dominating forces, rather than arbitrary magic numbers like 2 ETH/block or 21 million BTC.

These two market forces are: 1) the capital cost of staking (compensated through issuance), and 2) the demand for block space (transaction fees).

Future ETH supply can be modeled on Ultrasound.money with two simple sliders, one capturing releases and the other capturing burns.

7. Ethereum is a plutocracy run by stakers

A common misconception is that validators run Ethereum through governance. To be clear, Ethereum validators have no on-chain governance rights (unlike chains like Tezos, Polkadot, or Dfinity).

Let's dig a little deeper. The consensus is divided into two layers: the machine layer and the social layer.

The machine layer is responsible for day-to-day consensus; it is computer-driven and runs in seconds. The social layer is responsible for setting the rules for the machine layer; it is driven by humans and operates on timescales of weeks, months, and years.

It is humans who ultimately decide which software a machine runs: they have total control over the machine's consensus.

In every blockchain system, including Bitcoin and Ethereum (both pre-merger and post-merge), the social layer takes precedence over the machine layer. This means that changes to the machine layer can be made by consensus at the social layer. It is the social layer that upgrades Bitcoin with features like SegWit and Taproot.

There are no on-chain plutocrats on Ethereum. ETH holders and validators have no control. There are no ETH-denominated votes to change the consensus rules.

Like Bitcoin, the social layer sets the consensus rules.

8. The rich get richer

Similarly, one of the biggest misconceptions about PoS is that it is a scheme to make the rich richer. not like this!

In PoS, everyone gets the same APR, which means the rich are just as rich and the poor are just as poor.

It doesn't matter if you're investing $1 million in ETH or $100 in ETH, it's a level playing field for all.

The barriers to entry are also low — especially compared to proof-of-work.

Under PoW, you have to spend millions of dollars in hardware and energy to achieve economies of scale to have a remotely competitive (and profitable) system.

The bigger you get, the cheaper it is to mine with Proof of Work.

In contrast, staking protocols like Rocket Pool and Lido allow anyone to earn the same rewards as someone running a $100 million validating node. This will become very accessible to everyone.

PoS is a more democratic system.

9. Deflation is bad

Deflation is bad for the Ethereum economy in the long run - it incentivizes hoarding and not spending.

This concern stems from the way of thinking of traditional economists. This is a popular view, even held by some in Ethereum circles, which also targets Bitcoin’s deflationary economics.

But it is important to distinguish between two different kinds of money: collateral money (non-transactional, low velocity) and debt money (transactional, high speed).

For example: gold is collateral currency, while fiat currency is debt currency.

These are two different types of currencies, each with different properties.

Debt currencies are money that you borrow and spend, such as DAI, RAI, USDT, and USDC. You want the debt currency to inflate because it becomes easier and easier to repay the debt over time. In addition, price inflation will stimulate people to spend instead of hoarding coins, thus promoting high-speed economic development. If the debt currency is deflationary, you increase the risk of default and spend less (not a good thing).

Collateral currencies like ETH, on the other hand, are the hard currency you borrow against. You want the collateralized currency to be deflationary, thereby minimizing liquidation risk while increasing your purchasing power over time.

Both ETH and BTC are optimized as collateral currencies. For ETH, it is the collateral for staking and DeFi, backing billions of dollars in collateralized liabilities and loans.

Note that Ethereum, as a network, benefits from having two currency types running on it. The high-speed transaction currency generates billions of dollars in cash flow for Ethereum through transaction fees.

When ETH — the only native collateral on Ethereum — is locked in the Beacon Chain and DeFi, ETH velocity decreases and the ETH currency premium increases.

10. Higher ETH price necessarily means higher gas cost

This is a common misconception. It is believed that since the fees are paid in ETH, if the price of ETH goes up, then the fees must also go up.

The reality is that there are two different markets at play: the ETH market (ETH is denominated in USD) and the gas market (gas is denominated in ETH).

We may encounter such a situation: 1 ETH is worth 1 million US dollars, but the gas price is very low (only a fraction of Gwei), and the transfer only needs 0.01 US dollars. Only a complete bifurcation of the ETH and gas markets is possible right now, but that's actually where we're headed!

Of course, there is some correlation between ETH price and gas price - especially on smaller timescales. If the ETH price goes up, it means better security and higher economic bandwidth on the Ethereum network.

This makes Ethereum block space more useful, which increases the demand for block space and increases gas prices.

As a rule of thumb, people are willing to pay more in a bull market and less in a bear market. Fundamentally, there is nothing to force these short- to medium-term correlations to determine the long-term trend of the ETH and gas markets.

The price of ETH can go up—even to $1 million per ETH—while transaction fees are directed down, even down to $0.01 per transaction.

Also note that this critique does not yet take into account the emergence of Layer-2 blockchains that are working to scale Ethereum by moving transactions off the mainnet.

11. ETH is a security

This is a falsifiable statement.

Securities laws are enforced in different jurisdictions. I could go to each jurisdiction and ask if ETH is a security in that jurisdiction.

There are roughly 200 jurisdictions in the world, none of which have declared ETH a security.

When people say "ETH is a security", they actually usually mean "ETH is a security in the US".

But this directly contradicts the informal guidance of the US SEC that ETH is not a security. In addition, the CFTC has officially stood up and stated repeatedly that ETH is a commodity .

Likewise, CME lists ETH futures — it can only list commodities.

This also violates the 7-year statute of limitations for securities -it has been more than 7 years since ETH came out, and the regulator has not taken any enforcement action.

In the U.S., ETH is clearly not a security (not legal advice!). However, the resurgence of this argument is largely due to U.S. SEC Chairman Gary Gensler’s hatred of cryptocurrencies and his obsession with holding most crypto assets. Regulated as a security .

What if a jurisdiction does declare it a security?

The Ethereum network doesn't care. It will continue to produce blocks and function normally.

Instead, compliance will happen outside of Ethereum, with some centralized exchanges delisting ETH.

However, even if this happens, it will still be relatively easy to get ETH. For example, one can buy different tokens (such as USDC or WBTC), withdraw them from a centralized exchange, and convert them to ETH on Uniswap.

12. Scalability will reduce burn volume

The argument is that if Ethereum scales, then fees per transaction will drop, resulting in lower total ETH burned.

This view is common, even within the Ethereum ecosystem. But a simple rebuttal can be made to this. Transaction fees may drop on an individual basis, but that doesn't account for the fact that Ethereum now processes more fee-paying transactions.

In general, the total amount burned may decrease or increase with scalability - both are possible.

Another important concept here is induced demand. That is, the more the system improves, the more the system is used.

Take real-world transportation as an example. If there is a freeway with two lanes and there is always traffic, the city may decide to add a third lane. But soon after the third lane is built, traffic will pick up again as more people decide to commute on the highway due to the newly added lane.

In short: the more active capacity, the more active.

Just look at the historical data of Ethereum. In fact, the Ethereum network has scaled approximately 50-fold since genesis, while total transaction fees have expanded to billions of dollars per year. Let's look at it in detail.

At Genesis, the block gas limit was set to 3 million gas (the maximum gas an Ethereum transaction can consume in a block). As of this writing, the average gas consumption per block is 15 million gas. Scalability has been increased by 5 times.

But there is another more subtle 10x scalability: smart contract gas optimization.

In the early days of smart contracts, developers deployed very gas-inefficient contracts on Ethereum. Over the years, developers have gotten better and more efficient at writing efficient smart contract code.

Reducing the gas consumption of a contract is known as "gas golf". It's a bit like playing golf, a shot costs 1 gwei, and the developers try to get the lowest score possible.

You can see this by comparing the gas efficiency of Uniswap V2 and Uniswap V3. There is an order of magnitude improvement in gas usage per unit of transaction volume between V2 and V3.

When you combine the gas limit increase with the smart contract gas optimization, you get about 50x.

Now, despite the increased scalability, have total transaction fees dropped?

No, it has only gone up in 7+ years. In the beginning, the transaction fee was about $10 per day. Today, Ethereum processes millions of dollars in transaction fee revenue every day. Check out the chart below!

Scalability does not affect burn volume.

13. ETH is just a tech stock

One could argue that Ethereum is like a tech company, so ETH should be valued like a tech stock based on cash flow. This statement is partly true, but the reality is more nuanced and optimistic than it appears.

When looking at Ethereum's cash flow (burns = transaction revenue, issuance = security fees) and profit margins , Ethereum's P/E ratio is about 32, comparable to Google or Apple.

But that's only part of the story. It ignores that ETH is a low-velocity collateral currency, and therefore the potential for ETH to accumulate a monetary premium. You can use ETH as collateral in DeFi, and you can also use it to keep the network safe. But you can't do either of those things with Apple stock!

As more ETH supply becomes illiquid through these mechanisms, a currency premium will accumulate on top of ETH's "base" cash flow valuation. If the majority of ETH is used as collateral over time (and it should be, since that's what ETH is optimized for), then most of the ETH market cap will be the monetary premium.

14. The Ethereum narrative is always changing

As the categories of applications built on Ethereum grow in prominence, the Ethereum narrative is constantly changing. ICOs, DeFi, NFTs, even DAOs — all of these are new stories for Ethereum.

But one should not confuse Ethereum with the applications built on top of it. Early Internet narratives evolved with Internet applications (from email, to forums, to photo sharing, to social media, to streaming).

However, it is now well understood that the core purpose of the Internet is simply to be a communication protocol

Likewise, we can expect Ethereum to eventually be appreciated for what it is: simply as a settlement layer for the Internet of Value.

15. "Ultra-sound money" is disgusting

Ultra Sound Money is distasteful and a stolen meme.

Some Bitcoin proponents believe that the "ultra-sound money" meme is stolen from Bitcoin's "sound money" meme. Others find "ultra-sound money" offensive - they associate pregnant women, and the bat emoji reminds them of COVID-19.

This is especially ironic given that Bitcoin’s “sound money” meme was copied verbatim from gold fanatics, and “ultra-sound money” was stolen. 100% stolen, no innovations whatsoever. The sound money meme has been around for centuries, and people forget its history.

On the other hand, "ultra-sound money" is a new derivative of "sound money".

Memes are cultural messages that go viral.

They spread through human culture by replicating, mutating, and evolving (like biological viruses!). This is where "ultrasound money" comes in - a powerful mutation that has now spread to thousands of believers .

When it comes to the topic of antipathy, we cannot refute.

Dislike is subjective.

But if we delve into the etymology of sound money, “sound money” itself is objectionable (at least it was). The concept of "sound money" arose from the "clinking" of pure gold coins to test their authenticity. So even the origins of the sound money meme are pretty ridiculous.

Sound money opponents might easily mock it as "ding ding money" or "la la money".

If the purity test for gold was based on taste or smell, then gold could be called "taste money" or "smell money" - which is how offensive the term "sound money" sounded when it was first coined reason.

Anyway, it's just a meme.

Finally, happy merge day!