On November 12, venture capital firm Web3 Hack VC published research and analysis on Ethereum’s modular strategy.
“In the short term, modularization is likely to hurt the price of ETH due to lower fees and reduced chip burning, but that’s not the whole story,” said Hack’s managing partner VC Alex Pack.
The future of Ethereum is bullish
Since 2020, Ethereum has moved to a modular architecture, outsourcing parts of its infrastructure such as execution and data availability to layer 2 networks. The notion was intended to decentralize and improve network scalability, but there were short-term drawbacks.
The strategy has negatively affected the price of ETH in the short term due to reduced fees on the mainnet, leading to a reduction in token burning through EIP-1559. Lower fees mean a reduction in the scarcity of ETH, which puts downward pressure on its price, the research noted.
1/ ETH is underperforming BTC and SOL during this cycle. The reason? Many think that Ethereum’s choice is modular. Was it a strategic mistake? We’ve mined a ton of data and have some answers. pic.twitter.com/eAgqpLX5a2
— Alexander Pack (@alpackaP) November 12, 2024
Until recently, ETH had underperformed this year, with Bitcoin and rival network Solana seeing bigger gains. Additionally, the proliferation of new L2 tokens in the Ethereum ecosystem may have also diluted investor interest in ETH, the researchers said.
However, Ethereum’s modular approach aims to future-proof the network against technological changes, such as the rise of zk-rollups and shared security models like EigenLayer. This adaptability could help Ethereum avoid becoming obsolete, unlike previous tech giants like AOL or Yahoo.
The researchers concluded that, in the long term, Ethereum may emerge as a stronger player due to its “investment in fostering a broader ecosystem” as it is laying the groundwork to “adapt, scale and thrive” in the next wave of blockchain innovation.
“In an industry where success is driven by network effects, Ethereum’s modular strategy could be the key to maintaining dominance among smart contract platforms.”
“Perhaps modularity has positioned ETH for sustainable growth and continued dominance,” Pack concluded.
The price of ETH is reduced
ETH prices have soared this week, rising over 30% and adding more than Solana’s total market cap in just five days. The asset hit $3,424 on November 12 before retracing with the broader crypto market, which is cooling off after its week-long rally.
At the time of writing, ETH was trading at $3,148 after a 5.5% daily drop; however, it remains up 31% since the same time last week.
Meanwhile, total Ethereum ETF flows are back to net positive after a very heavy inflow day on November 12, with BlackRock’s ETHA fund seeing its second largest inflow of 131.4 million of dollars
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