Short and sweet one for you guys today. Here are a few bear cases of Ethereum at the current moment.
The switch to Proof of Stake
Ethereum’s Scaling Plans
Ethereum’s Monetary Policy
Switch to Proof of Stake
Ethereum now consumes 99% less electricity than before. However, Ethereum is now way more centralized.
In theory, validators are definitely better than miners. You do not need expensive overpriced GPU cards, you just need a personal laptop to run the software. However in reality, it’s actually pretty difficult to be a validator.
First, you need at least 32 ETH to stake (at least $32,000 even in such bear market conditions). Second, slashing exists to protect the network from malicious validators, but this also means that you could lose some of your staked ETH if you make an honest mistake.
This leads to many users inclining towards third-party staking services (eg. Lido or Coinbase)
This also means that Ethereum is now censorable.
Censorship
Validators of the Ethereum network run a software program that automates the block production and creation process. One popular option that many validators use is called “mev-boost”, which is created by Flashbots.
mev-boost helps validators to rearrange the transactions in a way that actually helps them extract extra monetary rewards.
However, Flashbots is compliant with the US Treasury’s OFAC rules. This software is hence coded in a way that respects the blacklists from that agency. OFAC is blacklisting a lot of addresses (eg. every address that has interacted with TornadoCash in the past).
This means that majority of Ethereum blocks are actively censoring transactions. Keep in mind though, this does not mean that the blacklisted addresses are unable to send transactions anymore. This just means that they have to wait for a validator who is NOT using “mev-boost” to process transactions, which undoubtedly may take some time.
Security (not how secure it is!)
Ethereum may now be labeled as a security because of the switch to Proof of Stake. US Senator Cynthia Lummis said that Bitcoin is now the only cryptocurrency that can be considered a commodity, as ether could be deemed a security. The “inability to unstake tokens right now makes it susceptible to being considered a security”.
How do we know whether something is labeled a “security?” - Introducing Howey Test. In short, the Howey Test attempts to determine if there is an "investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others."
If Ethereum is declared a security, the entire crypto market will be on fire again.
Ethereum’s Scaling Plans
Due to Ethereum’s plans to focus on Layer 2s and subsequently sharding to solve scalability, it severely undermines Ethereum’s composability.
Composability essentially just means that dapps / protocols can be built on top of each other. For eg. Building a dapp that calls a function on another dapp which can then call another function on another dapp. This composability drastically increases Ethereum’s use cases.
However, if dapps start to move / migrate into different Layer 2 solutions, they are unable to easily coordinate with each other, which in turn hinders the ability to build sophisticated systems that brings about new use cases.
Ethereum’s Monetary Policy
After the Merge, the ETH community was excited about ETH becoming “net-deflationary”. However, data has shown that ETH is currently net-inflationary just a few months after the Merge.
Why is this happening?
Gas prices and usage have fallen substantially following the bear market, resulting in the Ethereum network not being able to burn enough gas fees per transaction to outpace ETH emission.
This is not necessarily a bad thing though.
If our main purpose in the first place is for users to be constantly using ETH to interact with smart contracts, send transactions etc., then a deflationary monetary policy will not be ideal. Read here to find out more about having a deflationary model in our economy.
However, another point to note is that Ethereum’s monetary policy over the years has been changing constantly that we do not know what it is going to be like in the future.
Conclusion and Personal Thoughts
Despite all the aforementioned bear cases, I personally believe that Ethereum’s move to Proof of Stake is absolutely necessary for the longevity and sustainability of the network in the long run. However in the short term, issues such as the ones mentioned will definitely cause price fluctuations.
Do you agree with my cases? What are your thoughts? Have I made you guys bearish about ETH now?