ETH’s Lost Mind: Why Layer 2 Betrays the Original Intention of Cryptocurrency

Most L2s will always remain centralized: the incentives are distorted! The "solutions" to these problems are overly optimistic. As for-profit companies, L2s will not give up their revenue. This is exactly why ETH betrayed its roots and became a centralized service platform.

Competing L1 and L2 are cannibalizing ETH’s user base, while ETH’s leadership is promoting and celebrating ETH’s decline. This state of affairs is sad because it betrays the founding principles they once held dear. Pushing centralized solutions while empowering companies that are forced to comply with government censorship.

Privacy has always been one of the cornerstones of the cyberpunk movement, as cryptography brings the promise of widespread adoption of privacy-enhancing technologies. However, ETH pushes most users toward L2s that can monitor, freeze, steal, and censor funds, which is clearly far from the cyberpunk ideal. ETH is repeating the mistakes of BTC, turning to L2 instead of on-chain expansion, and history is repeating itself.

Centralization of L2

The current reality is that all major L2s are completely centralized and are able to censor and steal user funds. The admin keys controlled by the multi-signature can change the contract rules at any time (including theft), and the centralized orderers can also censor any transaction.

More critical is the possibility of the future. All solutions about L2 centralization are overly optimistic, requiring for-profit companies to give up most of their current income... This completely ignores human nature and history, which is a common mistake made by high-level engineers and computer scientists. Therefore, the study of blockchain must be interdisciplinary, including the humanities. This is not a technical problem, but reveals the inherent social coordination difficulties in these solutions.

Decentralization requires powerful groups to give up power, which has almost never happened in history.

Why Most L2s Will Never Be Decentralized?

The incentives clearly point to L2 remaining centralized, and “trust me” is not good enough, especially when we should verify rather than trust.

Drake's rebuttal

Changing how revenue is collected in the system is also not a suitable solution, as @drakefjustin recently tried to put Base's revenue in the execution module instead of the sorting module. For Base to be truly decentralized, it would have to give away all revenue; therefore, keeping execution centralized is not the right solution.

The harsh truth is that Coinbase will likely never be decentralized, and that’s what the “L2 Scaling” roadmap really looks like! KYC, AML, and institutional-grade scrutiny overwhelm the original vision by handing users over to a centralized and essentially custodial solution.

L2 Interoperability

L2 will unanimously oppose a unified interoperability protocol and instead try to get everyone to adopt their own solution, even if this hurts their long-term success. This is similar to the tragedy of the commons problem in political science. Twenty or so attempts to create a unified interoperability protocol equals no unified protocol at all!

Competition between L2s and with L1 creates a different competitive ecosystem than L1 scaling. The free market will continue to create diverse competing L2s. While this is good in most cases, when it comes to blockchain scaling, it will only lead to massive fragmentation and ruin the user experience.

Ironically, while ETH Core pushes for embedded L1 collators, L2 pushes for their own “shared collators” like Arbitrum’s Superchain and Polygon’s Agglayer, etc. The only way a shared collator works is if everyone uses the same one, which makes it impossible.

ETH's downfall is that it has given up on its own use, and while @aeyakovenko mocked the ETH community as a joke, the fact is that on-chain self-use will always yield better long-term returns than outsourcing. ETH is making a terrible mistake.

Distorted incentives

Now let’s talk about the elephant in the room: there is orders of magnitude more funding for L2 than there is for L1 in ETH and BTC. Billions of dollars have been created around L2 tokens and VC funding, while only millions have gone into L1 development. This creates a clear conflict of interest and perhaps even outright corruption. The incentives are so perverse that it can lead developers to arbitrarily limit L1 capacity in favor of L2. All they have to do is not pursue or support L1 scaling technology… and this is how L2 has become the single biggest corrupting force in this industry. Because they benefit from not scaling L1 in the short term. Turning developers into multi-millionaires through L2 tokens and equity. Of course, this also adds a strong bias towards L2 scaling over L1 scaling. This is because L2 stands to earn more by supporting the narrative of limiting L1 capacity, while only scaling through L2; this creates a clear conflict of interest between the long-term success of L1 (ETH and BTC) and the short-term profits of companies focused on L2. This is also because VCs can rent-seek through “L2 scaling” because these are typically for-profit businesses, while L1 scaling is a public good. It is impossible for VCs to extract a percentage of fees from a well-designed L1. However, this is the current norm in the L2 world. Scaling L1 will not benefit these VCs in the short term, while the “L2 scaling” roadmap will, even if it sows the seeds for ETH’s long-term self-destruction.

L1 Scalability

Both perspectives share a core assumption, and that is L1 scalability. ETH’s position hinges on whether the L1 scalability tradeoff is tenable. It is therefore this technical limitation that justifies the “L2 scaling” roadmap in their minds. The L1 scaling paradigm is far more optimistic, as it acknowledges that L1 can now scale to meet demand without sacrificing decentralization. Whether through pure parallelization, DAG, or sharding, all roads lead to Rome. The ETH community is ideologically attached to an outdated technical paradigm, much like Bitcoiners. ETH is also rapidly becoming a dinosaur, just like Bitcoin, with the same strangely toxic and cult-like ideological trappings.

ETH Maximalism

It is no coincidence that ETH supporters have gradually become indistinguishable from Bitcoin maximalists, as they have adopted the same philosophy and narrative as their coping mechanism/belief system. This is because it is all a result of the same systemic flaws in the governance structure that led to both BTC and ETH in the first place. Thus, environmental pressures create a particular belief system, just like convergent evolution in the biological sense. I am also convinced that if formal on-chain governance was implemented, not expanding L1 would never be seen as a realistic option.

Governance

Ultimately it comes down to “who decides”. The ugly reality is that a small group of people can decide BTC and ETH. This is the essence of “off-chain governance”; a highly centralized decision-making process. This can be captured by small groups with perverse incentives (such as for-profit L2) that directly benefit from not scaling L1 in the short to medium term. On-chain governance allows all stakeholders to vote on proposals in a completely transparent manner, which can understandably lead to very different outcomes. Most importantly, this benefits L1 rather than the interests of whichever group happens to be in control of the centralized governance process at the time. From a political science and philosophical perspective, these off-chain governance processes are often easily captured and distorted because the “GitHub dictatorship” is far less powerful than a nation-state. On the other hand, an on-chain governance process with a large number of stakeholders, coupled with more complex checks and balances and divisions of power, does have a chance of withstanding the test of time and the worst that human nature can offer. This is where on-chain and governance must be viewed as a mechanism to protect decentralization, rather than a repetition of old-fashioned/legacy governance. In fact, it is quite the opposite; off-chain governance replicates the governance systems that existed before blockchain; and I would add that in most cases, it does a very poor job of it. On-chain governance is something completely new that leverages the inherent strengths of blockchain technology and aligns with L1 and collective decision-making. It is no surprise, therefore, that the idea was outright rejected by the leadership of both BTC and ETH. Whoever has the most influence stands to lose the most if on-chain governance is implemented; this is why incentives are not in place for its establishment if it is not established early on.

Real Solutions

The solution lies in abandoning ETH, voting with our feet and supporting its scalable competitor. Because as stakeholders, we have no real say in ETH’s governance process. We can certainly admire efforts to lead a full-scale rebellion against the ETH status quo, similar to the block size debate in BTC. However, as a veteran of that civil war, and being on the “losing side” during that time (bigger blocks), the odds are not good. Because at the time, most businesses, miners, stakeholders, and users supported bigger blocks. Yet, the core developers still prevailed, and 8 years later the block size limit is still 1MB! In theory, there couldn’t even be a stronger case for effective centralized control over the rules of a decentralized network. ETH has nowhere near the same level of support for revolution as BTC, so I don’t see how it can succeed, especially without formal on-chain governance. In this free market of cryptocurrencies, we have to take into account another strong demographic effect: those who support L1 scaling leave ETH, and those who don’t eventually join it. Who is left to fight for L1 scaling now? The same effect happened with BTC, turning it into a monoculture with no real potential for change. All of these shifts start at the top of the leadership structure, gradually moving the entire ecosystem away from its original goals. We used to believe in "fork governance", but this was wrong for two reasons: the threshold for "agree or fork" was too high, so it evolved into an effective tyranny. The second problem has to do with the market not actually bypassing the problematic chain through forks, but choosing the next generation chain. This explains why the market did not bypass BTC through BCH at the time, but eventually upgraded and all turned to ETH.

History repeats itself

I went from being a die-hard Bitcoin supporter in 2013 to sounding the alarm in 2015, to being a critic in 2017. I abandoned BTC, believed in ETH's promise of on-chain scaling via sharding, became a die-hard supporter in 2015, sounded the alarm again in 2022, to being a complete critic in 2024. You can comment on my position as much as you want, but one thing is clear: BTC and ETH changed under my watch despite our protests, and I remained consistent. Radically changing the economics and purpose of a blockchain by arbitrarily limiting its capacity is a radical approach that runs completely counter to the conservative approach; we should not allow them to use "conservatism" or "social contract" as excuses because those principles have been completely violated. The real tragedy is that we have squandered opportunities for global adoption twice, and it may well have set us back decades. The silver lining is that we can clearly identify the problems and implement solutions in the latest generation of blockchains, finally breaking this terrible and painful cycle.

in conclusion

Let’s get back to the first solution and why ETH is doomed to fail. Because we must vote with our feet and support ETH’s competitors to achieve decentralization and the cypherpunk dream. If you really like Ethereum and Bitcoin, you must be able to abandon them for them, for their original vision. Precisely because this is far more important than the price of any three-letter ticker. Focusing on the big picture is focusing on the biggest prize: changing the world with financial sovereignty, censorship resistance, and true monetary independence!