Ethereum Faces Challenges, But Long-Term Prospects Remain Bright

The upcoming Cancun/Deneb upgrade of Ethereum is expected to reduce the expenses of Rollup operators, which may negatively impact Ethereum's revenue in the short term. As Rollup projects enhance interoperability with other high-performance, low-cost settlement and data availability chains, the performance of ETH may be affected. In the long run, if the theory of blockchain modularity is validated, the main source of fees for a layer one public chain like Ethereum will come from layer two Rollup service providers rather than end users. Additionally, as layer two public chains increasingly adopt account abstraction, the main individual holders of Ethereum in the future may be Rollup operators rather than ordinary users.

2023 L2 Development Status

Since the beginning of this year, trading activity on Ethereum L2 has more than doubled. Among L2s, Optimism and Arbitrum have seen the largest decline in TVL share, while Base and zkSync Era have grown the fastest. Notably, Base, launched by Coinbase, has rapidly risen in user adoption and popularity. Currently, the sorting revenue from Optimism, Base, and Arbitrum accounts for about 20% of total revenue, generating a cumulative income of $140 million.

The Impact of the Cancun/Deneb Upgrade

The main change in the Cancun/Deneb upgrade is EIP 4844, which will create dedicated block space for Rollup transactions. This may temporarily reduce Ethereum's fee revenue, as it will decrease the fees paid by Rollups by more than 10 times. Until Rollup technology matures, Ethereum's revenue may still primarily come from end users rather than L2.

Technical Challenges Facing Rollups

Rollup operators are currently advancing development in several key areas:

1. Scalability: Reduce fee volatility and Gas costs through upgrades.
2. Decentralization and Security: Implement effectiveness/fraud proofs, expand the validator and sorting operator set, and remove administrative privileges.
3. Interoperability: Improve the seamless migration of assets between L1 and L2.

Advantages of Alternative DA Solutions

Compared to Ethereum, alternative DA layers like Celestia can offer lower fees for Rollups. On average, Celestia's fees are 80 times lower than those of Ethereum. Although Celestia is not yet widely used, its characteristics optimized specifically for DA mean that its fees may remain lower than those of Ethereum in the long run.

Long-term Outlook

In the long term, as blockchain-based applications are adopted on a large scale, Ethereum's revenue may rise. The transaction volume of L2 could be ten times or more than that of Ethereum. Lower L2 fees will bring new use cases for blockchain applications, thereby increasing the overall demand for Ethereum's block space. At that time, Ethereum's primary source of revenue will be serving as a settlement and DA layer for Rollups.

Ethereum's Competitive Advantages

Despite the competition from dedicated layer-2 blockchains like Celestia that support Rollups, Ethereum's position as the most decentralized and secure general-purpose blockchain may continue to attract users. Some users may choose to interact directly on Ethereum to leverage its unparalleled decentralization and security.

Other Considerations

1. Account Abstraction: The implementation of native account abstraction on L2 will change the user experience, allowing users to pay transaction fees more flexibly.

2. Re-staking: The maturity of re-staking protocols like EigenLayer may increase the demand for Ether and provide additional rewards for validators.

Conclusion

In the short term, Ethereum may face the issue of reduced revenue. However, in the long run, as Rollup technology matures and L2 adoption increases, Ethereum is expected to benefit from larger-scale trading activities. Technologies such as native account abstraction on L2 will further change the way users interact with the blockchain. In the future, the main holders of ETH may be Rollup operators rather than ordinary users. Despite the challenges, the long-term outlook for Ethereum remains bright.