Bankless: Rebuilding Ethereum’s product and money circulation mechanism

Author: David Hoffman Source: Bankless Translation: Shan Ouba, Golden Finance

Overview

Since 2023, Ethereum has lost the distribution advantage that once turned ETH into a "currency" - it has actively restricted the availability of L1, urged developers to "leave the mainnet", and conducted ethical reviews of certain product categories. These choices have caused users, liquidity, and attention to be dispersed to L2 and other faster L1 chains. As a result, the original "product-currency" positive feedback loop has been interrupted - applications can no longer attract users, users can no longer bring developers and funds, ETH is no longer an anchor for growth, and can only be traded like discounted technology stocks, and capital has begun to flow elsewhere.

Solution? Return to a product-oriented, mainnet-first strategy: increase underlying capacity, treat every chain (including Rollup) as a competitor, and reposition Ethereum mainnet as the decentralized economic center of future tokenized assets. Ethereum's restructured two-year roadmap targets 10x gas limit, native zkEVM, and tighter L1-L2 integration, which is expected to reignite the positive feedback loop, pull developers and traders back to the mainnet, and make Ethereum the "second largest global currency" in the crypto world.

Broken cycle

ETH's rise in 2021 is because the market began to price it as the second "currency" in the crypto world.

Against the backdrop of global currency flooding after the new crown, people gradually realized that "currency" is essentially a belief myth, and the market began to look for a new belief system. Bitcoin was an obvious answer, but in 2021, people realized that there is more than one way to make "money" with blockchain, and fixed supply caps are not the only option.

Back then, Ethereum exhibited a positive feedback loop, and its ultimate results were concentrated in the value capture of ETH:

Applications → Users → Developers → Investors → Liquidity → Protocol Revenue → Increased ETH Value.

Positive feedback loops are extremely powerful. It's the piercing screams you hear when a microphone is pointed at a speaker; it's the runaway energy of a nuclear explosion; it's the exponential growth of viruses during a pandemic lockdown. Positive feedback loops are so powerful that even the indifferent can't ignore them.

It was this strong positive feedback from Ethereum that the market labeled ETH as a "new currency" valuation. Everything was working well.

What happened?

When you hear your speakers howling due to microphone feedback, what do you do? Simply disconnect the speaker from the microphone. Cut off the feedback and the sound stops.

This is exactly what Ethereum did when it put Rollup on its premature roadmap.

Ethereum’s initial advantage was L1, which was the only entry point for builders to reach the first users, the central place for users to access applications, and the natural platform for speculators and traders to optimize market efficiency. If you want to do something, you can only come to the Ethereum mainnet.

There is no second choice.

But when the "Rollup-centric roadmap" became mainstream, both Ethereum’s official leadership and its community voice pushed L2 as the core of the future. The slogan "Ethereum relies on L2 to expand" resounded throughout the ecosystem.

The costs were not fully appreciated at the time. Builders suddenly had to pick a winner among a dozen rollups; users worried about where their friends (and liquidity) would migrate; exchanges and wallets scrambled to follow. What was envisioned as competition and cooperation among Ethereum’s Layer-2s eventually turned into a zero-sum game and unproductive infighting.

Before Rollups, investing in Ethereum was easy: just buy ETH. But because Ethereum’s next phase of growth depends on rollups, access to that growth requires holding a basket of rollup tokens and making subjective guesses about winners or losers. How can ETH be money in this context?

Once the “Schelling point” of the mainnet as a coordination center disappeared, Ethereum’s signal strength collapsed. The Cosmosification of Ethereum is real.

What happened next?

The market stopped treating ETH as a "cryptocurrency" and started pricing it like a tech stock using a discounted cash flow (DCF) model. The problem is that no L1 asset looks "cheap" under this model.

ETH is no longer cost-effective compared to BTC, but looks more expensive than faster-growing smart contract platforms such as Solana.

Ethereum, once the only one, is now put into the general basket of "many high-performance centralized chains". The drop from 90% dominance to 60% is not just a data change. 90% dominance means it is a global currency; 60% dominance means it is just a technology platform.

This trend is lagging in ETH prices, but we all see the long-term weakness of ETHBTC.

Despite ETH's 3-day surge of $700 from May 8 to 10, it is still down 72% compared to BTC and 84% compared to Solana (in nearly 900 days).

Some people may think that ETH’s weak performance is due to some external factors and has nothing to do with Ethereum’s strategy.

But look at the reality:

• Michael Saylor invested $35 billion in Bitcoin in three years;

• Solana’s memecoin locked up hundreds of millions of dollars in liquidity;

These two parts of funds could have flowed into the Ethereum ecosystem, but were taken away by competitors.

And Ethereum does not have its own Saylor, nor can it have one, because the feedback loop between its assets and the ecosystem has been broken.

Solana’s memecoin craze is a complex phenomenon. Although Ethereum cannot achieve a 400ms block speed or replicate the memecoin gameplay on Solana, Solana's active development ecosystem and product-friendly attitude have attracted the developers who should have belonged to Ethereum - those who were pushed away after 2022.

Ethereum's Turn

Ethereum is a decentralized ecosystem with no centralized command center - signals come from the edges, and the right signals will continue to increase over time. By 2024, these right signals finally reached the right audience, and change began to happen.

My podcast conversation with Ansgar and Dankrad from the Ethereum Foundation revolved around this process - we discussed the reasons behind Ethereum's strategic mistakes between 2021 and 2024, and the specific adjustments made by the ecosystem in leadership.

I also put together a cheat sheet that lists the various "weakness" performances in the Ethereum ecosystem and the measures being taken to address them.

In the Ethereum community, some people think this is a "strategic shift", while others say it is just a "priority adjustment". But I think it doesn't really matter - it's just a semantics issue. What really matters is: what is the priority of Ethereum for the various components of the ecosystem.

The most critical point is: Ethereum must prioritize itself (L1) first, and then consider L2.

The Ethereum mainnet (L1) must always be the top priority of the ecosystem - L2 should not dominate the development roadmap of Ethereum, especially not override the core needs of the mainnet. Otherwise, it will become "putting the cart before the horse".

Ethereum's priorities should be:

1. L1's technical capabilities and security

2. L1's application ecosystem and user base

3. L2's interoperability standards

A weak L1 is a disaster for the entire Ethereum ecosystem. It will be bad for users, bad for applications, bad for traders, and bad for L2. On the contrary, if the focus is refocused on the strength of the mainnet, everything in the ecosystem will benefit.

For the healthy development of the entire ecosystem, L1 must maintain top strength in the competition.

If Ethereum wants to best serve its users, applications, and Rollups, it must first serve itself well.

Ethereum Mainnet is the Economic Center of Cryptocurrency

L1 should be the default platform for anyone who wants to build, use, or trade on-chain assets.

It is the only truly decentralized, multi-client, always-on network. It is here that the ideals of the cypherpunks can truly reach ordinary users. Our mission is to expand this remarkable foundation to the widest possible range.

We must restore Ethereum Mainnet’s status as a “Schelling Point”.

This means expanding L1 to be a “big tent” that accommodates the broadest possible user base, allowing ordinary users to transact freely as well as whales, while maintaining the censorship-resistant core that Ethereum is built on.

Claims that “mainnet only belongs to the top 0.1%” only severely undermine Ethereum’s appeal.

The right signal is: Ethereum is our home — the home of developers, the home of users, the home of assets.

Distribution is king

Every explosive growth in crypto — the ICO boom in 2017, the DeFi Summer in 2020, the NFT wave in 2021 — happened on Ethereum because users already flocked there.

But in 2024, Solana took the lead from the memecoin craze, relying on faster, cheaper block space to win the distribution advantage. Ethereum can’t lose this ground again.

Increasing the capacity of L1 is restoring the network effect that attracts applications and Rollups to return. In essence, blockchains are asset ledgers. And Ethereum is the best ledger. It should be the home of the deepest liquidity, highest trading volume, and smallest spreads.

Increasing the capacity of the mainnet is expanding execution, thereby attracting traders, market makers, and token issuers - they are all looking for the largest and most liquid market.

Traditional finance is now "shopping around" and considering which platform to deploy their real world assets (RWA). Ethereum's goal should be clear: There should be no "second choice."

L2 is a customer of Ethereum

L2 should be understood as a paying customer of Ethereum. Each L2 controls its own governance, can fork at any time, and can choose to settle on other chains. Ethereum needs to treat them as customers that may churn, rather than as part of the Ethereum technology stack.

The confusion about whether these Rollups "belong to Ethereum" depends on what perspective you look at it from: if you strictly define Ethereum as an L1 blockchain, then Base, Arbitrum, etc. are obviously independent chains; but if you define Ethereum as a broader security ecosystem, then they are indeed "family" because they anchor data proofs on the mainnet. When we talk about Ethereum, we must be clear about which perspective we are using, because the grand "ecosystem" narrative only resonates with those who have already identified with Ethereum's long-term vision, while others only see competing settlement platforms.

A More Integrated Ethereum

The positive feedback loop in the Ethereum ecosystem (excess value flows into ETH) is not a new concept. As early as 3 years ago, there was a chart illustrating this model.

The key mistake we made was not realizing that each L2 had to build the same network effect feedback loop for itself, and Ethereum could not recapture the network effect from L2 without the technical ability to strongly integrate L2.

Ethereum built L2 before it built interoperability technology. Base, Native Rollups, and interoperability standards did not appear until 2024, at which point Ethereum's initial L2 had already split the network effect for three full years.

In the future, we should prioritize the development of highly integrated Based and Native Rollups rather than independent L2.

The Ethereum community is part of the product

Ethereum is not only software, but also the people behind it. While core developers advance a product-driven roadmap, the community also has an equally important position - builders choose chains and culture.

This means that we are co-creators, not critics who sit on the sidelines, and we must work together to promote the popularity and application expansion of Ethereum.

We, the Ethereum community, should admit: we are not an attractive community. We have become a "self-righteous" ecosystem, creating an unnecessary gap between us and many other members of the ecosystem.

Many Ethereum people disparage meme coins, partly because they don’t like speculation, partly to avoid endorsing Solana, and partly because meme coins are often associated with scams and are seen as distractions from the crypto mission.

I do this. Bankless was a pioneer in setting this tone and message. We drew the lines that eventually evolved into the divisions we see today - and I am now working to repair them.

If Ethereum just rejected meme coins, that would be fine. But over time, this "rejection" has become part of Ethereum culture. It started as a way to resist scams, and then it became setting thresholds and determining what is "legitimate".

Much of this mentality stems from the collective trauma of 2021-2022 (Terra, 3AC, FTX), when scams were rampant and Ethereum was relatively safe in this crypto disaster. The “purists” proved themselves right, but those who were hurt didn’t join an ecosystem that kicked them when they fell. They felt excluded.

When many thought Solana was dead, traders and speculators stayed. Partly because Solana was indeed a better technical fit for their needs, and partly because the Ethereum community has always been biased against traders and speculators.

If Ethereum had chosen to prioritize scaling L1 and recognize the value of traders and speculators more when FTX collapsed, Ethereum could have won the market cycle for the third time in a row.

To this day, the “purist” Ethereum culture still exists. We are now licking our wounds for rejecting participants who are critical to the ecosystem.

Ethereum cannot be artificially scoped

Traders and speculators are the most important user groups in crypto. They are the first to deposit funds, take risks that others are unwilling to touch, and send clear market signals to attract developers and users to enter the market. When Ethereum conducts moral judgment on "legitimate" use cases, ideologically neutral users will take liquidity elsewhere.

You may think that developers are the most important user group in crypto, but if traders don't like what developers build, then developers will be "deprived of food".

The Ethereum community needs to see itself as part of the Ethereum product suite. When application teams choose a chain, they are also choosing the culture behind it. If they feel that they are facing a community that will look down on "speculation", they are likely to choose a friendlier ecosystem.

The Ethereum community cannot only support those use cases that we consider "morally noble" and exclude those that we find "objectionable". We need to start with a founder's mentality and optimize the largest possible total addressable market (TAM).

If Ethereum wants to continue to be a center for asset issuance and innovation incubation, its culture must be as open as its code.

The Ethereum community has always emphasized the importance of its "social layer", believing that this is one of the keys to Ethereum's uniqueness and value. But this obsession with the “social layer” has created a divide between those who agree with the project’s philosophy and those who just want to get on-chain and operate.

Economically rational but ideologically neutral users have been accused of not having enough agreement with the protocol.

Ultimately, the real job of the “social layer” is to choose the right fork when the consensus layer code fails. Anything else in the social layer is a bonus feature and should be done with caution. On a permissionless chain, restricting permissionless behavior runs counter to “trusted neutrality.” Ethereum must truly live up to the principles it advocates.

Fix the feedback loop

Ethereum is undergoing a major refactoring. The “Maslow’s hierarchy of needs” for blockchain development is being reestablished in the right order. Ethereum has some amazing core assets — now (in my opinion), it’s up to Tomasz to reconnect the feedback loops so that Ethereum’s assets — developers, applications, users, and the Rollup ecosystem — work together again and ultimately show up in the rising price of ETH.

Once this process is complete, the staunch ETH maximalists will have a solid product foundation to compete with Bitcoin extremists like Michael Saylor.

ETH’s role as “money” must be built on a strong Ethereum product. ETH's path to becoming a currency has always been built on Ethereum's "social-technical product stack". With the successful reconstruction of the product strategy, ETH's target price will no longer be $10,000, but much higher.

To achieve this goal, there is still a lot of work to be done, and we cannot be complacent. We are just getting started, and there is still a lot of reconstruction work to be done in the Ethereum ecosystem.