On Ethereum and Flippenings

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There is much ado in the crypto world about ‘flippenings’, a debate that ultimately spills into which protocol is the best. One protocol to rule them all, if you will. But framing this debate as winner-take-all does a disservice to what certain projects are looking to offer. Instead, if the ecosystem develops as it should, there will be many players serving many functions, all providing their own unique utility to society.

Bitcoin was designed to act as a database that keeps track of who owns what, creating an object of value that can be transferred from one individual to another without the need for an intermediary to confirm the transaction. It’s also really hard to change, which proponents would argue is a feature. So it lacks the ability to improve in any way, which makes it more safe but sacrifices functionality. The inability to alter the ledger at all solidifies the protocol as undeniably secure.

On the other hand, Ethereum is a computer. On this computer, people are able to build anything they want, whether it be art in the form of an NFT, a decentralized exchange for swapping cryptocurrencies, or a video game. Its native cryptocurrency, Ether, acts as the database for ownership and is secured by the same consensus protocol that governs Bitcoin (although not for much longer). Ether also acts as a store of value, but more importantly it’s the fuel for the Ethereum Virtual Machine (EVM) that enables an ecosystem of projects to be built upon it, similar to companies that build their products on top of AWS.

Although Ethereum promises a different solution than Bitcoin, it suffers from many of the same limitations. The networks are both slow; Ethereum can process about 19 transactions per second and Bitcoin can process about 5 per second. They are both electrically intensive, because the Proof of Work (PoW) model rewards miner participants with the native currency in exchange for offering compute to the network. More similarities abound, but Ethereum’s challenges differ since its looking to offer a platform, and risks are exacerbated by its inflationary monetary protocol and the volatility of gas fees that must be paid to engage on the network.

Bitcoin’s solution to these limitations is simple: do nothing. Doing nothing, again, is a feature, and is in the spirit of decentralization that it was invented with in the first place. The protocol is what it is, it’s highly secure, and no amount of agreement or collusion can alter that. That is the value proposition, since it only aims to offer a secure way to transact from peer-to-peer. Core Bitcoin developers are working hard on improving processes around Bitcoin, building components like Lightning that complement the network. But the fact remains that it’s impossibly difficult to gather consensus for changing the actual protocol - take a look at the story of how Bitcoin Cash was created as an example.

Ethereum takes a completely different approach to the notion of ‘improvability’. Its inventor, Vitalik Buterin, has been vocal about this philosophy for years. A true programmable money that provides a wide range of functions should be able to improve, given agreement among network participants. He posits that Ethereum should transition from a PoW consensus protocol to a Proof of Stake (PoS), and Ethereum developers are close to making this become a reality. Moving from PoW to PoS will enable greater scalability (lower gas fees), greater security (more difficult to attack the network), and greater energy efficiency (miners are no longer rewarded for contributing compute). A more detailed overview of the upgrades can be found here.

Bitcoin maximalists (like Pomp) abhor the idea of altering the original creation, since it introduces third-party risk where there was none. While many believe that the usefulness of cryptocurrencies comes from the fact that no central authority can control it, there is an argument to be made for the value gained in improving a product. And in Ethereum’s case, this argument has enormous validity: the network’s current limitations risk the stability of the entire ecosystem. Gas fees to engage on the Ethereum mainnet are absurdly high, and DeFi projects looking to leverage it face potentially prohibitive costs. Ethereum has a stranglehold on the market for building decentralized apps, but attempts to copy it, like Cardano, could actually succeed in grabbing market share if Ethereum is not allowed to evolve. This is one of the motives for Buterin to improve his invention, and why most Ethereum participants are willing to accept the tradeoffs.

So who is the winner then? Again, debating that misses the point. They might both succeed, and I believe they can both serve different functions in society for a long time.

In the case of Ethereum, however, I have significantly more conviction since it’s so obvious how useful the network can be for a wider range of businesses and individuals. Again, think of Ethereum as akin to AWS. Traditional financial institutions don’t have to transition to a decentralized monetary system; they can leverage Ethereum’s services and participate in the network rather than trying to become it. A SaaS business doesn’t begin by trying to replace AWS. It leverages the complementary services that AWS offers in order to focus on what it is trying to build.

source: James Wang, Villa Straylight

I think this is a good way of identifying Ethereum’s value proposition - as a platform that offers decentralized services. Thus, this platform might require maintenance in order to work as intended, as is the case with EIP-1559 and the transition to PoS. Many, if not most, of DeFi’s most promising projects like Uniswap and Chainlink are built on top of the Ethereum stack, aligning their incentives closely with those of Ethereum. These protocols contribute billions of dollars worth of flows onto Ethereum’s network, making it more functional while increasing demand for utilization.

It’s also fine to believe that Bitcoin should always stay the same, and that Ethereum should be allowed to change. That’s something I think many people misunderstand. It isn’t a zero-sum game, clearly there is room for many winners in this space.

Bitcoin acts as a store of value, like a digital gold. That’s useful for society. But Ethereum acts as a platform that enables the creation of decentralized products. The possibilities are significantly greater and more wide-ranging, which is why it seems Ethereum is poised to play a more dominant role in our daily lives, especially as traditional financial institutions wade further into the decentralized ecosystem.

There remains the possibility that the improvements don’t work as intended, the protocols and Layer 2 solutions leveraging the network suffer, and the entire ecosystem built on top of Ethereum becomes doomed. But this doesn’t seem likely, based on the overwhelming research that has gone into making sure these upgrades work. The Ethereum Foundation has provided incredible transparency into every aspect of the transition, and any bugs or shortfalls are likely to have been identified. I think the upgrades are necessary and I’m betting that they’ll succeed, solidifying Ethereum as the home of decentralized finance for decades.

Ultimately, since Bitcoin and Ethereum have different missions, comparisons between the two are often misguided. They have different use cases, and therefore provide different utility. When looking deeper into what each of these protocols are attempting to do, however, it becomes evident that Ethereum has more tangible functionality to offer the world.

Disclosure: I own ETH and BTC. This is not investment advice.

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