To start this off I want to state that I know this will be a very controversial post. There’s a lot of hype around Ethereum(ETH), and a lot of die hard communities in the crypto space that attack anyone that says anything bad about their particular project. My goal isn’t to bash Ethereum, my goal is to state why I think the project won’t succeed in the long term. I have a lot of respect for Vitalik and Ethereum and how it has paved the way for the crypto space in general. But Ethereum’s glaring flaws can’t be ignored and so I would like to state what I see to be wrong with the project and then hopefully start a healthy discussion regarding this. So please, correct me where I’m wrong, in a mature and sophisticated manner. At the end of the day, this is my opinion, and everyone is entitled to their own opinion. Now let’s get started on why I think Ehtereum is overrated and has the potential to fail in the long term.
What is Ethereum?
I’ll start off with the basics just in case you’re new to crypto. Ethereum is the second biggest crypto behind Bitcoin, the idea behind it is to create a world computer in which Dapps (decentralized applications) for all kinds of purposes can be built upon. Gaming, Defi and NFTs are just a few examples in which Ethereum has been used to build, the possibilities are only limited to the creativity of the developers.
Before we get into the advantages and disadvantages of ETH, we need to accept the fact that everything in the crypto market is overhyped right now. The only crypto that is properly priced based on its current value is Bitcoin. Bitcoin’s value is purely derived as a store of value and therefore from its network effect, with companies and retail investors alike looking to adopt Bitcoin as digital gold this year. I’m confident in predicting that Bitcoin is here to stay and is fairly priced. All other cryptos are either being launched or haven’t lived up to their promises yet. Therefore, the massive rise in valuations is based purely on speculation and hype. This isn’t a bad thing, I’m participating and benefitting off of the hype just as much as everyone else, but its important to acknowledge and be wary when we’re in markets that move based on essentially nothing. Now, why is Ethereum overrated?
Ethereum is a groundbreaking and ambitious project that enabled all the other cryptos after it to prosper. Its main advantages lie in its network effect and first mover advantage.
Network Effect: The network effect is defined as “the phenomenon by which the value or utility a user derives from a good or service depends on the number of users of compatible products. Network effects are typically positive, resulting in a given user deriving more value from a product as other users join the same network.” One prime example of an industry that largely benefits from the network effect is social media. As social media’s mass adoption grows, the value for the individual already using the particular app goes up(more content and people to connect with) as well as the incentives to join the network goes up(social media has reached a point where businesses HAVE to promote through this medium as its crucial for staying in touch with customers). An example of a crypto that largely benefits from the network effect is Bitcoin. Bitcoin’s sole purpose is a store of value and a store of value is completely derived based on the network effect. If Bitcoin doesn’t achieve mass adoption as a store of value, then the project is outright doomed as that’s its only utility, its only purpose. Lucky for Bictoin it has seen mass adoption through retail investors and now institutions are buying it, therefore sealing its inevitable fate as a worldwide store of value.
It’s safe to say Ethereum also has a strong network effect. A couple years ago almost all of the crypto projects being launched were being launched on Ethereum. As more and more projects are launched on ETH, there are greater incentives for others to join the ecosystem. The glaring problem with ETH and its network effect is that if Ethereum doesn’t do its job well, then its network effect can crumble quite quickly. Look at companies and products like Myspace, ClickFunnel, Internet Explorer, Skype etc. All of these had strong network effects and first mover advantages that got obliterated by competitors who did what they did but 30% better. At the end of the day, network effects may bring customers to a platform, but solid products are what make customers stay. With Ethereum’s glaring problems(which I’ll get into later) the network effect can easily crumble when competitors that do what Ethereum does but 30% better come to market.
First Mover Advantage: Similar to the network effect, first mover advantage is largely overrated. As Peter Thiel writes in his book “Zero to One”; first mover advantage is a tactic not a goal. First mover advantage is exactly that, an advantage. History shows that plenty of market dominators get crushed by innovation, i.e. refer back to the projects I listed in the network effect. Several years ago, all crypto projects were being built on Ethereum, now it’s roughly 20-30% and I predict this number will get smaller as their advantage continues to decline as projects built on solid foundations continue to enter the market and do what Ethereum does but better. Ethereum’s first mover advantage is rapidly declining.
Despite how groundbreaking and revolutionary Ethereum has and will be for the world, it has many disadvantages that I believe will hold it back in the long-run from truly living up to the vision it was originally built on.
Scalability: Anyone who is remotely familiar with Ethereum knows that the gas fees are a huge problem. Ethereum’s scalability issues are highly detrimental to the ecosystem, especially for retail investors. Last year the average gas fee was around $6 – $8, now we’re seeing $100 gas fees and at peak times even $200 fees. Ethereum 2.0 has promised to solve this for several years now, but evidence of the solution is yet to be seen. When comparing Ethereum to the legacy finance system, we’re simply left with the realization that Ethereum is strictly slower and costlier in every respect. If Ethereum 2.0 solves the scalability issues then we can write off this point but there are 2 other issues I see that I think will be Ethereum’s great downfall.
Sustainability: Ethereum’s foundation isn’t sustainable. In order for Ethereum to innovate or integrate new ideas or tech, it has to continuously rewire itself in order to accomplish anything. The project wasn’t built on a solid foundation that allows things to be easily built on top of it. This is a huge problem that has plagued the project for years. Other projects have a solid foundation where new additions can be easily added like adding lego bricks on top of another(obviously exaggerated but the point remains). Eventually, there will be a tipping point, where projects like Cardano and Polkadot which were built on solid foundations and researched heavily before being built, will be able to out develop Ethereum exponentially as they are able to develop and progress far easier.
Leadership: First and foremost, Vitalik Buterin is an incredibly smart person, super genius some may say. The issue is leadership and intelligence are not the same, and Vitalik lacks the leadership required for the role. The project from the gecko has been plagued with indecision, lack of a clear vision, proper team building etc(I recommend reading the book The Infinite Machine to learn more about Ethereum’s early days). This is evident through the fact that seven of the eight founders have moved on to start their own projects, Vitalik being the only one to remain. The Ethereum team lacks a clear and concise vision where everyone is on the same page. Compare this to projects like Cardano and Polkadot where the leaders have a clear vision for where they’re taking the project, everyone on the team is on the same page and the project was built on a solid foundation the first time around. Leaders of a business are significantly more important than people give them credit for, and when leadership is lacking so is a businesses’ ability to execute on its ambitions.
After all that I’ve stated, I still believe Ethereum has an opportunity to turn itself around. Ethereum 2.0 could potentially solve the major issues in Ethereum and maybe Vitalik begins to grow into the leadership role a little better. Either way, Ethereum will do great in this bull market. Like all other cryptos, it will be hyped up on speculation and fandom. What I fear for long-term investors of Ethereum, is that the project may never recover after the next bear market due to it getting outclassed by its competition. ETH currently lies in the range of $250-$300 billion, therefore it has a ton of room to bleed. Projects like ADA, Polkadot, Binance etc. all have massive opportunities to take market share away from Ethereum, and I believe in the long run they will. But at the end of the day, we’re very early into crypto and anything can happen, Ethereum may be the World Computer still. My final suggestion would be this; be careful of all investments, do your research on each individual project and its competitors and make educated conclusions based on YOUR own research. Don’t give into the Twitter, reddit or discord hype.
Thanks for reading! Let me know what you think of Ethereum and the other projects I mentioned, would like to start a healthy conversation and gain some additional insight.