The crypto space is full of internal struggles.

Competition has been characteristic of this industry from the very beginning, not the “hand-in-hand” that idealists envision. The top-ranked crypto assets by market capitalization have “blockchain superpowers”: liquidity brings liquidity, capital creates capital, and network effects create network effects. The winning public chain can capture all of the above elements and easily maintain the number one position.

In this article, let’s look back at the fundamental principles of blockchain to understand what the “blockchain empire model” is and how investors can use this to navigate the extremely complex L1 valuation process. Eventually, you realize, the Ethereum empire is coming.

The key to winning L1

There’s plenty of room in the crypto space to “grow the pie” as we’re still in the early stages of Crypto’s long growth phase. At the beginning of the industry outbreak, the space was large and there were many public chains. It seemed that the L1 that the ecosystem could carry seemed to be unlimited, but this was just an illusion. In fact, if L1 does not compete for the first place, it will be dominated by other L1s.

Liquidity brings liquidity. Capital produces capital. Network effects create network effects. The winning public chain will capture all liquidity + capital + network effects.

Currency wars are everyday in the crypto industry. “Currency premium” is the scarcest resource in cryptocurrencies. This is something every blockchain wants, but not everyone has. Bitcoin accounts for the majority, Ethereum has some, and other public chains only get a little soup. The so-called “more monks and less porridge” is the status quo of the currency premium (detailed in Section IV).

The fight for “money capability”

The same competition takes place at the national level. When your currency is the global reserve currency, you have the most powerful asset in the world: the ability to print any currency you want. When the world uses your money, you are number one. Any country can print money, but without the support of global demand, it could quickly slip into high inflation.

When you have the world’s number one currency, the global demand for your assets greatly mitigates the negative impact of currency issuance. Thanks to the “petro-dollar peg,” any new supply of dollars is immediately absorbed by global trade. But wasteful spending and corruption have also eroded confidence in the dollar. Tokens based on decentralized blockchain networks are catching up with good times – leaping to the status of global reserve currency.

The value of the chain is circulating and the same as the country

The country with the world’s reserve currency also has the most powerful military in the world. Military power secures the value of a currency (the global economy is using its money) by controlling global trade.

This power operates in a positive feedback loop: once the world’s No. 1 country, it becomes cheaper to maintain the military due to control over the world’s reserve currency; the value of the major reserve currency further subsidizes military costs, which in turn Consolidate the value of the currency.

Saying back to the Crypto world:

Nation’s army = blockchain security;

Bitcoin’s army = miners, PoW erects a power wall around the Bitcoin economy, and anyone with weak energy cannot penetrate Bitcoin’s PoW force field;

Ethereum’s Army = Token Holders, PoS erects a capital wall around the Ethereum economy, and anyone with less capital than required cannot penetrate Ethereum’s protective wall.

Each chain has a security fee paid. The sustainability of the blockchain is achieved by optimizing the amount of money issued for production security. The price of BTC and ETH is an important factor in the security cost of these ecosystems. If the asset value of a chain increases 10 times, the security budget will also increase 10 times accordingly. The price after 10 times also means that the system can get 10 times the security level under the same circulation.

Currency premium linked to security concerns

As the price of BTC increases, so does its supply of computing power. As the price of ETH increases, so does the interest in investing in Ethereum.

Bitcoin’s issuance rules are hard to reprogram, so an increase in Bitcoin’s value increases Bitcoin’s security fee spending (at least until its block reward subsidy runs out), which can lead to security fee overruns.

In contrast, Ethereum is more flexible in terms of issuance. As the price of ETH increases, the block reward distribution of ETH decreases:

block 0 – block 4369999: 5 ETH;

Block 4.37M – Block 7.28M: 3 ETH (2017, adjusted via EIP-649);

Blocks 7.28 million to date: 2 ETH (2018, adjusted via EIP-1234).

In 2021, EIP-1559 begins to recover excess ETH by burning it. By the end of 2022, after Ethereum is upgraded to PoS, the issuance will be further reduced by 90%.

The security philosophy of Ethereum is to issue the minimum amount of ETH to achieve the required security.

Back to the country analogy: How do we optimize the military for the most security at the least cost? The answer is to reduce the number of tanks and increase the number of drones.

The reduction in ETH issuance makes ETH more scarce, increasing its value on the secondary market. Higher prices on the secondary market increase the security of Ethereum, creating a positive feedback loop for greater security with fewer issuances.

This is the currency premium.

What about L2? Is it possible to build empire mode too?

Ethereum’s modular design structure enables it to scale infinitely. Instead of trying to host a decentralized economy on top of a single (main) chain, Ethereum is a settlement layer for other chains. It’s like the United States has the most powerful military, securing and facilitating global trade among nations, as long as nations adopt the dollar. Ethereum now has the highest security, ETH transactions on L1, can guarantee and facilitate transactions between L2.

The strength of the dollar comes not from the domestically produced part of the U.S. economy, but from the external demand for dollars by countries to participate in global trade. The United States does not control the economies of Germany, France, Argentina, etc., but it still seizes the advantages of these economies. In order to trade with other countries, those countries must convert their GDP into dollar demand for imports and exports.

Likewise, Ethereum does not control the economy of the L2 blockchain. Each L2 has full sovereignty over its own economy. But when it comes to exporting GDP from one Rollup to another, L2 must consume ETH for L1 transactions. Consolidating tens of thousands of transactions into L1 transactions is how economic activity on L2 interoperates with the rest of the Ethereum ecosystem.

The beauty of Ethereum’s modular design is that you can add (basically) infinite L2s on top of it, making Ethereum as L1 the most basic scalable blockchain design that grows from a nation to an empire.

The cost of developing a new L2 on Ethereum is close to zero. It’s the equivalent of an empire that can easily demonstrate economic influence in new territories or foreign countries as long as it needs to. Each additional L2 increases the net GDP of Ethereum, and Ethereum is free to increase L2 according to market demand. 

All roads to Ethereum are increasing the value of ETH.

The L1 and L2 of Ethereum are the federal and state of the United States

The L1/L2 structure of modular Ethereum mimics the federal/state structure of the United States. Simple at the center, complex at the edges.

The US federal government is L1. It determines the “law” that all states (L2) obey. These laws are meant to promote interoperability between states. It provides trust for efficient interstate commerce.

Ideally, the federal government would provide only the minimum required rules and regulations. All other laws and rules can be left to the individual states (L2) to decide.

The same pattern exists in Ethereum.

The EVM on Ethereum L1 acts as a law to coordinate economic resources between L2. This common standard helps L2 share each other’s growing economic benefits.

Sharing the same L1 protocol allows each independent chain to go from adversarial to a united front. Due to the interoperability provided by the underlying L1, the success of one L2 Rollup on Ethereum has a positive impact on other Ethereum L2 Rollups and will be a “joint advantage”.

The beauty of the L2/state entitlement model is that each L2/state can decide what works best for them.

Currently, the “states” of the Ethereum “federation” include:

Optimistic Rollup: such as Optimism or Arbitrum;

Zk-Rollup L2 solutions: such as zkSync or Starknet;

Ethereum L2 scalability solutions like Immutable X;

Centralized ledgers like Coinbase or Wells Fargo;

Consortium chains like Hyperledger…

There are no restrictions on building L2 on Ethereum, as long as the EVM interoperability standards are adhered to. The “simplicity of the center” maximizes the “expression of the edges”. Enable everyone to build what they want and inspire creativity.

In the face of L2, we have a choice

The L1/L2 structure (federal/state structure) is an individual empowerment mechanism. 

If the state is charging you more in taxes than the services they provide, the solution might be: Live in a different state. States must compete with each other to keep voters happy and retain their residency. States that do better at this will have access to more economic resources and a larger population.

The same thing happens in L2.

Has your frequently used L2 fee increased? Is it investing enough in infrastructure, is it keeping up with the pace of innovation, or is it falling behind? If L2 doesn’t meet your requirements, you can change one. L2 will compete with each other for users and lock-up volume, and this competition is beneficial to users.

Ethereum Empire

Ethereum is a modern instance of a global coordination model. Over time, Ethereum is fundamentally structured like the U.S.—maintaining its position by ensuring that global trade is denominated in U.S. dollars.

The Ethereum Empire will consolidate itself in two ways:

New L2s are created and added to the ecosystem, like the Ethereum-native Rollup (Arbitrum, Optimism, zkSync) leaving the crowded central empire and creating new sub-territories outside the main castle;

Other low-security L1s are added to become Ethereum’s new L2.

These new forks of Ethereum can govern themselves and generate their own economies. But after every few blocks, they tie up aggregate economic activity to transact with L1. In exchange for an ETH tax on processing transactions, the security powers of Ethereum L1 are delegated to L2.

Altered L1s can issue more coins than Ethereum, which can pay lower security fees. But if you want to stop currency inflation, you can always choose to be protected by Ethereum.

Speak with data, compare different L1

Ethereum currently provides $45 million per day in security fees to its network.

BTC’s current inflation rate is only 1.7%, but it can provide $40 million in security fees per day. So from the perspective of security efficiency, Bitcoin is 2.7 times that of Ethereum.

Era of Ethereum Empire is coming

Solana’s inflation rate is 7%, while security spending is only $11 million per day. The security efficiency of Ethereum is 7.17 times that of Solana.

AVAX’s inflation rate is 5.5%, while the daily security fee hits $5.7 million. The security efficiency of Ethereum is 10.4 times higher than that of Avalanche.

This was before Ethereum switched to PoS (Solana and Avalanche were already PoS). In the future, the issuance of ETH will drop by 90%, while strengthening its security mechanism.

Competing chains falling into the “currency premium” trap

Both Avalanche and Solana advertise themselves as low-fee L1, but this forces them to issue more tokens to cover security fees. Solana and Avalanche also do much higher throughput than Ethereum. They generate more total block space to carry more data. If you have more block space, you must increase security spending to protect the extra space.

The larger the territory, the more troops are required to guard it. Expanding a huge kingdom is like expanding the territory, rather than letting people leave the kingdom to build scattered little dependencies.

In order to outperform Ethereum in performance, Shanzhai L1 improves L1 throughput and reduces gas fees. For these L1 long-term monetary premiums, the consequences could be catastrophic. This design choice creates high circulation while also limiting fee collection. This kills the currency premium, which is a trap for scaling.

In contrast, Ethereum’s scalability on its L2 generates higher L1 fees while minimizing the need to issue ETH.

Issue less and charge more. This is how the monetary premium is generated.

Since issuance has been minimized, the burn fee from EIP-1559 captures the economic energy of the Ethereum ecosystem and injects it into the value of ETH (by making it more scarce). ETH goes up in value and less ETH needs to be issued to pay for security. This reduction in issuance increases the scarcity of ETH, increasing its value and further reducing the need for issuance. This is a positive feedback loop for currency premiums.

Other chains trying to expand on L1 have negative feedback loops. Scaled L1 requires high circulation and cannot generate meaningful fee income. This forces supply inflation, reducing its scarcity and putting downward pressure on the currency. It cannot subsidize issuance with fees, as this is counter to the purpose of these competing chains. With more and more issuance, the devaluation of the currency (due to inflation) triggers further issuance needs.

The battle for the top spot in L1 always favors who can issue the least amount of money for the most security. If you create security, you can own everything (users and funds). If security is expensive for you, your options are limited.

Competitive chain, turn to Ethereum as soon as possible~

On April 13, people familiar with the matter said that one of Arbitrum, Optimism, zkSync and Starknet may issue tokens next month.

Optimism and Arbitrum, as L2s that are already running, do not need to issue coins from an economic point of view. They generate revenue by selling blocks and then pay a small “tax” to the Ethereum economy every time they make an L1 transaction.

Avalanche, Solana, Terra, and basically all blockchains where “security efficiency doesn’t dominate” have a vulnerability. The longer they let inflation go, the bigger the problem. In the future, by becoming Ethereum L2, their token issuance vulnerability may drop to 0, with immediate benefits and even increased throughput.

People in the Competitive Chain community describe me as an “ETH maximalist”. In fact, it is the maximalism of decentralization that enables this blockchain empire model to exist. Ethereum’s commitment to L1 decentralization and limited block space encourages a vibrant and rich L2 ecosystem.

In the end, you will find that all roads lead to Rome, and all public chains lead to Ethereum.

Note: The article is authorized to be reprinted from Planet Daily. All articles shared or reprinted in this account are intended to convey industry information and do not constitute any investment advice or suggestion. Investment is risky, and you must be cautious when entering the market. Welcome to pay attention to visit the blockchain to obtain more valuable information in time.