# Cyber Capital | Ethereum is dying without L1 scaling - Justin Bons  | ETHDam 2024

- Channel: [CryptoCanal](https://streameth.org/cryptocanal)
- Date: 2024-10-07
- Duration: 30:06
- Watch: https://streameth.org/watch/yt-dF0VbSjbhJE
- YouTube: https://www.youtube.com/watch?v=dF0VbSjbhJE

## Description

Ethereum is Dying Without L1 Scaling | Justin Bons, Founder of Cyber Capital at ETHDam 2024
https://x.com/Justin_Bons https://x.com/CyberCapital https://www.cyber.capital/

Sterling Schuyler - MC of ETHDam, copy and content writer for emerging fund managers & crypto enthusiasts. 

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    0:00 - Introduction
    1:08 - Ethereum's competition and lack of on-chain scaling
    2:25 - Separate ecosystems within Ethereum 
    5:05 - Proposal for L1 scaling benefits
    8:23 - Fragmentation issues in Ethereum's ecosystem
    10:03 - Shift in Ethereum's scaling strategy and its consequences
    11:10 - Critique of L2 solutions 
    14:03 - Shared sequencing 
    19:25 - Reflection on the systemic governance flaws in cryptocurrency projects
    22:06 - Diversification strategy for investing in Ethereum competitors
    23:08 - Projects that have tackled the blockchain trilemma

## Transcript

Congratulations Justin. Thank you. So, the title of my talk, the title of my talk—“Ethereum Dies Without First-Level Scaling.” This is clickbait, of course, but I mean it. And I think we are at a crossroads now. I spoke here last year on a similar topic, and it seems to me that in some aspects my position was confirmed. I am obviously a critic of modular scaling. I am a critic of second-level scaling. I believe this is the second-level scaling. I believe this is the wrong way to scale blockchain. I really think this is a losing strategy and if Ethereum continues on its current course, it will lose out to its competitors. There's been a lot of talk here today about fragmentation, which I think is great. One difference from my talk last year is that many core developers have acknowledged this problem. That's why they're talking about collaborative sequencing as a potential solution to this problem. In this talk, I will explain why this is not a good solution to the fragmentation problem. And I would even go further and say that this can be solved technologically. And I especially want to bring this to the attention of many of the developers in the room: there's a difference between a problem that can be solved from a technological perspective and a problem that can be solved from a political or social perspective, from a social coordination perspective. And I think that's exactly what many people don't factor into this equation. The problem with fragmentation today—if you look at the Ethereum ecosystem— Ethereum ecosystem— is that you have the Optimism ecosystem here. You have the Arbitrum ecosystem there. You have ZKsync, EigenLayer and so on. You have all these separate ecosystems. And also you have the Ethereum ecosystem there. Do you understand what I just did? Do you understand what I'm doing here? I say that these are separate ecosystems. These are separate competing ecosystems. Optimism and Arbitrum compete with Ethereum for fees and usage. And this is despite the fact that the core developers have decided that we will no longer scale the power of Ethereum. Maybe I'll dig into this a little more before I can say this with certainty. But as of today, there are no commitments to scaling the network. They literally took the gas cap increase off the road map. They removed it. Of course, they can implement technologies that make Ethereum more efficient and improve its scalability, so to speak, but if you don't increase the gas limit, it won't do anything, because you're still limited to about 100 transactions per second, which is not what you need at all. Not at all. It seems to me that Ethereum is now behaving as if it is turning on its back in front of predators. This is capitulation. Surrendering even before trying to be competitive competitive . Of course, proponents of modular scaling will say that everyone will just use these second- tier solutions that will pay the first. That's how it works with this tiered approach to scaling, right? This is their argument. Let's take a recent example. I think you've all seen these statistics. Coinbase received $40 million in revenue thanks to Base. Correct me if I'm wrong on the numbers, but it seems to be only around 200,000. Can someone correct me? Yes, a very small portion of this money is returned to the first level. A tiny fraction, orders of magnitude smaller. So, in essence, Base takes all the activity, receives all these commissions, and only a tiny portion returns to the first level. Is n't that right? I suggest something else: wouldn't it be better if the first level was scalable ? If the first layer were to scale layer were to scale , all of this value would go directly into Ethereum. If only the system could just scale. But instead we have this situation. And I want to emphasize one more point. This was already mentioned in the previous panel. If you look at the top 10 second- tier solutions right now, according to L2Beat, every one of them has admin keys. They can steal all of the users' funds. Do you understand? They can censor transactions. They may block your access. This is not a cypherpunk dream. This is not Ethereum scaling. This is a completely different thing. This is not what I signed up for. I completely quit BTC by 2017 because I had had enough. I've had enough of Bitcoin not scaling. I had had enough of him betraying his original vision— original vision— to become money for the whole world. You can't be the world's money if only a few people can use it at the same time. This is ridiculous. And of course, the argument of the second- tier proponents is that they are “ they are “ decentralizing in the future.” I just want to point out, as a blockchain researcher and investor in the space with over a decade of experience, that the number of times I've heard people say this compared to how it actually happens is simply negligible. And here is something to think about. Yes, I believe that people sometimes do the right thing. It happens. People can be heroes. People can give up money for the sake of some higher ideal. I really believe this, right? But if we're talking about a system with millions of people and this type of collective incentive or collective governance, then I wouldn't rely on the goodwill of individuals. If I were to predict what will happen to this system, I would say that most people will be guided by their own interests. This is my position. Yes, if we talk about large systems of people, about civilization and society, the future is predicted future is predicted taking into account incentives. You shouldn't, you shouldn't just hope for the best. This is a losing strategy. OK. So, today all of these second- level decisions are actually centralized. And the idea is that they simply decentralize. Good. So you're saying they will voluntarily give up their power? Will Coinbase just give up? By the way, Coinbase is a profitable company based in New based in New York. OK. By the way, I love Coinbase, for the record. I love Coinbase. Fantastic company. They have done a lot for cryptocurrencies. I just want to emphasize this, and I really respect them for standing up for cyberpunk principles when it mattered. They picked their battles, but I appreciate that. And as a company, I don't blame them for creating Base, right? Of course, they created Base. They just made $40 million on this . OK. But to solve the problem of fragmentation— of fragmentation— let me go back to fragmentation. So, fragmentation ruins the user experience. Fragmentation takes commissions away from the base level. Fragmentation destroys composability. Composability, you know, is the reason why Ethereum DeFi has been so successful from the start. You know, that's also destroyed. Now, you're saying that if Base were to decentralize, they would have to give up all of that revenue. They will probably make over $100 million this year. This is a profitable company with a board of directors. Do you seriously think they're just going to give up this income? This is madness. Really? If I were on that council, I would vote against it, even though I love decentralization, you know? This is just madness. So I think there's a lot of wishful thinking here , and we have a lot of computer scientists and engineers, but I would really emphasize: think about the human factor. Think about the fact that power corrupts, and absolute power corrupts absolutely, and that we have seen these lessons in history over and over again . This applies to Ethereum as well. This applies to cryptocurrencies as well. And we are sometimes so blind to this. It's especially frustrating that the same thing happened to BTC, right? Well, what I'm talking about is: BTC has moved away from first-level scaling in favor of second- level scaling, right? The BTC chain became extremely congested, and that's when Ethereum became extremely successful extremely successful . This is not a coincidence, okay? Because Ethereum was committed to first-level scaling. I joined Ethereum because I thought, "Yeah, sharding, first-level scaling—this is fantastic." I'm on the case. I have been a die-hard supporter of Ethereum since the day it launched. I mined it in the first week. It was literally the largest asset in the fund I manage for most of its history, up until recently up until recently , actually. Because, you know, I've come this far, but I'm losing hope in Ethereum more and more. Because many of the core developers, many of your leaders, are redoubling their efforts in this direction, and I don't think the change will come from the leadership, because they've made a bet on it. Because they have huge perverse incentives, like billions of dollars. You know, think about this example: if I were the core developer, right? I could work for the foundation and get paid, right? Or I could create a second- level blockchain, do a token distribution, and possibly make hundreds of millions of dollars. That's much better than a salary, right? I mean, this is part of the distortions and corruption that is happening in cryptocurrency right now. You know, the fund know, the fund probably spends no more than a few million on scaling the first level, right first level, right ? Actually, no more. I mean true first-level scaling. They, to be honest, completely abandoned it. Um, but in the second- tier space, what's the funding there—over a hundred billion dollars, probably right now? This doesn't surprise me at all . Well, just crazy amounts of money. Crazy amounts of money. This is corruption, right? These are the people, your leaders, your leaders saying, " your leaders saying, " We're not going to scale the first tier." We're going, we're going to do this second level. And this second level, look, my main criticism of the second level is the problem of fragmentation. I, I'll come back to that. I want to go back to basics, and I'll also check my notes a bit. The main thing, and the reason why I think this is impossible to solve, and what I find really exciting, is collaborative sequencing collaborative sequencing . Who, who knows how collaborative sequencing works? Raise your hand. Ovva, two people, three people. Oh my God. Okay, I expected a little more at the Ethereum conference. Okay, that's fine. Okay, let me explain to you what collaborative sequencing is collaborative sequencing is . So, Justin Drake recently appeared on a bunch of famous podcasts. Justin Drake, by the way, is a fantastic researcher, and not just because he has the same name as me. Um, and he came forward and actually admitted, yes, fragmentation is a problem. And this is the confirmation that I was talking about earlier, when I think many in the Ethereum community were resisting, and now the core developers themselves are saying that fragmentation is a problem. Okay, who agrees that fragmentation is a problem? Raise your hands. That's it. At least more people know what the proposed solution is. So that's good. So the proposed solution from the core Ethereum developers, as far as I can see, is the idea of ​​shared sequencing. As of today, um, most, well, practically all second tiers have what's called a centralized sequencer, and that's where most of the base revenue is coming from now. They can streamline transactions. They can mine MEV and they can charge fees. And the idea of co- sequencing is that...and in principle, I actually support this idea. I actually like this idea. I just don't think it can be implemented for reasons of social coordination, and I'll talk about that in more detail. Um, now, what does a shared sequencer do? Instead of everyone using their own centralized sequencer, how about we put the sequencer on the first level, which I like in principle because I want, I want to pin everything on the first level. I'm a fan of monolithic scaling, right ? So basically I'm like, "Oh yeah, that's great "Oh yeah, that's great ." This is a step in the right direction right direction , right? However, there is a problem here too. For this to work, everyone has to use the same shared sequencer. Of course? We're in an environment now where Optimism says, "Hey, we have a solution to the fragmentation problem." This is the Optimism superchain. And then EigenLayer comes along and says, "Hey, we have a solution to the fragmentation problem through EigenLayer." And then Polygon comes along and says, "Hey, we have a solution for this interoperability protocol thanks to AggLayer, right?" And Arbitrum also has something similar, and, you know, there's a whole bunch of them there, right? So therein lies the irony. This makes me both sad and laugh at the same time. But when I hear these people say—when I hear Optimism or Arbitrum or others say, "Hey, we're solving the fragmentation problem because we 're creating a shared sequencer that everyone will use, and you 'll all pay us a commission." This won't work. You see, it's a free market. And naturally, in a true free market, parties will compete with each other, and that's good, right? This, this, this is a good thing. Of course? But the idea that Base would give up its censorship ability to be compliant, right? Um, will give up all of his income in favor of the higher ideal of using a basic sequencer. I consider this to be complete nonsense. I really think so. I just don't see a way from A to B. While technologically it's entirely feasible, I recognize that the problem is a social one. The problem is coordination. And the irony of all this is that this is exactly the problem that layer one solves. The first level should be a credibly neutral platform around which we can all unite as around Schelling's common point. This is why I believe in level one scaling. And to be completely honest with the modularists, I think at least the ones I respect the most, their position is that it's impossible to scale the first level. This is their position. That is, who agrees with the statement that it is impossible to scale the first level while maintaining decentralization? Raise your hands. Ovva. Ovva. I think last year was completely different. This is amazing. So, we move on. Who thinks it's possible to maintain decentralization while scaling the first layer? Hands up. Ovva. I didn't expect this at the Ethereum conference. A very progressive audience. So if it's possible to scale the first layer while still maintaining decentralization, then all these trade-offs that we're making— we're making— fragmentation, trust risks, high fees on L1, all this terrible UX, as Joel so aptly described... Joel so aptly described... you know, "Oh, do I have Arbitrum USD or Optimism USD? Oh, do I have to go over this bridge or that one? this bridge or that one? " That's a complete nightmare to me. I don't take any UX seriously unless it's one click. Seriously, everything should just work. I am how it should work. That's how it's supposed to work, right? So, I have Ethereum. You have Ethereum. OK. And I just scan the QR code and click "send." That's all. That's all. This...this works. This is how Ethereum worked forever until it became overloaded. And now the experience of working with the second level is completely different. Okay, so I have ETH, you have ETH. What second level are you on ? Can I interact with you directly? Oh, no, I can't directly? Oh, no, I can't . No, I have to cross the bridge first. Oh, this bridge is centralized, so I'm at risk. You know, hundreds of millions were lost due to hacker attacks on bridges, FYI. And then...okay, is this second level safe? Well, like I said, they all have administrative keys now. They can all exercise censorship. That gives you a lot to think about, doesn't it? This gives me a lot to think about. And if you compare this UX, it's not even a competition. And look, Ethereum spent most of its history striving for sharding, then silently abandoned it. I would say in the 22-23 years, right? And I think it's worth coming back to this. And when I talk to some core developers, even though I have a lot of respect for many of them, they tell me that sharding is not possible. That's what they tell me. Sharding is not possible. This is impressive is not possible. This is impressive , considering that we now have several fully implemented sharded chains in cryptocurrency that are proving them wrong. So all of this, this whole roadmap of scaling through level two is based on a false dichotomy. The false dichotomy is that we cannot scale the first level while maintaining decentralization. and all these people point to the blockchain trilemma. I tell you today that the blockchain trilemma has been solved. It is resolved has been solved. It is resolved . When Vitalik first talked about the trilemma, I think it was in an article from 2015 or 2014, I don't remember exactly, he called it the scaling problem of traditional blockchains. Yes, that's why he took up sharding, because it's an unconventional blockchain architecture. We can overcome these limitations, and look limitations, and look , I think a lot of you today don't like Solana, and I have my own criticisms of it. She is far from perfect. It has many flaws, but the fact that Solana is showing such results, the fact that it, despite all its problems—which, by the way, is even more humiliating for Ethereum— has a higher TPS than Ethereum and all Level 2s combined. You're missing the main use cases that people are actually using blockchains for right now: speculation, memecoins, and all the things we techies hate. But these are steps towards mass implementation. Okay, open your eyes. Ethereum is in full swing. He's racing straight into a brick wall. And so, in my opinion, it will be a slow death, just like BTC. Gradual loss of dominance over many years. You can continue to believe and have your niche coin, but I seek global dominance. I want freedom, you know? I strive to make the world a better place through this technology. And I just don't believe that a modular scaling plan can deliver that. He is absolutely uncompetitive uncompetitive . There is no chance that this could actually work. And I don't see the proposed solutions working. And it all comes down to this idea. To this idea, and the incentives here are perverted. I mean, there's a lot of talk about other potential technologies, like ZKVM and things like that. But in the situation we are in now, let's assume Ethereum scales. Ethereum is scaling its main chain. What will happen to Optimism? What will happen to Arbitrum? What will happen to zkSync? What will happen to all these blockchains? Ha? Yes. They will disappear. They will become worthless. Billions of dollars will go down the drain. So yeah, this whole idea of ​​Ethereum scaling if it can. No, I'm not convinced of that at all. I'm not convinced about this at all because there's too much money at stake betting on the opposite outcome. So, look, from a venture capitalist's perspective—this is great, right? You can participate in the pre- sale. You can then dump everything on retail investors. You can ride the hype wave, but that doesn't mean building the future of decentralization. This is not building the future of cryptocurrencies. This is a classic substitution of concepts. This is not what I signed up for. This is not what the idea of cyberpunk is. So yeah, I think Ethereum...and listen, the leadership on this issue has already been determined. I've talked to them, and I don't think they'll change their minds. Therefore, the only way for Ethereum to correct course is for the community to rebel against its own leadership. It's not easy, right? This is what happened to BTC during the block size debate, and they failed. Even in BTC, when most of the industry supported larger blocks, most miners, companies, users, and stake share were in favor of larger blocks, they still lost out to what the developers wanted. Not because people wanted it, and not because the market wanted it. And that comes down to the main problem in all of this, and we have little time left. The main problem is this. Ultimately, scalability is a problem, yes, but the bigger problem is governance, because how did we get into this situation in the first place? How can this happen again and again? This is clearly a systemic flaw in management. This is clearly a set of perverse incentives that will lead to the same result over and over again. We need to break this cycle. I hope Ethereum can do this. But as time goes on, I become more and more skeptical that this will become a reality. And this makes me very sad, because it's a lost opportunity. You know, I'm worried about this movement. I want to see mass adoption. And now when I talk to a lot of people, they say, " people, they say, " Oh, I don't believe in cryptocurrency because it's slow and expensive." Yes. I don't believe it either . OK. I am not. And I don't believe in compromising on your asset protection. And I don't believe in compromising on censorship. It's just... it's censorship. It's just... it's just amazing that some of you even think this is okay, you know. So, the solution is to move back to a sharding system. I think that's unlikely. A more likely solution is that likely solution is that people will simply start pouring money into other cryptocurrencies en masse, even if it's Solana, which will only make you worse off. So, thank you all. Actually here. Hold that for a second. Perfectly. Thank you very much, Justin, for this very insightful and very, very informative conversation. I'd like to bring up Slido so we can answer a few questions. Oh, yes. Okay, let 's begin. Don't be too lenient with me. Okay, come here. So, the first question So, the first question : if BTC and ETH are dying L1s despite accounting for the majority of market cap, then what is the real solution for trustless scalability ? I really appreciate this question, because I had just highlighted an alternative solution in my notes. So, the alternative for me—my favorite solution is sharding, and the reason is that it's a form of horizontal scaling. Vertical scaling, I think we all agree... think we all agree... sorry...quadratic scaling, we'll all agree, is a bad idea, right? Because if you increase the bandwidth by 10 times, you can do it once; if you increase it another 10 times, your costs could increase 100 times, so this is not a sustainable way to scale a blockchain. I can...I can agree with you in principle. So, I particularly like sharding systems because it's a true form of horizontal scaling, where we can increase the capacity of the network while maintaining the node requirements. Look, I'm not against purely parallel blockchains like Solana. I just think they have a much lower upper limit. And what they do, essentially, compared to sharding, is trade power for speed. And in sharding systems, the trade-off, to be completely frank, is that such a system adds a few seconds to the confirmation time. So there is a perfectly reasonable trade-off between something like Solana and a sharding system sharding system . However, if you compare this to the Layer 2 ecosystem, it is obvious that with Layer 2 and the settlement time between networks, things are much worse. So great. And we have one more question. What are the competitors that Ethereum could lose to ? You talked a little bit about Solana, but is there anyone else? Well, that's the trillion dollar question, is n't it? This is what everyone wants to know. Where should I invest my money? Um, listen, I don't think anyone really knows this for sure. I mean, it's my job to mean, it's my job to know that. This is literally what I do. Um, I would advise people to diversify. Um, I mean, usually I'm like, "Okay, I want to invest in Ethereum competitors. I'll invest in, like, five, and if two of them work out, that's a great outcome. Because some things are just impossible to predict, even if you're the best researcher in the world—it's beyond our ability to predict, from politics to narratives to global events. So global events. So , you know, diversify. But what's important to me is, is it scalable ? Is it decentralized? Is it programmable? Uh, I also like Proof-of-Stake. By the way, the Ethereum economic model, what happened to EIP1559? I like it. It's great. It's the best economic model of any cryptocurrency. That's something I'm also looking at . I think that brings us to another question us to another question . Uh, to name the first- level (L1) blockchains that solved the blockchain trilemma. Yeah, there are a few of them. Uh, so EGLD, also known as like Multiverse X, formerly known as Elrond formerly known as Elrond , also known as E-gold , also known as E-gold . Terrible marketing, very disappointing. But in fact, I think it's the only blockchain it's the only blockchain that has fully and properly implemented sharding: there are four shards that are validated by separate validators, with random shuffling— shuffling— in short, it has everything you need. The more famous blockchain, of course, is Near. So, Near has n't fully implemented sharding yet, but they're close to it. Um, and then there's Ton. Uh it. Um, and then there's Ton. Uh , it's also a sharded blockchain. Um, but Ton has a lot of red flags. So, you know, a warning— warning— buyers beware. Um, and then of course there are parallel blockchains parallel blockchains . You have Solana, Sui, Aptos, and Monad, which is coming out now, which has a parallel EVM. But that's a perfect example of Ethereum's arrogance Ethereum's arrogance . By the way, I don't see any There's no good reason not to parallelize the EVM. Even if you don't care about increasing gas limits, if you parallelize the EVM with minimal compromises, right? You can reduce the node requirements by a factor of eight, right? That's ridiculous. We all have computers with multi-core processors. Why not use multiple cores? It's just a ridiculous bottleneck, but it just shows that there's a certain level of complacency that comes with cryptocurrency becoming successful. People relax. Fire some of these developers—that's what I'm saying. More nuanced. I think that's the perfect sharp note to end this Q& A on. Justin, I'm sure we'll be available after this for any follow-up questions you may have, but I just want to give you another round of applause for this incredible talk. Thank you, everyone. Great. Thank you. Yeah.