After the wealth effect disappears, will the myth or tragedy of decentralization emerge?

Written by: Zuo Ye Waiboshan

Ethereum is shifting towards L1 scaling and privacy, and the DTCC, the back-end engine of the US stock market with $100 trillion in assets, is beginning to migrate on-chain, seemingly signaling the arrival of a promising new wave in crypto.

However, the profit logic of institutional investors and retail investors is completely different.

Institutions possess exceptional resilience in terms of time and space. A ten-year investment cycle and leveraged arbitrage with minimal spreads are far more reliable than retail investors' fantasies of achieving a thousandfold return in a year. In the coming period, it is highly likely that the spectacular phenomenon of on-chain prosperity, institutional influx, and retail investor pressure will occur simultaneously.

Don't be surprised; the complete disappearance of BTC spot ETFs and DAT, the four-year BTC cycle and altcoin season, and the South Koreans' "abandoning crypto for stocks" have all repeatedly verified this logic.

After 10/11, CEXs, which served as the last line of defense for project owners, venture capitalists, and market makers, have officially entered a period of decline. The greater their influence on the market, the more likely they are to adopt a conservative approach, which will eventually erode capital efficiency.

The lack of value in altcoins and the memes posted by editors are both episodes on a predetermined path that has been crushed by its own weight. Migrating to the blockchain is an inevitable move, but it will be slightly different from the free and prosperous world we imagine.

We originally intended to use the wealth effect to compensate for the numbness that followed the loss of our belief in decentralization, hoping that we would not lose both freedom and prosperity.

Today will be the last time I talk about concepts like decentralization and cypherpunk. The old stories about freedom and betrayal are no longer keeping up with the times.

Decentralization: The Birth of the Pocket Computer

DeFi is not based on the ideas and entities of Bitcoin, and never has been.

Nick Szabo created "smart contracts" (1994) and Bit Gold (first proposed in 1998, perfected in 2005), and inspired core concepts such as Bitcoin's PoW (Proof-of-Work) and timestamp recording.

Bitcoin was once affectionately called a pocket computer, and Ethereum a general-purpose computer, but after The DAO incident in 2016, Ethereum decided to roll back transaction records, and Nick Szabo began to become a critic of Ethereum.

During the ETH bull run of 2017-2021, Nick Szabo was considered an out-of-touch old fogey.

On the one hand, Nick Szabo genuinely believed that Ethereum surpassed Bitcoin and achieved better decentralization, as Ethereum at that time fully implemented PoW and smart contracts.

On the other hand, Nick Szabo believes that Ethereum reforms the governance system from the perspective of trustlessness, and the DAO mechanism enables efficient interaction and collaboration between strangers on a global scale for the first time.

We can now outline the actual meaning of decentralization: at the technical level, disintermediation -> pricing costs + transaction consensus; at the governance level, trustlessness -> trust minimization.

Image caption: Decentralized structure; Image source: @zuoyeweb3

- Decentralization: Instead of relying on gold or governments, it relies on computational work as proof of an individual's participation in Bitcoin production;

- Trustlessness: Opening up to the outside world without relying on human social relationships, creating network effects under the principle of minimizing trust.

Although Satoshi Nakamoto was influenced by Bit Gold, he remained noncommittal about smart contracts. While retaining the possibility of complex operations through some opcode combinations under the idea of simplicity, he focused on peer-to-peer payments as a whole.

This is also why Nick Szabo saw hope in PoW ETH, with its complete smart contracts and "self-limitation." Of course, Ethereum encountered similar L1 scaling obstacles to Bitcoin, and Vitalik ultimately chose L2 scaling to reduce the damage to the L1 ontology.

This "damage" mainly refers to the full node size crisis. After losing Satoshi Nakamoto's optimization, Bitcoin is rushing headlong down the road of a mining machine + computing power race, and individuals have been effectively excluded from the production process.

Image caption: Blockchain node size; Source: @zuoyeweb3

Vitalik at least put up a fight. Before surrendering to the data center blockchain model in 2025, although he switched to the PoS model, he still tried his best to ensure the existence of personal nodes.

Although Proof-of-Work (PoW) is equated with computing power plus electricity consumption to determine its basic production cost, in the early days of the cypherpunk movement, the combination of Proof-of-Work and timestamps was used to confirm transaction time, thereby forming an overall consensus and on this basis, mutual recognition.

Therefore, Ethereum's shift to PoS will fundamentally remove individual nodes from the production system. Coupled with the "cost-free" ETH accumulated from ICOs and the nearly 10 billion US dollars invested by VCs in the EVM+ZK/OP L2 ecosystem, a huge amount of institutional costs have been accumulated. ETH DAT can be regarded as an institutional OTC exit strategy.

After failing to achieve technical disintermediation, Ethereum managed to control the node explosion but also moved towards mining pool clusters and a hash power race. Ethereum went through several iterations from L1 (sharding, sidechains) to L2 (OP/ZK) and back to L1, and ultimately, it completely embraced large nodes.

It must be objectively pointed out that Bitcoin has lost the "personalization" of smart contracts and computing power, while Ethereum has lost the "personalization" of nodes, but has retained the ability to capture value through smart contracts and ETH.

Subjective evaluation is also necessary. Bitcoin achieves minimal governance, but it relies heavily on the "conscience" of a few developers to maintain consensus. Ethereum eventually abandoned the DAO model and turned to a centralized governance model (theoretically not, but in reality Vitalik can control the Ethereum Foundation, and the Ethereum Foundation can lead the direction of the Ethereum ecosystem).

There is no personal intention to belittle ETH and inflate BTC here. From the perspective of the wealth effect in coin prices, the early investors of both have been successful. However, from the perspective of decentralized practice, there is no possibility that either of them will change course.

Bitcoin will hardly support smart contracts, while the Lightning Network and BTCFi are still used for payments. Ethereum retains smart contracts but abandons the PoW pricing benchmark and, in addition to trustlessness/trust minimization, has chosen to go back to the historical trend of building a centralized governance system.

Whether it was right or wrong, merit or demerit, is left for future generations to judge.

The Middleman Economy: The Fall of the World's Computer

Wherever there is an organization, there will inevitably be internal strife; wherever there is talk of unity, there will inevitably be a central authority, and bureaucracy will naturally follow.

In terms of token pricing mechanisms, there are two types: narrative and demand. For example, Bitcoin's narrative is application-oriented—peer-to-peer electronic cash, but people's demand for Bitcoin is digital gold. Ethereum's narrative is "world computer," but people's demand for ETH is application-oriented—gas fee.

The wealth effect is more favorable to the PoS mechanism. Participating in Ethereum staking requires ETH first, and using Ethereum's DeFi also requires ETH. ETH's value capture ability, in turn, enhances the rationality of PoS. Driven by real-world needs, Ethereum's decision to abandon PoW is correct.

However, on a narrative level, the transaction volume * gas fee model is very similar to SaaS and Fintech, which cannot correspond to the grand narrative of "computing everything". When users who do not use DeFi leave, the value of ETH cannot be sustained.

Ultimately, nobody used Bitcoin for transactions; someone always wanted to use Ethereum to calculate everything.

Image caption: Profits from BTC and ETH addresses; Source: @TheBlock__

Decentralization does not equal wealth effect. However, after Ethereum switched to PoS, it was assumed that the capital value of ETH was its only pursuit. Price fluctuations will be repeatedly over-focused by the market, further questioning the gap between its vision and reality.

In contrast, the price fluctuations of gold and Bitcoin have become largely equated with changes in the market's fundamental sentiment. When gold prices surge, some people worry about the global situation, but no one doubts Bitcoin's fundamental value when it falls.

It's hard to say that Vitalik and EF caused Ethereum's "de"decentralization, but it must be acknowledged that the Ethereum system is becoming increasingly intermediary-based.

Between 2023 and 2024, it became fashionable for Ethereum Foundation members to serve as advisors to projects, such as Dankrad Feist for EigenLayer, but few people remember the unclear relationship between The DAO and several Ethereum core members.

This situation only ended when Vitalik officially announced that he would no longer invest in any L2 projects, but the systemic "bureaucratization" of the entire Ethereum ecosystem was already inevitable.

In a sense, the term "middleman" does not imply negative connotations such as broker, but rather refers to the efficient matching and facilitation of mutual needs. For example, the Solana Foundation, once considered an industry model, generally promotes project development from the perspectives of market forces and its own ecosystem.

However, for ETH and Ethereum, ETH should become a "middleman" asset, but Ethereum should remain completely open and autonomous, maintaining the technical architecture of a permissionless public chain.

Image caption: Ethereum DEX Volume by Token; Source: @blockworksres

Within the Ethereum ecosystem, there are signs that stablecoins are gradually replacing ETH. Liquidity is migrating to the blockchain via Perp DEX, and USDT/USDC is also profoundly changing the old landscape. The story of stablecoins replacing ETH/BTC as the benchmark asset has already unfolded within CEXs, and it will be repeated on the blockchain.

USDT/USDC are centralized assets. If ETH cannot maintain a large number of application scenarios and can only be used as an "asset", then in the context of speeding up and reducing fees, the gas fee consumption needs to be large enough to maintain the price of ETH.

Moreover, if Ethereum is to be completely open, it should allow any asset to act as an intermediary asset, but this would severely damage ETH's ability to capture value. Therefore, L1 needs to reclaim power from L2 and L1 needs to be scaled up again. In this context, privacy can be interpreted as a necessity for institutions, or as a choice to stay true to its original purpose.

There are many stories here, each one worth hearing, but you must choose a direction to pursue.

Complete decentralization cannot achieve minimal organization, leading to everyone acting independently. Under the principle of efficiency, it can only continuously tilt towards minimizing trust. Minimizing trust relies on the order derived from Vitalik, which is no different from the extreme freedom that Sun gave to the black and gray industries.

We either trust @VitalikButerin or we have to trust Sun @sunyuchentron . Simply put, decentralization cannot establish a free and self-sustaining order. People crave extreme chaos, but their bodies abhor an insecure environment.

Vitalik is a middleman, ETH is a middleman, and Ethereum will also be a middleman between the traditional world and the blockchain. Ethereum wants a product without a product, but any product inevitably contains marketing, falsehoods, and deception. There is no fundamental difference between Just use Aave and UST.

A financial revolution can only succeed by repeating the first failed attempt. USDT failed with the Bitcoin network, UST failed with buying BTC, and then TRC-20 USDT and USDe succeeded.

Or rather, people are suffering from the decline and sideways movement of ETH, as well as the expansion of the Ethereum system, which makes it impossible for retail investors to separate from Wall Street. It should have been Wall Street buying ETH from retail investors, but people are now suffering the bitter consequences of buying ETFs and DAT.

Ethereum's limitation is that ETH capital itself is produced for the sake of production, and for the sake of ETH. It is two sides of the same coin and a self-evident truth. East and West do not take over each other. Capital and project teams that prefer a certain ecosystem or a certain entrepreneur are ultimately not producing for the tokens of the invested projects, but for the sake of ETH.

Decentralization: The Future of Financial Computing

From the Second International to LGBT, from the Black Panther Party to the Black Panthers, from Bitcoin to Ethereum.

Since The DAO incident, Nick Szabo has begun to hate everything related to Ethereum. After all, Satoshi Nakamoto has already disappeared from the public eye. However, Ethereum's performance cannot be said to be bad. I am not schizophrenic. I criticize Ethereum and then praise V.

Compared to next-generation public chains such as Solana and HyperEVM, Ethereum remains the best player in balancing decentralization and wealth effect. Even Bitcoin's biggest flaw is its inherent lack of support for smart contracts.

As a 10-year-old blockchain, ETH and Ethereum have transformed from "opposition" to "official opposition," needing to occasionally step in to revive decentralization and cypherpunk, and then continue to advance towards the realistic future of financial computing.

The owls of Minerva can only take flight at night, and the debates about the wealth effect and decentralization will be buried in Königsberg. The truly cruel historical practice has long since buried both narratives together.