The Value of Ethereum and the Jevons Paradox

The value of Ethereum lies not in the current burn, but in the future of Layer 2 chains.

Written by: Dao Says Blockchain

"For Ethereum to increase in price, it ultimately needs to burn more! Even though the Robinhood chain is currently very popular, earning tens of millions of dollars a day, the amount sent to the Ethereum main chain is only a few hundred or a little over a thousand dollars! What does this popularity have to do with Ethereum?"

This was a comment following the article "The Inspiration from Harmony's Transformation into Ethereum L2" published on September 11.

"For Ethereum to increase in price, it ultimately needs to burn more," I completely agree with this. It is the only way for Ethereum's existing economic mechanism to positively feedback into its price.

However, the latter viewpoint, "Even though... what does this popularity have to do with Ethereum?" fundamentally differs from my approach to the issue.

Before reading Duan Yongping's Q&A, I had emphasized in my previous articles: investment is not about looking at the present, but about looking at the future.

After reading Duan Yongping's Q&A, my understanding deepened further: investment is about investing in things you understand. And what it means to understand is to grasp the future of that thing, rather than fixating on the present.

The unique method used by Duan Yongping (and also by Buffett and Munger) to evaluate a company's value is to look at the total discounted future free cash flow of that company. This method still focuses on the future, not the present.

Therefore, when I assess the value of Ethereum, I do not look at how much it earns in a day, but rather at everything it has done over time, the advantages it has continuously formed, and the moat it has accumulated, and how much burn it might generate in the future.

Regarding this assessment, I have previously written a detailed method in my commentary on when a co-founder of Bankless liquidated Ethereum. I will not elaborate on it here.

However, like all issues in every field, people's views on problems are often more misunderstandings than understandings, always fixating on the present while ignoring the long term. Therefore, whenever I encounter certain issues, especially very core and critical issues, I believe it is necessary to reiterate the viewpoints I have previously shared.

How can Ethereum maximize its advantages to achieve sufficient burn of ETH? I will look at it from two perspectives:

First, the most fundamental and core principle is that the main chain must achieve extreme decentralization in its operation. This is both a guarantee of security (able to withstand attacks from states and AI) and a guarantee of ecological freedom (whether angels or demons can use this public chain without permission).

These two points are the fundamental guarantees for achieving ecological prosperity and must not be shaken.

If we want to ensure that the main chain operates with extreme decentralization, then the performance of the main chain must have a ceiling. Even if performance expansion is carried out, there will eventually be a limit. Although the current expansion of the main chain is in full swing, the theoretical limit undoubtedly exists.

Therefore, the comprehensive and unlimited expansion of the Ethereum ecosystem will certainly not occur on the main chain but rather on Layer 2 expansions.

To allow Layer 2 expansions to rely on Ethereum, the primary thing Ethereum must provide is security assurance (which brings us back to the first point), and secondly, the capacity expansion for Layer 2 (such as blob technology).

In fact, the capacity expansion that Ethereum is currently doing for Layer 2 has already provided sufficient redundancy, which is completely adequate. So the fundamental thing is still to ensure the first point.

Having achieved these two points, the only logical method for the future is: one Ethereum main chain, and then Layer 2 expansions attached to it reaching hundreds, thousands, or even tens of thousands.

Of course, this scenario may seem a bit like a fantasy right now, but if we believe that the crypto ecosystem is the future, then I see no reason to doubt this scenario.

When this scenario is realized, although each Layer 2 expansion contributes very little to the main network, the combined fees contributed by hundreds, thousands, or even tens of thousands of Layer 2 expansions will be substantial—this is the manifestation of the Jevons Paradox, where lower unit costs attract more users, leading to higher overall fees.

This is also what Ethereum is currently doing: first building all the infrastructure, minimizing unit costs as much as possible, attracting and accumulating more and more users (Layer 2 expansions), and then waiting for the scale effect to form, resulting in an increase in overall fees.

This is the path to realization in the future, and in my view, the most feasible method for achieving significant burn of ETH.

Of course, this scenario may also encounter an unexpected situation: although there are many Layer 2 expansion systems, they still contribute very little revenue to the Ethereum main network.

In this case, I believe there is another method, which sounds a bit coercive but is actually completely feasible: Ethereum can forcibly upgrade and reclaim a portion of the revenue from Layer 2 expansions.

There is no technical issue with this, and there are already existing solutions. I have previously introduced two of them. One of them is the technology adopted by GNOSIS.

At that time, even if Layer 2 expansions have grievances and dissatisfaction, I do not believe anyone would dare to take the risk of compromising Ethereum's ecological advantages and thus leave the Ethereum ecosystem to build their own independent chain.

Therefore, in summary, I believe this is a short-term issue, but not a long-term one; there will definitely be solutions.

Thus, if we believe in this future, we can see Ethereum's potential value by following this path.

Of course, if one does not believe in this future, then it is also normal to doubt Ethereum's value.

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