Discussing Ethereum’s current “dilemma” from the perspective of the primary market: How can more innovation and value capture occur?

Original author: Lao Bai, ABCDE investment research partner

Talk about ETH's current "dilemma" from the perspective of the primary market

Since @jason_chen998's "angry at its lack of competition" ETH article fermented, there have been many articles on the Internet discussing the dispute between ETH and Solana in the past few days, and I have no intention of repeating or elaborating. Let me add a perspective (not Fud), that is, from the perspective of innovation and financing in the primary market. After all, many of these projects have not yet entered the public eye and are still being intensively organized.

In the two years at ABCDE, I have talked about more than 1,000 projects. Although it certainly cannot cover the overall status of the primary market, the number of samples should not be small. In 2023, ETH and Solana will develop separately in the primary market, and even because of the expectations of Eigenlayer and the entire Restaking+LRT ecosystem, ETH will have more momentum in the primary market.

In 2024, there was a relatively big turn. The entire market no longer paid for the completely oversupplied Infra projects, and the "empty city ghost chain" phenomenon caused everyone's disgust. V God himself also changed his tone in "The Next Decade of Ethereum" in August, saying "Basically, I think we have or will have the tools to build the best applications in every field suitable for Ethereum."

In the early second half of 2024, V God's tone changed, a certain AI Infra project raised nearly 100 million US dollars in seed round financing, Matr1x with 2.5 million downloads and FDV with only more than 100 million openings - the superposition of three independent but similar events in time is a turning point in my personal eyes - that is, the peak of Infra and the bottom of application. After that, Infra began to turn downward, and applications began to slowly improve. Of course, this is a timeline that stretches to the next few years and will not be achieved overnight.

Crpyo's several major innovations in the past, including ICO in 2017, Defi Summer in 2020, Play2Earn in 2021-22, NFT, etc., all occurred on ETH, and more importantly, on ETH L1. This has also made the price of ETH soar. But the current market sentiment, from the perspective of the price, everyone is confident that Solana will break the previous high, and there is endless worry about ETH returning to 4,000, not to mention the previously mentioned ETH breaking 10,000. Solana PumpFun is booming in the secondary market. Although ETH's TVL is still far ahead, the applications are still the same old faces from 20-21, and more and more users are going to L2, and L1 Gas has remained low all year round.

The primary market is actually facing the same problem. In the past 6 months, my personal feeling is that there are more application-oriented projects, including various prediction/gambling markets, AI applications, Depin, micro-innovation Defi, Payfi, 3A game masterpieces, etc. It is not sure which track the next big innovation breakthrough point will be. I just made an ecological distribution map of the project based on my impression. This is generally the situation.

-Prediction/Gambling Market - Ton/Solana/Monad
-AI - Solana/Base/Monad
-Depin - Solana/MegaETH/Monad
-Defi - Arbitrum/Berachain/MegaETH/Monad
-Payfi - Ton/Solana/Monad/MegaETH
-Game - Sui/Ronin/Immutable X
-RWA - ETH/Solana

It can be seen that no matter where the next big application-level innovation is, Solana currently has the greatest opportunity, followed by Monad and MegaETH. Except for some RWA-related projects, it is rare to see new projects that run entirely on ETH L1. Arb and Base are the most powerful in L2 (in terms of application, OP has basically taken the path of launching chain Infra), but even if there are popular or even phenomenal applications on them, the value that ETH L1 can capture in them under the existing architecture is probably very limited.

I personally think that the most promising new track is AI and PayFi. Solana and Base are currently far ahead in AI. Base has previously completed the first AI-to-AI payment in history, and recently launched a new set of fully on-chain AI agents that can create an Al Agent with its own encrypted wallet and Twitter account (optional) in 3 minutes. Solana is not to mention, where the new track of AI Meme was born. Of course, if you really study Goat and ACT carefully, you will know that they are by no means as simple as meme, but have the potential to create a brand new track and paradigm.

Payfi is a competition between two veterans, Ton+Solana, and two rookies, Monad+MegaETH. This is a track that is almost impossible to be disproven. Basically everyone knows that Crpyto is actually most suitable for payment, which is also the original intention of Satoshi Nakamoto to invent Bitcoin. It is nothing more than seeing at which point in time, which chain/project can finally realize his long-cherished wish. (Finally, several projects based on the Lightning Network for Payfi have also appeared recently. Let's see whether this round of Lightning can rise).

I have said so much, not to continue to Fud ETH. I personally do not think that Solana can really flip ETH with this round of momentum. ETH's current community + technology accumulation is enough to secure its second place. My only worry is whether ETH is content with the status quo, willing to let innovation and value capture happen in L2, and L1 itself can do DA and settlement with peace of mind (while facing competition from projects such as Celestia), and the coin price has been so calm. But I really don't have an answer. It is an established fact that ETH L1 is currently weak in value capture for L2, and L1's GAS and TPS are indeed not enough to carry Mass Adoption type applications. The old Defi + possibly the new RWA track alone does not seem to be enough for everyone to see ETH rush to the peak of 10,000 US dollars. If in the next few years, BTC is 150,000-200,000, Solana is 500-1,000, and ETH is still hovering around 3,000-4,000, the confidence and status accumulated in the past 10 years will surely be slowly eroded.

How to break the deadlock? This is probably not the responsibility of VCs. We look forward to ETH developers and entrepreneurs to tell us the answer.

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