The Flip-Floppening: Check's Opinion on Ethereum

Years ago, I made a conscious decision to focus my time and energy on Bitcoin, where my skills are sharpest. However, it was thinking through the Ethereum problem that helped me reach this conclusion.

Last week really was one for the history books as far as crypto-regulation in the US goes. Overall, it signifies a major and overwhelmingly positive shift in the political landscape:

• SAB121 was overturned by congress (votes 60-38), which removed an overly restrictive SEC requirement on banks regarding the custody of crypto-assets. The veto which was pre-warned by President Biden was not exercised.

• FIT21 Market Structure Bill was passed (votes 279-136), which attempts to provide structure and guidance for which cryptoassets are commodities vs securities, and therefore which regulator has oversight (the SEC or CFTC).

• Anti-CBDC Act was passed in the House (votes 216-192) which prevents the Federal Reserve from issuing a Central Bank Digital Currency in the US.

• Ethereum spot ETFs were emergency approved on short notice. This is no doubt a major political backflip by the Biden administration who appear to be coming to terms with the significance of the crypto voting bloc.

• President Trump made crypto and Bitcoin part of his campaign, which suggests a favourable stance on crypto is a likely to be a theme for the election moving forwards.

There is no question that the political and regulatory winds in the US have turned last week, despite the fact you can trust a politician about as far as you can throw them. Nevertheless, the strings appear to have been pulled behind the curtain, and I suspect Wall Street is simply chomping at the bit to collect endless fees on crypto trading products for years to come.

Check’s Ethereum Experience

Now one of the topics that I have received several questions about this week is the Ethereum ETF approvals. Folks asked for my perspective is on ETH the asset, Ethereum the blockchain, and the market implications of the ETF approvals.

I have spent several years studying and thinking about crypto markets, and strive to always remain as intellectually honest as I can. I prefer to use data, evidence and experience as my grounding anchor. I’m also an engineer at heart, so I like to tinker and test as part of my process for forming an opinion.

I do not intend to spend a great deal of time analysing Ethereum via the checkonchain project, but this is certainly not because I am some kind of closed minded Bitcoin maximalist.

In this piece, I will outline my journey thinking through the Ethereum problem. It is intended to be a sort of worked example for how I arrived at the conclusion to focus my energy on Bitcoin, and not crypto.

I will share the experiences, process and rationale that led me to the conclusion that Ethereum just isn’t for me.

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Impact of the Ethereum ETFs

The question regarding what impact the Ethereum ETF approvals may have is one of the easiest parts to address and answer. My views are as follows:

• The ETF approvals were inevitable and are a net positive. The arguments which helped get the BTC ETFs approved related to the connection between spot markets, and CME futures, are equally true for ETH. As such, the ETFs were always happening at some stage, and this reflects a less hostile regulatory environment for the entire industry.

• It allows Ethereum to compete on even ground with Bitcoin for capital, as the corn no longer has an unfair advantage with respect to capital access. I’d be very surprised if the demand for Ethereum was more than 10% to 20% of the demand shown for Bitcoin over the medium to long-term. Bitcoin and Ethereum will however have an advantage over all other non-ETF crypto assets.

• I expect the market will eventually arrive at the already established conclusion that the fabled ‘flippening’ has a probability very close to zero. Market forces have already positioned Bitcoin to be the most valuable crypto-asset, by far, for 15 unchallenged years. I do not expect the ETH ETFs change any of the realities which established this initial condition.

Check’s Crypto Tuition Fee

I paid my market tuition fee in 2018, and successfully turned my $10k initial investment into approximately 10 cents…and I can assure you, it wasn’t by holding Bitcoin. After the -50% red candle that was December 2018, I realised I had clearly missed something important, and perhaps I should actually read the Bitcoin whitepaper to see where it all began.

My real orange pill was listening to the What Bitcoin Did series on Mt. Gox, where I realised that as far back as 2013, these guys were fighting tooth and nail to get access to that Bitcoin…Why? It must be pretty valuable…

My most formative Bitcoin years were during 2019-20, where I started to become fascinated by the monetary system and the plumbing of traditional finance. It finally clicked that Bitcoin was a serious contender as solution to monetary debasement, which I became convinced was inevitably coming our way.

I moved from stage 5 to stage 6 on the McConaughey scale, and I became Bitcoin obsessed, as we all tend to do at some stage.

Throughout 2019-20, I started thinking much deeper about how crypto-assets traded, operated, and importantly were governed. There were a few major events and life experiences which helped shaped my thinking at this time:

• The explosion in high quality Bitcoin and TradFi podcasts. I spent countless hours listening to What Bitcoin Did, TFTC, Macro Voices, Hidden Forces et al (and still do). I am entirely self taught in this space, in no small part due to my obsession for listening to everything that came over the airwaves.

• I started writing research for ReadySetCrypto, where I learned to appreciate markets and investor psychology from professional trader Doc Seversen. I started writing up my own research into the fundamentals of Bitcoin and crypto alongside Mav Seversen. This is where I explored many of my early concerns about Ethereum (more on this later).

• Onchain analysis hooked me good, as it allowed my engineering mind to visualise how Bitcoin traded under the hood. My mates couldn’t work out why I was so obsessed with the hundreds of pages of onchain papers I’d printed off at work. These were the early onchain papers by David Puell, Murad Mahmudov, Chris Burniske, Willy Woo, and Coin Metrics.

• I became an analyst contractor for Decred, where I developed numerous onchain analysis frameworks, metrics, and models alongside my good friend Permabull Nino. Most importantly, this is where I learned about how blockchains were governed, and many of the technical layers of consensus, mempools, hard/soft forks, nodes, proof-of-work vs stake…

These were the building blocks and experiences which gave me the reason to dig deeper, to think smarter, and to explore many rabbit holes. Whilst my fascination and appreciation of the trade-offs in Bitcoin’s design grew, so too did my concerns around my second largest holding, Ethereum…

The Flip-Floppening

Ethereum has honestly been one of the most interesting mental puzzles I have tried to solve. Like many folks, I came into the crypto industry starry eyed, and immediately convinced that Bitcoin was old outdated boomer technology, destined to lose the race.

I flip-flopped for years and years between two extremes; Ethereum was the most innovative thing since sliced bread…and simultaneously a house of cards, destined to achieve not much.

Over time, I became increasingly concerned that Ethereum would forever struggle to rid itself of the human desire to tinker, tweak, and tune the protocol parameters. The more complex it became, the more things needed to be fixed, and it was becoming clear that financial incentives were a corruption risk.

In Jan 2020, I participated as the ‘Bitcoiner’ in a debate on Bankless where I laid out my case as to why Ethereum was unlikely to sustain a monetary premium. This was relatively early in my thinking about the Ethereum problem, but my core points can be summarised as:

• Constant tinkering with the supply curve resembles fiat central banking.

• Sound money doesn’t mean fixed supply, it means free from human governance.

• The burn mechanism and staking are a wealth tax from users to holders.

• Over-reliance on centralised ‘DeFi’ apps and issued stablecoins to accrue value.

• Excessive technical debt building up from overly complex changes.

• Risks associated with centralisation of Proof-of-Stake pools.

The core of my argument was not so much the importance of a protocol’s fixed supply monetary policy, but instead the reliability of it, and the assurance it was free from human intervention.

This is why I love this chart (which can be zoomed out to year 2140).

Live Chart

Vitalik himself actually saw fit to respond, and he opened his rebuttal with this screenshot of my tweet…

As far as I am aware, Proof-of-Stake has been live for 3.5yrs, the Merge was completed 1.5yrs ago, and the Ethereum community is STILL debating whether their monetary policy needs more tweaks and tuning.

My concern wasn’t that Vitalik’s good intentions weren’t there. It was that technical and financial incentives were always destined to over-ride that intention. That is how the supply and issuance curves end up looking like this (and projection to year 2140 is impossible).

Modern Problems Require Modern Solutions…

Somehow the Proof-of-Stake protocol designers didn’t expect **checks notes** this many people would want to stake!? There are now so many messages being transferred between validators to keep the Ethereum blockchain in sync, that it is becoming overloaded.

Simultaneously, they are attempting to combat the centralisation vector of liquid staking protocols like Lido because…surprise!…people demand the convenience of NOT running a validator holding $125k worth of ETH on their kitchen counter.

As a result, they are capping the rate of new validator growth (lucky for those who staked early), and considering refactoring the monetary policy again to limit the ‘real yield’; as a disincentive for when too many people want to stake.

Let’s not even start down the contemporary debate focused on liquid restaking tokens; where tokenised staked ETH from the consensus layer is used as collateral for a different re-staking protocol, so it can then be used as collateral in DeFi protocols to borrow stablecoins, which are used to leverage up the yield earned from staking, re-staking and MEV…Why don’t we enshrine liquid staking tokens!?…What about a few universal intersubjective work tokens?…

…I’m all good guys, this just isn’t my cup of tea.

At first, second, and increasingly third glance…this resembles the fiddling with the knobs by central bankers to me, and I think this recent Bankless podcast with Justin Drake does a spectacular job of making many of the above points for me. As I listened to this podcast in particular on the staking endgame, I just couldn’t help but see the parallels between the Ethereum insiders, and the FOMC; tweaking this dial, and tuning that dial to get monetary policy just right for the economic conditions.

The goal here isn’t to dunk on Ethereum, nor its dynamic monetary policy, nor the complexity of Proof-of-Stake (that would be easy, and lazy). It is to highlight that there STILL appears to be no end to the tinkering, tweaking, and tuning of the protocol parameters, which was my original concern.

Finding Product Market Fit

In my journey, I have used almost all of the major DeFi protocols, and I am the first to admit that ETH was one of my all time best trades. It went as follows:

• I built up significant experience using Uniswap, Compound and Maker protocols back in 2019-20, and was a user long before DeFi summer, at a time when gas prices rarely exceeded 1-gwei.

• When I became convinced that March 2020 was the bottom, I borrowed stablecoins via Maker and Compound up to 30% of my ETH collateral. I used this to buy more ETH, which I added back into the vaults as extra collateral.

• The market mooned, but so did my concerns that Ethereum wasn’t aligning with my world view.

• So I started to ‘hedge’ my ETH position by borrowing more stablecoins, and buying spot BTC with it. My logic was that if Ethereum imploded, at least I had extracted ~30% of the value in Bitcoin.

• As the Merge approached, I released the video below in a final attempt to lay out what I saw as major concerns with the move to Proof-of-Stake. My main argument was that Ethereum’s primary point of differentiation was actually the censorship resistance owed to being a Proof-of-Work chain.

When it became clear to me the Ethereum folks had no interest in entertaining the discussion, I took it as my signal to exit, and traded all my ETH into BTC (…and paid my taxes..) in the days immediately after the Merge.

It was a great trade at the end of the day, and I learned a lot about how to effectively use leverage to manage a portfolio. Many of the critiques I make in this video are still very relevant, and several have since evolved into acute concerns within the Ethereum community.

Throughout the 2021-22 bull market I farmed shitcoins, I received airdrops, I lost money, but I definitely made more. At the end of the day, I was rewarded for being a speculator, even if I was a comparatively conservative one (far from a degenerate).

When I honestly summarise my usage of Ethereum, I was using DeFi lending protocols to obtain leverage which I used to speculate on tokens.

Having not used any of this stuff for a few years now, I don’t feel like I am missing out on much at all. I honestly cannot think of many times in my life when I would need any of those platforms, and I was perpetually concerned about hacks, drains, rugs, bugs, liquidations, and everything in between. It didn’t solve a serious problem I had, and I always felt uncomfortable using it, like I was one mis-click away from zeroing out.

By the time the Merge rolled around, I had reached the conclusion that irrespective of the technical, governance, and monetary policy problems I perceived for the Ethereum project, I simply had no need for the products it offered.

Stuck in the Middle

I want to wrap up with some of my more recent observations I have been puzzling over related to the under-performance of the ETH/BTC ratio in 2023-24. It is no secret that both Bitcoin and Solana have absolutely trounced Ethereum performance since the Merge.

I believe there are a few factors playing into this:

• The gas fees are rough, and rightly or wrongly, the type of users who are looking to speculate (as I did) are fee sensitive. It doesn’t matter that Ethereum made trade-offs to be more decentralised, because users appear to be migrating towards the Solanas of the world, even with the downtime problems.

• The user experience of rollups is a horror show. The reality is that most of these Layer-2s are a multi-sig wallet, and a single server. Ironically, the advice most bankless people give is to bridge via Binance and Coinbase…seriously? Decentralisation is dependant on your weakest link folks, and in this instance, that would be Binance and Coinbase.

• What exactly am I using this rollup for? I have played around with Arbitrum, Optimism, Starkware…and what did I find? The exact same applications that I didn’t need on the mainchain, just a bit cheaper, and with less liquidity. Capital is broken into silos, and composability of the apps has degraded.

• Ethereum is too decentralised. Weird concept, but in my opinion, the trade-offs Ethereum has made in its design are ill-suited to its desired use cases. If your weakest link depends on the ability for Tether, Circle, Binance, Coinbase, and real-world-security-tokens which can be frozen and censored…you might have overdesigned the system. It is decentralised enough to be a place for speculation…but is that really what we’re building here?

• Ethereum has very little edge in a Proof-of-Stake world. It does however have plenty of technical debt. The podcast with Hasu and Jon Charbonneau covering the ‘single core EVM vs the multi-core SVM’ is very technical, but it really drove home that Ethereum has to compete with the serious technological advances by well funded projects lower down the food chain.

• A lack of pretense that any of this shit does anything, or will ever do anything. I encourage all subscribers to listen to this podcast between Grant Williams and Travis Kling. Travis highlights a harsh reality that outside Bitcoin, crypto has delivered very little in 15yrs, but will likely pump anyway. It is unclear whether Ethereum has a competitive edge in this style of ‘casino-first’ world where meme-coins rally harder than well-meaning token solutions which are looking for a problem.

My primary thesis for why ETH/BTC has under-performed, and is likely to continue to do so over time, is the answer to the following questions:

If Ethereum was launched today, would anybody use it?

Will Ethereum resolve its user experience woes in the next 12-months?

Does Ethereum seriously compete with Bitcoin as sound money?

Does Ethereum seriously compete with Tron/Solana/Binance for speculation?

I struggle to answer in the affirmative for any of these….

Yes Ethereum has the starter pack of liquidity dominance today, but that too is steadily migrating. USDT transaction dominance on Ethereum has fallen from 78% in 2020 to just 6.8% today (most is now on Tron).

Live Chart

When it comes to stablecoin transfer volumes, the picture is a little less grim, but Tron now hosts some 50% of Tether volumes, and Ethereum dominance has declined from 53% in 2020 to 38% today.

This isn’t a claim Ethereum is dying…but it is an observation that its liquidity dominance is objectively no longer rising (which has been true for a few years now, and there are many metrics telling the same story).

It truly is Ethereum’s game to lose right now, and we are watching the undeniable, slow, and steady migration of users, which leads to a migration of developers, which leads to a migration of capital and VC funding.

I struggle to see Ethereum growing its market share in the years to come.

Live Chart

Concluding Thoughts

I really do want to stress that this article is strictly NOT intended to be an Ethereum hit piece, nor a condemnation of the project, nor a claim that the Ethereum price will not perform well (it almost certainly will). What I want this article to reflect is the journey I have personally walked, and the key steps along my process and thinking that helped me form the opinions I currently hold.

I made the decision back in September 2022, after the Merge, that Ethereum just wasn’t for me, and evidence I have seen since then supports that position.

I exited my ETH position, paid my taxes, and made the call to focus full time on Bitcoin where my skills are sharpest, and I feel most at home. The onchain data for Bitcoin is exceptionally clean, crisp and reflects the rawness of investor sentiment beautifully. The same is not true for Ethereum in my experience, as is requires significant filtering, processing and scrubbing to account for all the smart contracts, protocol changes, beacon chains, staking, burn mechanisms, airdrops, incentive schemes…it’s not pretty, and the data is considerably less useful.

I am positive many will disagree with my takes, and I probably have a few things misquoted or outright wrong. But that is ok, as it’s a complex problem, and I like to learn when I am wrong. Whilst I am no longer an ETH holder, I still to enjoy the exercise of thinking through and pondering the many challenges Ethereum faces, and I honestly wish all holders the best of luck in solving them.

I truly want the Ethereum project to succeed, as I see absolutely no win condition where an asset worth more than $460B fails. Competition is good, and I am pleased the Ethereum folks now have an even playing field with Bitcoiners by getting the ETFs approved.

However, with all of that said…I still I think the flippening is a plausible scenario…

Thanks for reading (and I would love to hear your thoughts and comments too),

James