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When Ethereum’s “Merge” to proof-of-stake went off without a hitch last September, some felt the layer-1 was primed for a breakout. Speculation arose around a “flippening” and institutional investors waited in the wings.

But ether’s price did not end up meeting these expectations. NFTs tested new lows, and the bear market muted DeFi engagement. Bitcoin continued to outpace ether in 2023 — recently reaching dominance levels not seen since 2021. Meanwhile, institutional inflows are largely yet to materialize

Blockworks spoke with Justin Drake, a researcher at the Ethereum Foundation, about the network’s current standing and future prospects. Keep reading for more excerpts from Blockworks’ interview with Drake.


Blockworks: You can see variations of this stat in different places, but the rewards paid out by Ethereum were larger than the transaction fees that were burned in both September and October. It looks like that’s turned around a little bit, but how should people think about issuance versus burn and when that flips negative? 

Drake: The fee market is exceptionally volatile. What you really want to be doing is zooming out, because when you zoom out, you’re smoothing your data over a longer period of time. 

If you look at ultrasound.money, you’ll notice that when it’s profitable, it’s like printing money. It’s really, really profitable. Ethereum has about a profit margin of 50% which is outstanding for a business. Now okay, on some days, especially weekends, it won’t be profitable. In some months, if you’re in the absolute depth of the bear market, then it won’t be profitable. But over a long period of time, it’s extremely profitable.

Blockworks: How important is this deflationary aspect of Ethereum and Ethereum’s ability to generate fees? Because obviously Ethereum is not a company in the traditional sense where your revenues need to outweigh costs. So how should people think about revenue versus issuance? And how important is that metric as a way to gauge the success of the network?

Drake: Broader than just as a company, some people think of ether, the asset, as money for the internet. And in that context, scarcity as a meme is extremely important. There’s this almost obsession with the 21 million Bitcoin meme precisely because it’s all about scarcity. And for the first time in history pretty much, we have money which not only has a fixed supply but actually has a decreasing supply. 

So now there’s what I call memetic potential. Memes are ideas that spread. The 21 million meme is one that spreads far and wide because it’s kind of an attractive thing intellectually. There’s an opportunity potentially for this meme to spread that ether is the scarcest money on Earth. Its supply is going down over time.

Blockworks: And who benefits from this meme?

Drake: Ether the asset is the basis of two very fundamental public goods in any programmable blockchain. 

Public good number one is economic security. We’re trying to build systems here which have a lot of longevity. We want to be in a position where it’s extremely difficult even for the most powerful nation-states out there to attack Ethereum.

And then there’s this second really important public good for blockchains which is called economic bandwidth, and that’s the ability to be used as collateral within DeFi. Ether is especially valuable as collateral money because it’s the only so-called pristine collateral. Pristine means that there’s no contract risk. There’s no governance risk. There’s no oracle risk. It’s the one risk free asset. 

Blockworks: It sounds like you’re saying the idea of ultrasound money is a means to these larger ends that you described.

Drake: Exactly. It’s a Trojan Horse, but ultimately the value is utilitarian through economic security and economic bandwidth. 

Blockworks: Ethereum’s validator queue has been in the hundreds of people waiting to stake ether (ETH), and that’s down from tens of thousands over the summer and even into September. What do you make of this? 

Drake: The churn, which is basically the amount of validators that can be processed by the queue, is proportional to the amount of staked ETH. As the amount of staked ETH grows, the churn grows and it becomes easier and easier to clear the queue. And so in that sense, looking at the queue is kind of a totally irrelevant game. The fact that the queue is very low just means that ether is very efficient at processing deposits. 

The better metric is what’s called deposits. Every single day on average, there’s 40,000 ETH coming in, which is a huge amount of money. 

Blockworks: How concerned are you about staking yields being down? 

Drake: I mean in a way, the lower the better, right? Because it means that we’re not spending as much to secure Ethereum. Ethereum is already extremely secure.

The security ratio is the value secured by Ethereum, which is all the ETH, all the NFTs, all the ERC-20s divided by the value securing Ethereum, and it’s 7.5, which is extremely healthy. If we were to have more staked ETH, this ratio would keep on going down. But there’s no real need for that. And so having more staked ETH in the way is wastefully paying for security. 

Blockworks: Post-Merge, there was a lot of excitement about Ethereum. In 2023, ether’s price has gone up, but especially compared to bitcoin, not as much as some had predicted. Why is that?

Read more: The flippening: Will ether flip bitcoin in the next year?

Drake: What tends to happen, generally speaking, is that during bear markets, dominance of bitcoin goes up, and then during bull markets, it drops down precipitously and then it reaches a new low, so this is all standard behavior.

What I’ll say is that bitcoin dominance hasn’t grown as much as what would have been expected in the bear market. So I think expectations were unreasonable thinking that during a bear market, ether will outperform [bitcoin].

This is all speculation, but my guess is that there will be a flippening in the next bull run. 

Interview responses were edited for brevity and clarity.


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