September 11, 2024 | Read Online

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"On the internet, controlling demand is more important than controlling supply."

— Ben Thompson

The aggregators are coming for Ethereum

Is Ethereum a platform?

For technology purposes, yes, of course — Ethereum is a decentralized computing platform that allows developers to create and deploy smart contract applications.

But for investing purposes? Maybe not.

Investors love platform businesses like Microsoft, Apple and Amazon because they have the potential to extract monopolistic rents from infinitely scalable businesses.

(For the most recent platform success story, see OnlyFans.)

Crypto investors think about Ethereum in the same way: a platform that will take a substantial cut of all the activity that happens on top of it — the "app store of crypto," as it was optimistically pitched to TradFi investors ahead of the recent ETF listing.

It's not working out that way.

Ethereum is in fact enabling a lot of activity, but its cut of that activity is negligible — revenue is down 99% in the past six months.

This disappointing development has led to a heated debate as to whether the many layer-2 blockchains (L2s) built atop Ethereum are friend or foe.

Many now consider L2s to be "parasitic" and the reason why Ethereum's ecosystem of L1 applications is "dying" due to "vampiric" L2s draining the life out of ETH.

Others counter that L2s are necessary to grow Ethereum to global scale, that L2s are keeping users in the Ethereum ecosystem and that L2s are what give ETH a claim to being money.

Much of this is a matter of perspective.

If you view Ethereum as a business, you will probably think L2s are parasitic; if you view Ethereum as the next iteration of the internet, you probably won't.

Neither view is entirely correct: Ethereum is not exactly a business, of course (no one "owns" the protocol), but "the internet" doesn't have a tradable token, so it's not exactly that either.

Ethereum is something in-between. For that reason, even if you're just in it for the tech, you still have to give some thought to its business model.

With that in mind, here's what I think is happening: Ethereum is a platform that's being turned into a commoditized supplier by the L2 blockchains it enables.

If so, the relevant precedent for thinking about the fate of Ethereum may not be Apple's app store, as we had so recently hoped — instead, it may be newspapers.

Once great businesses, newspapers were famously disintermediated by Google and Facebook, which co-opted their content and advertising markets without having to bear the costs of journalism.

Google and Facebook are often referred to as platforms, but they are better understood as "aggregators."

Ben Thompson (who coined the term) explains the difference: "Platforms are powerful because they facilitate a relationship between third party suppliers and end users; aggregators, on the other hand, intermediate and control it."

Apple is a platform because it facilitates a relationship between app developers and iPhone owners; Amazon is a platform because it facilitates a relationship between businesses and consumers; OnlyFans is a platform because it facilitates….well, you get the idea.

By that logic then, Ethereum, which undoubtedly started out as a platform, may not be one for much longer.

With the ascendance of L2s, Ethereum no longer facilitates a relationship between suppliers and users (or not as much as it used to, at least).

Instead, the facilitating is increasingly being done by L2s, which have become something akin to aggregators in the process.

I hope Ben Thompson doesn't read this because it's not an exact analogy, but I suspect he would agree that L2s are now the more powerful facilitators in the Ethereum ecosystem and therefore have at least the potential to become aggregators.

L2s act as intermediaries between crypto users and the Ethereum network because they aggregate many user transactions into a single batch before submitting them to the Ethereum blockchain.

This is bad news for investors who view Ethereum as a business.

As Thompson explains, disintermediated businesses, like newspapers, "lose value in favor of aggregators who aggregate modularized suppliers."

Emphasis added because Ethereum is now "modular."

Like newspapers, Ethereum is an integrated service provider (providing execution, consensus, data availability and settlement) that's being modularized — L2 blockchains can choose some of those services to pay for and provide others themselves.

Much like Google modularized content distribution, L2s are now modularizing execution.

This has not (yet) infringed on Ethereum's core value proposition of security and decentralization, but to accrue value, L2s probably don't have to — Google didn't infringe on newspapers' core proposition of investigative journalism, either.

But just as newspapers found out that readers weren't really there for long-form reporting, Ethereum may now be finding out that users aren't there for decentralization and security.

If so, Ethereum may be left providing the lowest-value parts of the crypto value chain.

"In an aggregator-dominated value chain," Ben Thompson writes, "aggregators completely disintermediate suppliers and reduce them to commodities."

Are security and decentralization crypto commodities?

That might be the real debate we should be having.

— Byron Gilliam

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