Why Ethereum 1.0 failed and Bitcoin succeeded

Noah Ruderman
Jan 22, 2019 · 7 min read
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Introduction

Ethereum 1.0 wouldn’t be undergoing a complete redesign unless it had major flaws. So how did we get here? And why did Bitcoin seem to fare much better? Two important factors are user experience and economics. At a minimum, for a product to succeed it needs to be a compelling alternative to an existing problem, and the transaction fee must not exceed the economic value of the actual transactions. Together these point to an upwards trajectory for Bitcoin and a downwards trajectory for Ethereum 1.0.

Competing on User Experience

There’s a saying that for one product to replace another with network effects, it needs to be ten times better. Specifically it must be good enough to justify the painful switching costs. Here we examine that first competitor and if those improvements could arguably be called a 10x better experience.

Bitcoin was 10x better

Who was Bitcoin’s first competitor? Gold comes to mind, but Bitcoin’s inflation in the early years was very large, far exceeding that of physical gold mining. There was little Bitcoin had to offer gold bugs in terms of longevity, inflation, decentralization, at least for now. It was not yet a competitive product.

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Bitcoin was an obvious 10x improvement on the wire / ACH transfer

Ethereum turned out to be 10x worse

Who was Ethereum’s first competitor? Many think it was Bitcoin, but it was hardly better equipped to offer a substantial improvement with respect to payments. Rather, than being engineered for payments, it was a general purpose platform and originally branded a “world computer”.

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Ethereum was unfortunately 10x worse than the web 2.0 it sought to replace

Economics of transactions

It’s an economic reality that the value of the transactions must at a minimum exceed the transaction fees paid. Without this, we can’t realistically expect to onboard users. Nobody is interested in leaving money on the table. Single fee markets behave like you might expect, but multiple competing fee markets can crowd out applications with low economic value.

Bitcoin’s single-application platform was smooth sailing

Transactions on Bitcoin were intended for wealth transfer. Although there were secondary uses of Bitcoin such as gambling and storing data, the primary function had the highest economic value. This meant that using the platform as intended was not impeded by secondary uses.

Ethereum’s multi-application platform had unexpected interactions

Transactions on Ethereum were meant to power dapps. Wealth transfer was meant to be a secondary use that unfortunately could not be designed out of Ethereum. So what happens when a low-value application is on the same platform as a high-value application? Unless they both offer comparable economic value, the low-value application may be entirely priced out. Picture dapp A’s bottom 1st percentile of transactions justifying a fee of above $0.06 and dapp B’s top 99th percentile of transactions justifying a fee of below $0.06.

Wealth transfer out-priced dapps on Ethereum

In Ethereum’s case, despite its intended use case being for decentralized applications, the most popular use of Ethereum is still just transferring wealth without the assistance of dapps. Ironically, what was surely considered to be a secondary use of Ethereum is now setting a transaction fee baseline that’s putting dapps out of business.

The Ethereum 1.0 dapps that survived lacked traction

With that said, there have been a few categories of dapps which have provided enough economic value to survive. Most notably they are gambling, decentralized exchanges for on-chain tokens, prediction markets, ICOs, and collateral-backed loans. What they share is that people are willing to pay on par with baseline transaction fee for these workflows. (It is not a coincidence that they involve moving potentially large sums of money at once.) The problem, however, is that these are niche applications whose values are way out of line.

Conclusions

So why did Bitcoin do so well and Ethereum always seemed to struggle?

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Coinmonks

Coinmonks is a non-profit Crypto educational publication.

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Noah Ruderman

Written by

http://thedevilscompiler.com/

Coinmonks

Coinmonks

Coinmonks is a non-profit Crypto educational publication. Follow us on Twitter @coinmonks Our other project — https://coincodecap.com

Noah Ruderman

Written by

http://thedevilscompiler.com/

Coinmonks

Coinmonks

Coinmonks is a non-profit Crypto educational publication. Follow us on Twitter @coinmonks Our other project — https://coincodecap.com

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