Ethereum’s Modular Strategy: Short-Term Pain, Long-Term Gain, Says Research

On Nov. 12, Web3 venture capital firm Hack VC released research and analysis on Ethereum’s modular strategy.

“In the short term, modularization likely hurts ETH price because of lower fees and reduced token burn, but this isn’t the whole story,” said Hack VC managing partner Alex Pack.

Ethereum’s Future is Bullish

Since 2020, Ethereum has shifted to a modular architecture, outsourcing parts of its infrastructure like execution and data availability to layer-2 networks. The notion was aimed to decentralize and enhance the scalability of the network, however, there were short-term drawbacks.

The strategy has negatively impacted the ETH price in the short term due to reduced fees on the main network, leading to less token burn via EIP-1559. Lower fees mean reduced scarcity of ETH, which puts downward pressure on its price, the research noted.

1/ ETH is underperforming BTC and SOL big time this cycle. The reason? Many think that it’s Ethereum’s choice to go modular. Was this a strategic misstep? We pulled a bunch of data and have some answers. pic.twitter.com/eAgqpLX5a2

— Alexander Pack (@alpackaP) November 12, 2024

Until recently, ETH had underperformed this year, with Bitcoin and rival network Solana seeing greater gains. Additionally, the proliferation of new L2 tokens in the Ethereum ecosystem may have also diluted investor interest in ETH, the researchers said.

Nevertheless, Ethereum’s modular approach aims to future-proof the network against technological shifts, such as the rise of zk-rollups and shared security models like EigenLayer. This adaptability could help Ethereum avoid becoming obsolete, unlike past tech giants like AOL or Yahoo.

The researchers concluded that in the long term, Ethereum may emerge as a stronger player due to its “investment in fostering a broader ecosystem” as it is laying the foundation to “adapt, scale, and thrive” in the next wave of blockchain innovation.

“In an industry where success is driven by network effects, Ethereum’s modular strategy could be the key to maintaining dominance among smart contract platforms.”

“Maybe modularity has positioned ETH for sustainable growth and continued dominance,” concluded Pack.

ETH Price Cools

ETH prices have been on fire this week, surging more than 30% and adding more than Solana’s entire market cap in just five days. The asset topped out at $3,424 on Nov. 12 before reiterating with the broader crypto market, which is cooling after its week-long rally.

At the time of writing, ETH was trading at $3,148 following a 5.5% daily dip; however, it remains up 31% since the same time last week.

Meanwhile, spot Ethereum ETF total flows have finally flipped to net positive following a bumper inflow day on Nov. 12, with BlackRock’s ETHA fund seeing its second-largest inflow of $131.4 million.