The Nation-State Thesis of Ethereum

This is a guest post by RobAnon who is the Founder and CEO of InfiniFi.

Thanks to all our sponsors for making it possible to share this content for FREE!

🖥️ PYTH | SMARTER DATA FOR SMARTER CONTRACTS

⌛️ HOURGLASS | LEVERAGE AIRDROP FARMING

🪄 TANSSI | LAUNCH YOUR SYMBIOTIC RESTAKED NETWORK IN MINUTES

📈 ⁠iYIELD | YOUR FINANCIAL PICTURE, SIMPLIFIED

🧪 MANTLE | START YOUR RESTAKING JOURNEY TODAY WITH CMETH

🐡 PUFFER FINANCE | LIQUID RESTAKING FOR THE LITTLE FISH

🌔 MOONWELL | THE LEADING LENDING AND BORROWING APP ON BASE

🐐 ⁠GOAT NETWORK⁠ | A BITCOIN L2 TO EARN WITH BTC & DOGE

⚙️ GEARBOX PROTOCOL | ONCHAIN LENDING REIMAGINED

📈 DEFINITIVE | THE MOST ADVANCED PLATFORM FOR ONCHAIN TRADING

Recently, many have expressed concerns as to the fundamental long-term value of Ether. While the value of Bitcoin, a reserve asset if ever there was one, has continued to skyrocket, Ether has recently seen stagnation and questioning amongst its core believers, despite historic support and tailwinds. For most, the question is quite simple: even in the face of mass-adoption, what will drive long-term value accrual to ETH? Put simply, Ethereum’s value lies not in fees or scarcity, but in its role as the backbone of a new global power struggle.

I will not spend much time on the discussion of Proof of Work vs. Proof of Stake value accrual mechanisms, as much has already been written on this consideration; however, one must understand that many believed that the “ultra-sound” deflationary nature of Ethereum, in combination with the fees that it generates for validators, would be enough to drive value into the token. This thesis has not proven out, as under a traditional revenue valuation model, the fees generated by Ethereum validators are insufficient to hold up its current market cap, much less a higher one, while the “ultra-sound” deflationary thesis has itself proven ironically unreliable (though likely temporarily) under the need to increase blob-space to better scale L2s.

However, these theses have fundamentally missed the mark on the long-term value of Ethereum. The long-term value of Ethereum is not one of revenue or deflationary currency, it is one of power - the only true currency in this world, and the reason for the generational dominance of the dollar. The Nation-State Thesis of Ethereum best describes why Proof-of-Stake is a better long-term strategy than Proof-of-Work, why Ethereum gains value the more L2s that roll-up to it, and why both approval for staking ETFs and the US Government’s forthcoming Strategic Crypto Reserve are opening moves in the greatest quiet conflict since the Space Race.

Proof of Stake

At face-value, Proof-of-Stake (PoS) is widely considered to be a reflexive response to the exponential scaling problem that mining presented. To offer a simplistic explanation of its function, PoS works by requiring would-be validators to put up an amount of ETH as a “stake,” with this buy-in then allowing the validator to participate in Ethereum’s consensus mechanism.

To validate transactions on ETH, you must own ETH. If you own more ETH, you can create more validators, and hold a greater degree of control over the transactions that are validated on Ethereum Mainnet. At typical scale, this control is inconsequential; however, if an individual or aligned group were able to accumulate greater than 51% of all validator power (and therefore 51% of all staked ETH), they would be able to execute a so-called “51% Attack,” giving them greatly increased economic power over what transactions were validated in what order (including, under the right conditions, the ability to double-spend, and even the ability to force-through a hard-fork).

It can therefore be concluded that control of the Ether cryptocurrency (ETH) is control of the security consensus layer that powers Ethereum Mainnet. Control of a majority of ETH is the ability to disrupt this consensus, while control of a plurality of it in concert with other aligned groups is the ability to prevent disruptions of this nature. Control of ETH is control of the soft-power of the consensus layer.

Furthermore, if more value can be extracted from controlling Mainnet than it costs to acquire enough Ether to effect that control, then we can conclude that such extraction is guaranteed to occur. Analogously, the cost of robbing a bank (both economic and social) must always be greater than the benefit that can be obtained by doing so. Corporate-raiders are not a concept exclusive to blockchain, but in the case of PoS, they are what fundamentally guarantee that Ether’s value must always increase with increasing value stored on Ethereum Mainnet. Increasing economic value secured by the Mainnet conensus layer fundamentally drives value to ETH.

L2s and Value Accrual

Layer 2 (L2) blockchains are highly-centralized blockchains that “roll-up”, or borrow security consensus from, their parent Layer 1 (L1) blockchain. For the purpose of this article, “L2” will be used primarily to refer to Layer 2 blockchains which roll-up to Ethereum Mainnet (the majority of such Layer 2 blockchains in existence meet this criterion). Much ado has been made about the danger to Ether’s value accrual that such L2s might present through choosing tokens other than Ether to pay for native transaction gas with, or through choosing different Data Availability (DA) layers to store data within. Certainly, L2s can play their token games; however, the Nation-State Thesis contends that these considerations are entirely secondary, and that simply by choosing Ethereum Mainnet as their base layer of security, L2s inherently drive value to Ether.

As L2s are focused on speed, they are wholly reliant on Mainnet to protect their economic security and to verify that no double-spends or fraudulent transactions have occurred. The more value that these L2s secure, the more value that could be extracted from them through a compromise of the Mainnet consensus layer. Therefore, in considering the economic value that Ethereum’s consensus layer secures, it is necessary to consider all economic value secured by it, both on L1 and on all relevant L2s. Every additional dollar of TVL that is deposited to an Ethereum L2 represents a fundamental increase on the value of Ether itself.

The Coming Arms Race

Thus far, we have seen the lion’s majority of stablecoin and RWA flows being directed into Ethereum Mainnet and L2 deployments - based on the understanding that no other smart contract blockchain offers the security and uncensorability that Mainnet ETH is able to, we can assume that major global financial players will continue to choose Ethereum as their blockchain of choice. The primary priority of global financial entities is not speed, it is an inability for competitors to seize or interfere with their wealth - stability. Only Mainnet and L2s that roll-up to it offer the level of stability that they desire - thus, only Mainnet and Mainnet L2s will receive significant institutional inflows. We can already see this with BlackRock and others choosing EVM as their network of choice for tokenization operations - as of publication, Mainnet makes up the majority of all tokenized TVL, at 52% market-share. With infiniFi entering the market, tokenization will only speed up, engulfing TradFi within the next two decades. Therefore, control of Mainnet will become control of the Global Financial System - this will ignite the Ethereum Arms Race.

The Ethereum Arms Race will begin with the Traditional Finance (TradFi) Institutions. The opening moves are already being made, as Asset Managers offering Ethereum ETFs seek approval for staking the ETH that backs their ETFs. Ostensibly, this is to offer the holders of such ETFs yield on ETH - in actuality, I believe that it is being pursued under the banner of increased power. Just as Asset Managers have traditionally wielded their holdings to force corporate governance into outcomes favorable to the Asset Manager’s agenda, I believe that they are correctly viewing staked ETH through a similar lens of soft-power. Certainly, the yield that they offer to subscribers gives those with staked ETH a more compelling offering for subscribers than those who do not, but the real power-play being made is acquiring additional control over Ethereum Mainnet. I am doubtful that any of them hold real delusions of centralizing control of Mainnet to themselves - rather, it is a game-theory driven outcome. If they do not control a significant-enough chunk of Mainnet, then their competitors might be able to source a plurality of control and interfere with their operations. This outcome is unacceptable, and thus, each asset manager has strong incentive to convert their ETF holdings to staked-ETH and thereby increase their control of the network.

However, it is not with Asset Managers that the Ethereum Arms Race will remain. All Asset Managers are ultimately operational within the borders of sovereign nations, and those nations also have strong interests in control of the Global Financial System. It is on this international stage that the Ethereum Arms Race will play out its main act.

For decades now, the United States has maintained near-hegemony over the Global Financial System through its control of both the US Dollar and its de-facto control of the Society for Worldwide Interbank Financial Telecommunication (SWIFT), a messaging network allowing for rapid international bank transfers. Similarly, for decades, those who challenge the unipolarity of this system have attempted to propose alternatives - the Chinese CIPS, the Indian SFMS, and the Russian SPFS have all attempted to supplant the globally-agreed upon standard, meeting middling success at-best.

As it becomes more and more clear that the new standard platform for global finance will be based on Ethereum and its L2s, the power struggle to maintain or weaken this status-quo will drive the value of ETH into geometric growth. The United States and its allies, seeking to maintain the control that they have wielded for the better part of a century over the financial system of the world, will seek to acquire, both directly and indirectly, as much control over staked ETH as is feasibly possible. Within the United States, this will likely take the form of a combination of friendly Asset Manager ETF - Government relationships, where the USG need not directly own ETH, and direct acquisitions of Ether itself, whether by purchase or by seizure of illegitimately-gained ETH. The US will seek to maintain a cadre of allies performing similar activities, such that they are able to continue to wield a plurality of control.

The Near-Peer Adversaries of the United States (China and Russia) will attempt to counter this by acquiring more staked ETH through similar, but likely slightly more authoritarian, strategies. Nationalization of in-country data-centers (or the soft-power threat thereof) is likely to add to their strategic ETH reserves, while direct nationalization of validator organizations or seizure of individual wealth are also likely vectors to increase their holdings. Within these groups, the goal will be to acquire sufficient ETH that they are able to challenge the United States through complex webs of alliances.

For smaller wealthy nations, their goals will be slightly different than the large players - rather than seeking to compete for first place, these nations (Switzerland, for example) will instead seek to acquire enough Ether that the large powers have strong incentives to reward them for alliances of convenience. Much in the same way that capital within DeFi is mercenary to the highest payer, so too will the validator power of these nations become available to the highest bidder.

Finally, for developing nations with tumultuous financial histories, we can expect at least one or two successful upstarts. In all likelihood, there will be at least one nation which realizes that, provided it is hidden cleverly on the national books, their currency can be debased to zero in pursuit of the acquisition of additional Ether. For a first-mover, this gamble is likely to pay off, as if they are able to fully front-run the United States and other major powers, the resulting scramble for Ether will, like the discovery of oil in the UAE, turn them into a wealthy nation overnight. Others will attempt to replicate this success, with predictable destruction of the local economy and all-too-familiar cycles of hyperinflation marking the price of being late.

You can, of course, expect all the conflict that accompanies any form of cold war to flow freely with the Ethereum Arms Race. Cyberattacks will become all the more threatening when they are able to fully abscond with a nation’s strategic control of the financial system. Locally, small conflicts may erupt over control of data centers and electricity will become an even more valuable commodity than it is today. While the threat of a 51% attack or a hard fork will remain omni-present and drive much of the scramble for Ether, this, however, is about as likely as a nuclear war to occur. A 51% attack will correctly be seen as Mutually-Assured Destruction (MAD), with the financial upheaval that it would cause on an international level deleterious to all parties involved. One double-spend could tank L2 trust and torch trillions in tokenized RWA overnight. Whichever nation is able to reach a majority of power first is likely to wield it much in the same way that the United States has wielded its power of the GFS: as an implicit threat, to be rarely, if ever, applied. The winner will have to contend with continuous attempts to knock them off the throne, but these will be well-worth it for the benefits that having control of the Global Financial System will offer.

This set of changes will be a paradigm-shift that many are entirely unprepared for: the discussions currently surrounding Ether focus on its weaker qualities of revenue or store-of-value, rather than as an instrument of geopolitical dominance. For those of us who continue to hold this asset, ride the waves and brace for impact. Ether is not a stand-in for a corporate revenue model driven by fees, it is not a deflationary ultra-sound money, and it is not an archaic, gas-hungry artifact from the dawn of smart contracts: Ether is the geopolitical soft-power of the future. He who controls the ETH, controls the world.

Buy my bags, Government.

• Follow Rob on X here

• Follow Infinifi on X here

• Subscribe to The Edge Podcast here

• Watch The Edge Podcast on YouTube here