Ethereum’s Big Bounce: What’s Driving It and What’s Next?

Ethereum is making a comeback. Over the past month, it has outperformed most other cryptocurrencies. A surprising shift. After months, even years of bleeding out, people are talking about a pivot, a new strategy from Ethereum's leadership aimed at pulling the asset out of its downward spiral.

The public believed that Ethereum had gone in the wrong direction and believed that Ethereum was going to get bypassed by the industry. And that's really been fixed now and that's really going to drive, you know, ether at 20k, 50k, 80k.

So what's really driving this turnaround? And more importantly, can ETH continue outperforming in the months ahead? To find out, I sat down with Ryan Bergmans, Ethereum OG and investor, to break it all down. Before we get started, don't forget to smash the like button and subscribe to our channel. I'm Giovanni. Let's get into it. Before we jump into all the positive catalysts around Ethereum, can you maybe point at the main problem according to you, affecting Ethereum in the last couple of years?

Yeah, Giovanni. So about four and a half, five years ago, the Ethereum community decided that the best way to scale Ethereum, both technically as well as politically, was to use this so called rollup centric roadmap, which became the Layer two centric roadmap. And the challenge for us is that that Transition to the layer 2 model ended up taking longer and being much more sort of violent and having much more challenging sentiment issues than we expected. And part of that was as the Ethereum community, it was our responsibility for not doing a better job, for shepherding the public through this transition in terms of explaining the strategy, explaining expected outcomes, talking about the kind of KPIs we expected to see. Another was around taking too long for interop efforts between the layer twos to become a major focus of development. So the Layer two model is not just about having all these standalone blockchains, it's about connecting them into a broader economy on Ethereum. And those connections require a lot of work, both technically in terms of product work, in terms of setting expectations. And that's something that we only really started in the last couple years instead of, you know, four, four years ago. And so really what you look at is there was this incredible strategy which was the, the Layer one plus Layer two strategy to build this overall Ethereum economy of connected chains while allowing each Layer two to be controlled and customized by its own operator, which is very attractive value proposition for institutions. But we didn't connect the dots right.

And now I want to touch upon that moment of reckoning, because we saw that in the last couple of years, Ethereum has been bleeding out versus Bitcoin. We saw a lot of negative media coverage as well. It seems that at certain point there was a moment of reckoning that prompted a change in the course of how Ethereum is going to be developed in the future. And that's been referred to as the pivot. When do you think was this reckoning moment for the Ethereum community? What served us, this point where everybody started saying, like, okay, we need to change something here?

Yeah, Giovanni, it's such a great question. And I would describe it as almost a civil war having started about 15 months ago. It was much uglier behind the scenes, I think, than even the pa, the price action in public and some of the public, you know, signals coming out of the community, the folks who are in charge of Ethereum, who are these incredibly genius, benevolent people who have brought these incredible ideas and align, you know, until recently, alignment of execution to the world, they've done such a great job, but, you know, they're not perfect. And they had always assumed that Ethereum would be successful. And so as the price had been getting lower and as some of us who are a little further away from the center, who are operating more in the ecosystem and, you know, maybe a little closer to the real world, we see these issues coming down the pipe even years ahead, and we say, hey, guys, there's issues. And they brush us off often, not always. And the reason they brushed us off is because, bless them, but they had this indomitable optimism that they're so sure Ethereum is going to succeed. And it really wasn't until earlier this year when, when the price action got so unbelievably poor versus Bitcoin and the, the, the bitcoin ratio, you know, fell below the, the, the old death of Eth party. And I think there were some, you know, some seriously wealthy and seriously influential Ethereum folks close to the heart of the community, you know, Vitalik included, who looked at this moment and said, oh my God, we never thought it could get this bad. And so I think that it was ultimately the market sending a message that couldn't be ignored, that, guys, there's an issue here. What are you doing about it?

And now I want to get into one of the main changes that we're talking about here. So apparently this pivot of Ethereum focuses mainly on a refocus on Delayer 1 compared to Delayer 2. While the rollup based roadmap was mainly focused on growing the Ethereum ecosystem on the layer 2s while using the base layer as a settlement layer. Now there is a reckoning that we need to work on the layer one more. We need to scale the layer one, not just relying on the layer two. Can you get us deeper into what's actually being done on that aspect?

That's right, Giovanni. So from a technical perspective it was always the plan to scale the layer one. However it had been the future eventual plan to do so. And you're absolutely right that in the last few months what we've seen is not so much a technical pivot because it was always part of the technical roadmap, but a social layer pivot to reprioritize the layer one scaling both in terms of delivering it sooner in, in Ethereum's journey as well as in terms of the stories we tell ourselves and how we explain Ethereum no longer calling it the roll up centric roadmap, the L2 centric roadmap, no longer calling it the, the L2 L2 scaling. You know, now we call it L1 plus L2 which is really where we should have gotten from years ago. And so I think it represents the healing of an unforced error in the Ethereum community and Ethereum, Ethereum community leaders around giving ourselves in the public the mistaken impression that the L1 was closed for business. The fact is that the L1 has always been an ideal place for high value tokenization, high value protocols. We see Things like, like BlackRock's Biddle Fund is now, I think over $2 billion on, on Ethereum L1 mainnet we see Visa building a protocol to distribute tokenization to their network of customers. So they're building a tokenization Factory on the L1 on Mainnet. And so L1 DeFi L1 high value use cases were never supposed to go away and now we're seeing a much better balance between those priorities and it's be very, very exciting to see that reflected in Ethereum's hard forks and business development and communication were now 100% aligned on L1 plus L2.

The main issue was that the layer 2s were capturing too much value that was not trickling down on the main asset eth and that was partly the reason why it was underperforming in general. And this refocus on the layer one should also redirect some of those financial flows back to the main assets. Am I correct? And when should we expect that to sort of have some effects?

Yeah, Giovanni So there's some important distinctions there. So one is that the valuation of Ether the asset is not tied to the cash flow that the platform generates. First of all, the cash flow is denominated in Ether. So the actual US dollar value is based on the spot price of Ether and not the quantity of units of Ethereum that have been paid in as fees to the platform. And so Ether is much more a, a store of value digital oil, you know, akin to Bitcoin that gets its value from the public's aggregate confidence and belief in the durability and longevity and importance of Ethereum and Ether the asset. And so the reason that the Ether price cratered was, was not because all the fees went to layer two, for example. It it, yes, the fees did primarily go to layer two, which was always the plan. And they will recover in due course as congestion returns to the L1 because business development efforts on L1 are rising, because we're scaling the L1 which will give other businesses the confidence to build there instead of, you know, defaulting to L2. Uh, but the most important factor there is that the reason for Ethereum's price collapse was not because of any one metric. It was because the public believed that Ethereum had gone in the wrong direction and believed that Ethereum was going to get bypassed by the industry, that Bitcoin was going to be this, you know, institutional grade store of value competing with, with physical gold, and that Ethereum's competitors were going to do a better job of bringing on chain economy to the global market. And it was our fault for not explaining better and executing better on our transition to L1 plus L2 strategy. And that's really been fixed now. And so what's really happening there is we're seeing layer two succeed financially as well as in terms of integrations and growth. And that success will ultimately translate into higher L1 fees, higher L1 revolution. But it's not going to be the rev that drives the valuation of Ethereum. It's going to be Ethereum's domination as both a store of value digital oil reserve asset combined with the domination in the on chain economy, you know, bringing, bringing stable coins and on chain treasuries and identity and gaming and defi and so much more to the world.

Don't you think that this pivot will make the layer 2s less relevant now that there is this new effort to scale the base layer? What is the purpose for layer two?

Yeah, Giovanni, it's such a great question. And the answer to that question is that layer 1 and layer 2 cannot replace each other. The L1 is the economic HQ, is its role and it's an irreplaceable role. And the layer two, the layer two marketplace's role to be inventive, to be politically scalable and to provide the world's, you know, tighten trillion dollar stakeholders with the control and customization tools they need to come on chain on their own terms. That's what it does best. And so there's no scenario where L1 scalability replaces L2 or vice versa. Both are needed. And other ecosystems that have tried to suggest that layer 2 scaling is not the way forward are running into a brick wall where they sell the same TPS to all the customers. They're not going to be able to scale technically and they're certainly not going to be able to scale politically. And so yeah, we're very, very excited about our model and it's finally coming to maturity and it's being reflected in price.

Now we saw an impressive rally from Ethereum in the last month, over 50% up. But Ethereum compared to Bitcoin and other crypto assets is still quite far from the previous all time high that we saw in 2021. Do you expect Ethereum to overcome its previous all time high by the end of the year?

Yeah, Giovanni. So Ethereum is a multi trillion dollar asset trading at just under $300 billion. And you know, we're going to see all boats rise with the tide. There's a huge global push for crypto now, both as an institutional reserve asset as well as for on chain functionality. You know, that's going to result in Bitcoin gains, it's going to result in programmatic chain gains and Ethereum is going to be the beneficiary of overlapping forces. If we look at the previous U.S. administration's, you know, war on, on chain, it wasn't so much a war against Bitcoin, it was more of a war against Ethereum specifically. You know, they came after our staking programs, our innovative business models, our, our, our institutions trying to do work there. Now we're seeing the new administration that is not just pro digital assets, it's pro on chain and pro stable coins and stablecoins are, you know, they live on Ethereum. And so I think that, that this global push for crypto will cause all boats to rise. But there's also going to be this secular growth in Ethereum where as we come out of this tunnel, this sort of dark period of this transition to our, our new strategy that, that is now finally killing it. And people are seeing that, you know, Ethereum is going to outperform. And so ultimately do I think that we're going to reach beyond all time highs by the end of the year? Well, I think there's, there's a distinct possibility in the coming years we're going to see a re rating of Ethereum up towards that multi trillion dollar asset. And you know, ultimately in the years to come on chain and on chain economies are going to get a thousand x bigger than they are today. It's that it's not, they're not going to get 10x bigger, they're going to get like a thousandx bigger. It's going to permeate the world economy and people are going to realize that a maximally decentralized store value that is, you know, this native digital oil is actually a really, really good idea. And a lot of that sentiment is going to reposition itself from, you know, pure digital gold or less decentralized chains and into Ethereum. And that's really going to drive, you know, ether at 20k, 50k, 80k in the coming years. Giovanni.

Okay Ryan, that was clear. It was a great conversation. Thanks a lot for coming to oversho again.

Thanks for having me Giovanni.