IOSG Partners, an Investor in Numerous L2 Solutions: Ethereum Should Abandon Its Commitment to Neutrality and Shift Towards Performance Orientation

Ethereum Faces Internal and External Challenges

Recently, Momir Amidzic, a partner at IOSG, a venture capital firm investing in multiple Ethereum Layer 2 (L2) projects, discussed the future of Ethereum and Layer 2 in a Twitter post. This article is a continuation of his previous piece titled “Ethereum Reimagined: Restoring Control and Value to ETH.” IOSG’s investments include Layer 2 solutions such as Arbitrum, zkSync, Stacks, BOB, Taiko, StarkWare, and Aztec Network, covering both Ethereum and Bitcoin ecosystems.

Ethereum Faces Internal and External Challenges

In the article “Ethereum Reimagined: Restoring Control and Value to ETH,” he first mentioned that the Web 3 vision from 2021 has gradually faded, and Ethereum has encountered significant setbacks. Not only has the community moved away from the Web 3 vision, but Ethereum also faces fierce competition from platforms like Solana, vying for the remaining market share. With external threats, there are also internal issues: the fragmentation of L2, erosion of value accumulation, dilution of ecosystem control, and lack of cohesion have further weakened Ethereum.

Momir Amidzic pointed out that these issues have affected ETH’s economic value, and with the rise of L2, Ethereum’s influence has diminished. These problems ultimately led to a significant pullback in ETH prices. In response, Amidzic proposed solutions such as enhancing L2 interoperability, prioritizing ETH-centered infrastructure development, and adopting decisive, performance-driven leadership. He emphasized that Ethereum has solid infrastructure and a vibrant developer community, which are its advantages, but swift and strategic actions are necessary to restore ETH’s position.

Ethereum’s Proud Value Replaced by Nihilism

At present, Ethereum has shifted from the Web 3 frenzy to a more sober reality, leading to a reevaluation of Ethereum’s core value propositions. The once idealized vision of decentralization and user autonomy has now been replaced by a more cynical view of the crypto industry, seeing it as little more than Bitcoin and digital casinos. This shift in sentiment has had a particularly severe impact on Ethereum.

Another element exacerbating this trend is that Ethereum is no longer the sole representative of the Web 3 vision. Solana is rising as the hub of crypto consumer activity. Against this backdrop, the article aims to identify Ethereum’s most pressing strategic challenges and propose feasible solutions to address this ever-evolving landscape. However, the focus of this article is on Layer 2-related issues.

Layer 2 Fragmentation: A Lose-Lose-Lose Situation for Ethereum, Users, and Protocols

Momir Amidzic noted that the fragmentation of Layer 2 has disrupted user experience and liquidity. This has affected Ethereum’s mainnet composability advantage, which remains evident in competitors like Solana. For users, inconsistent protocols, standards, and cross-chain issues have weakened the seamless interaction experience that Ethereum originally promised. Developers now need to maintain protocols across multiple L2s, creating unnecessary burdens, while startups are forced to spread their limited resources across various L2 user bases.

More critically, Ethereum’s decision to set Layer 2 as the mainstream scalability solution could weaken its control over its ecosystem, as Layer 2 is essentially developed and operated by third parties, effectively outsourcing Ethereum’s scalability solutions. As Layer 2 builds its own ecosystems, creating network effects, they could evolve into strong competitive moats.

Over time, these execution layers (Layer 2) may outperform Ethereum’s settlement layer, leveraging the network, which could lead future Ethereum communities to neglect the importance of the settlement layer. Assets might begin to exist natively on the execution layer (Layer 2), diminishing Ethereum’s role as the settlement layer and reducing its value accumulation potential, with the settlement layer gradually becoming commoditized.

Additional note: Blockchains are typically divided into data availability layer, execution layer, settlement layer, sequencer layer, and aggregation layer. Layer 2 solutions usually execute transactions on their own execution layer and then send transaction data to Ethereum’s mainnet for settlement. The finality time of transactions varies depending on the consensus mechanism (Optimistic, zk).

The Rise of Layer 2 Affects ETH’s Value Accumulation

The rise of Layer 2 has impacted ETH’s value accumulation, with a reduction in funds flowing back to Ethereum’s mainnet. This shift has transferred economic benefits from ETH holders to Layer 2 token holders (editor’s note: most Layer 2 token prices have dropped by 80-90% from their peak), weakening the incentive for holding ETH for investment purposes. Although this trend has clearly reduced ETH’s value as a productive asset, this is an inevitable challenge for any Layer 1 blockchain. However, as the most mature public chain, Ethereum faces this issue first.

Momir Amidzic also acknowledged that single-chain platforms like Solana or even Layer 2 solutions themselves may face similar challenges in the near future. Ethereum also faces significant leadership challenges. Within the Ethereum community, realistic performance goals need to be balanced with idealism, which may slow down progress. ETH holders lack direct mechanisms to influence strategic decision-making, and their only option is to sell their tokens if dissatisfied.

However, Amidzic pointed out that, in hindsight, these issues are easy to define, but to some extent, they may arise due to regulatory considerations and efforts to mitigate national risks, rather than a true lack of insight into governance and leadership.

Ethereum Should Promote L2 Interoperability Standards

One of the solutions proposed by Momir Amidzic is to let Layer 2 engage in a survival-of-the-fittest scenario, leaving 2-3 active mainstream L2s, while others gradually disappear or shift toward serving specific use cases as application rollups. Another solution is to establish robust interoperability standards to reduce friction across the entire rollup ecosystem, decreasing the likelihood of any single rollup establishing a dominant moat.

He believes that Ethereum should proactively promote the latter solution, enforcing interoperability standards while it still has influence over Layer 2. He pointed out that this influence is gradually waning, and the longer Ethereum delays, the less effective the strategy will be. By implementing a unified L2 ecosystem, Ethereum can improve user experience and strengthen its competitiveness against single blockchain platforms.

However, relying solely on market-driven integration poses significant risks for ETH. Each Layer 2 is likely to prioritize the value accumulation of its own token, pushing ETH aside and weakening Ethereum’s economic model. To avoid this outcome, Ethereum must act decisively to shape its L2 ecosystem and ensure that value and control remain tied to the mainnet and ETH.

ETH Positioned as Currency and Pure On-Chain Collateral

The narrative of productive assets is not a sustainable long-term strategy for Layer 1 tokens (including Ethereum). The window for L1 to capture most MEV (Maximum Extractable Value) is likely limited to the next five years, as value accumulation continues to shift upward to Layer 2. Meanwhile, the store-of-value narrative has been firmly occupied by BTC, leaving little room for a second asset. If ETH tries to compete in this space, the market might view it as “the poor man’s $BTC,” akin to silver’s historical position as a secondary substitute for gold.

Although ETH may eventually demonstrate advantages over BTC in store-of-value, this shift may take at least ten years, a period during which ETH cannot afford to wait. During this time, Ethereum must create a unique narrative to maintain its relevance.

Momir Amidzic believes that positioning ETH as a “currency” and pure on-chain collateral provides the most promising path for the next decade. While stablecoins dominate on-chain finance as a medium of exchange, they still rely on off-chain ledgers. The role of a blockchain-native, unstoppable currency has yet to be established, and ETH is uniquely positioned to seize this opportunity. However, this requires Ethereum to regain control over its ecosystem’s general layer and prioritize ETH adoption, rather than simply focusing on the diffusion of ETH standards.

Ethereum Has Two Ways to Reclaim Ownership of its Ecosystem

There are two ways for Ethereum to regain ownership of its ecosystem:

• Expand Ethereum’s Layer 1 to improve performance to match more centralized, yet higher-performing competitors, ensuring consumer applications and decentralized finance (DeFi) experiences are free of delays.
• Launch Ethereum-native Layer 2 and concentrate all business development and adoption efforts on this Layer 2. By focusing activities on Ethereum’s owned infrastructure, Ethereum can strengthen ETH’s central position within the ecosystem. Ethereum must shift from the outdated ETH-alignment paradigm to an Ethereum-owned ecosystem model, prioritizing direct control and maximizing ETH’s value accumulation.

However, reclaiming ecosystem control and enhancing ETH adoption are subtle decisions that could alienate key contributors, such as rollups and liquidity staking providers. Ethereum must tread carefully, balancing control needs with the risk of community fragmentation, to ensure that ETH successfully establishes a new narrative as the cornerstone of the ecosystem.

IOSG Partner Prescribes a Strategy for Ethereum: Shifting to Performance-Driven Leadership

Finally, Momir Amidzic explicitly stated that Ethereum’s leadership must evolve to address its governance and strategic challenges. Ethereum’s leaders should be performance-driven, with a stronger sense of urgency, and take a pragmatic approach to ecosystem development. This evolution requires abandoning past commitments to trusted neutrality, as this commitment has hindered decision-making, particularly in developing Ethereum’s product line and positioning ETH as a competitive asset.

Furthermore, the market has expressed dissatisfaction with Ethereum outsourcing key infrastructure, from rollups to staking, to decentralized entities. To address this issue, Ethereum must shift from the outdated ETH-alignment paradigm to an Ethereum-owned model, ensuring that critical infrastructure is unified under a single banner: $ETH. This transition will strengthen ETH’s core position and restore market confidence in Ethereum’s strategic direction.

Best Strategies for L2 and Ethereum: Venture Capital Partner’s Recommendations

In a May 9th article, Momir Amidzic further outlined what he believes is the best course of action for Ethereum and L2s:

Ethereum’s Best Strategy Handbook:

• Own critical infrastructure: For L2, acquire existing or develop new general solutions (Ethereum R1) to tie value commitments to ETH. While specialized rollups may scale, innovate, and attract institutions, Ethereum must control general L2 activities.
• Enforce interoperability standards to address liquidity fragmentation, proactively resolving it before market forces do. Market-driven solutions will lead to 2-3 dominant L2s that leverage the base layer, controlling ecosystems and asset issuance. Interoperability ensures long-term value for L1.

L2’s Best Strategy Handbook:

Main L2s (Base, Arbitrum):

• Bring liquidity into L2 from L1 to achieve network effects and ecosystem dominance, competing with Solana’s integration approach.
• Ignore broader interoperability standards, focusing on standards within their own ecosystem.
• Actively bring institutions onto their L2 (regardless of Ethereum’s strategy, restricted to current L2).

Less Dominant L2s:

• Support broader interoperability standards to weaken dominant L2’s moat.
• Actively bring institutions to specialized L2s.

Risk Warning

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