Hack VC: Was modular a mistake? A data-driven look at Ethereum's strategy
TechFlow Selected TechFlow Selected
Hack VC: Was modular a mistake? A data-driven look at Ethereum's strategy
Ethereum's performance in this cycle has been weaker than Bitcoin and other major coins like Solana.
Navigating Web3 tides with focused insightsAuthors: Alex Pack, Alex Botte, Partners at Hack VC
Translation: Yangz, Techub News
Summary
-
Ethereum has underperformed this cycle compared to Bitcoin and other major blockchains like Solana. At least in the eyes of critics, the main culprit is Ethereum’s strategic decision toward modularization. But is that actually true?
-
In the short term, the answer is yes. We find that Ethereum’s shift toward a modular architecture has impacted ETH’s price due to lower fees and reduced token burning.
-
The picture changes when we consider Ethereum and its modular ecosystem as a whole. In 2023, the value created by Ethereum’s modular infrastructure tokens was roughly equivalent to Solana’s entire market cap—about $50 billion. However, in 2024, these modular tokens have underperformed relative to Solana. Moreover, the gains from these tokens largely benefit teams and early investors, not ETH holders.
-
From a business strategy perspective, Ethereum’s move toward modularity is a rational way to maintain dominance. Blockchain value depends on ecosystem size. While Ethereum’s market share has declined from 100% to 75% over nine years, that still represents a strong position. We compare it to Amazon Web Services (AWS), whose share fell from nearly 100% to about 35% over the same period.
-
In the long run, the greatest benefit of Ethereum’s modular approach is future-proofing the network against disruptive technological advances. Through L2s, Ethereum has successfully navigated the first major “extinction-level” event for L1s, laying a solid foundation for long-term resilience—even if with trade-offs.
What Went Wrong?
Compared to Bitcoin and Solana, Ethereum has performed poorly in this market cycle. Since 2023, Ethereum is up 121%, while Bitcoin and SOL are up 290% and 1,452%, respectively. Many explanations have been offered: irrational markets, lagging technical roadmaps, poor user experience, and declining market share to competitors like Solana. Is Ethereum destined to become the AOL or Yahoo of crypto?
The root cause of Ethereum’s underperformance lies in a deliberate strategic decision made nearly five years ago: shifting to a modular architecture and decentralizing its infrastructure roadmap.
In this article, we explore Ethereum’s modular approach through data-driven analysis to assess how this strategy has affected ETH’s short-term performance, Ethereum’s market position, and its long-term prospects.
How Radical Was Ethereum’s Shift to Modularity?
In 2020, Vitalik Buterin and the Ethereum Foundation (EF) issued a bold and controversial call: to split apart the layers of Ethereum’s infrastructure stack. Instead of handling all aspects of the platform—execution, settlement, data availability, sequencing, etc.—Ethereum would intentionally allow other projects to provide these services in a composable way. Initially, they encouraged new rollup protocols as Ethereum L2s to handle execution (see Vitalik’s 2020 piece “An Ethereum Rollup-Centric Roadmap”), and now hundreds of different infrastructure protocols compete to offer what were once considered exclusive L1 capabilities.
To grasp how radical this idea is, consider the Web2 equivalent. The closest counterpart to Ethereum is Amazon Web Services (AWS), the leading cloud infrastructure platform for building centralized applications. Imagine if, two decades ago, AWS had decided to focus only on flagship offerings like storage (S3) and compute (EC2), rather than expanding into dozens of additional services. It would have missed massive revenue opportunities and failed to lock customers into an expanding service suite. With a full product lineup, AWS could have built a “walled garden,” making it hard for users to integrate with alternative providers. And indeed, that’s exactly what happened. Today, AWS offers dozens of services, making customer lock-in strong and driving explosive revenue growth—from early hundreds of millions to nearly $100 billion annually.
Yet in terms of market share, AWS has steadily lost ground over time. Competitors like Microsoft Azure and Google Cloud have steadily grown, reducing AWS’s share from 100% to around 35% today.
What if AWS had taken a different path? What if it acknowledged that other teams might build certain services better, opened its APIs, prioritized composability, and encouraged interoperability instead of walled gardens? AWS could have enabled a developer and startup ecosystem to build complementary infrastructure, resulting in more specialized, higher-quality tools, a more developer-friendly environment, and a stronger overall ecosystem. This wouldn’t have boosted AWS revenue in the short term, but it could have given AWS a larger market share and a more vibrant ecosystem than its rivals.
Still, this likely wouldn’t have made sense for Amazon. As a public company, it must optimize for revenue, not “ecosystem vibrancy.” For Amazon, unbundling and modularization may not be rational. But for Ethereum—a decentralized protocol, not a corporation—it might be.
Decentralized Protocols, Not Companies
Like companies, decentralized protocols generate usage fees—what you might call “revenue.” But does that mean a protocol’s value should be based solely on that revenue? No, not necessarily.
In Web3, a protocol’s value depends on overall activity on its platform—on having the most active builder and user ecosystem. Below is our analysis of the relationship between token prices and Metcalfe values (a metric measuring the number of users on a network) for Bitcoin, Ethereum, and Solana. In all cases, token prices are highly correlated with Metcalfe value, a relationship that has held for years—and in Bitcoin’s case, over a decade.
Why does the market price these tokens so closely tied to ecosystem activity? Stocks are priced on growth and profitability. But theories about how blockchains accrue value for their tokens remain immature and lack real-world explanatory power. Therefore, valuing a network based on its strength—user count, assets, activity—is reasonable.
More specifically, token prices should reflect the network’s *future* value—just as stock prices reflect a company’s future value, not its current one. This leads to a second reason Ethereum might want modularity: treating modularization as a “future hedge,” increasing the odds that Ethereum remains dominant long-term.
In 2020, when Vitalik wrote “An Ethereum Rollup-Centric Roadmap,” Ethereum was still in version 1.0. It was the first smart contract blockchain, but it was clear that orders of magnitude (OOM) improvements in scalability, cost, and security were coming. The biggest risk for pioneers is being too slow to adapt to new technological paradigms and missing the next OOM leap. For Ethereum, this meant transitioning from PoW to PoS and evolving into a blockchain 100x more scalable. Ethereum needed to foster an ecosystem capable of scaling and achieving major technical breakthroughs—or risk becoming the Yahoo or AOL of its era.
In Web3, decentralized protocols replace companies. Ethereum believes that in the long run, nurturing a strong modular ecosystem is more valuable than controlling all infrastructure—even if it means giving up control over the infrastructure roadmap and revenue from core services.
Next, let’s examine how this modular decision plays out in the data.
Ethereum’s Modular Ecosystem and Its Impact on ETH
We analyze the impact of modularity on Ethereum across four dimensions:
-
Short-term price (negative)
-
Market cap (partially positive)
-
Market share (positive)
-
Future technology roadmap (debatable)
Fees and Price: Negative
In the short term, Ethereum’s decision has clearly impacted ETH’s price. Although ETH has risen significantly from its lows, it has underperformed Bitcoin, SOL, and even the Nasdaq Composite Index during certain periods.
This is undoubtedly due, in large part, to its modular strategy.
The first way Ethereum’s modular strategy affects ETH’s price is through lower fees. In August 2021, Ethereum launched EIP-1559, which burns excess transaction fees, thereby reducing supply. This is somewhat analogous to stock buybacks in public markets, creating upward price pressure. Indeed, it worked—for a while.
But as L2s for execution, and even alternative data availability (DA) layers like Celestia, have emerged and matured, Ethereum’s fees have declined. By relinquishing core revenue-generating services, both Ethereum’s fees and revenue have dropped—significantly impacting ETH’s price.
Over the past three years, there’s been a statistically significant +48% weekly correlation between Ethereum fees (in ETH) and ETH price. If fees drop by 1,000 ETH in a week, ETH’s price tends to fall by an average of $17.
Of course, those fees didn’t vanish—they flowed to new blockchain protocols, including L2s and DA layers. This leads to the second reason modularization may hurt ETH’s price: these new protocols mostly have their own native tokens. Previously, investors could gain exposure to all the exciting growth in the Ethereum ecosystem by buying just one infrastructure token—ETH. Now, they must choose among many different tokens (CoinMarketCap lists 15 in its “modular” category, with dozens more backed by venture capital in private markets).
This new category of modular infrastructure tokens may harm ETH’s price in two ways. First, if we treat blockchains like companies, this setup is potentially fully negative-sum: the total market cap of all “modular tokens” could cannibalize ETH’s market cap. That’s how stock markets often work—when a company splits, the old company’s market cap typically declines as the new ones rise.
But for ETH, it could be worse. Most crypto traders aren’t sophisticated investors. Faced with the need to buy dozens of tokens to capture “all the cool growth happening on Ethereum” instead of just one, they may feel overwhelmed and buy nothing at all. The mental overhead and trading costs of buying a basket of tokens instead of a single one may hurt both ETH and modular token prices.
Market Cap: Partially Positive
Another way to assess the impact of Ethereum’s modular roadmap is to look at absolute market cap growth over time. In 2023, Ethereum’s market cap grew by $128 billion. Solana’s grew by $54 billion. While Ethereum’s absolute increase was higher, Solana started from a much lower base, which explains why its price rose 919% versus ETH’s 91%.
However, the picture shifts when we include the market caps of all new “modular” tokens aligned with Ethereum’s strategy. In 2023, these tokens collectively added $51 billion in market cap—nearly matching Solana’s growth.
What does this mean? One interpretation is that Ethereum’s modular strategy enabled its ecosystem to create as much value in 2023 as Solana did on its own—not to mention the $128 billion it generated for itself. Imagine how jealous Microsoft or Apple would be—companies that spend years and billions building developer ecosystems around their products.
But 2024 tells a different story. SOL and ETH continued growing (albeit modestly), while modular blockchain market caps declined overall. This could signal that the market lost confidence in the value of Ethereum’s modular strategy in 2024, or it could reflect token unlock pressures—or simply the psychological burden of buying a basket of tokens to go long on Ethereum’s infrastructure, compared to buying a single token to go long on Solana’s tech stack.
Now, let’s shift from price movements and market signals to fundamentals. Maybe the 2024 market is wrong, and 2023 got it right. Has Ethereum’s modular strategy helped or hindered its position as the leading blockchain ecosystem?
Ethereum’s Ecosystem and ETH’s Dominance: Positive
On fundamental metrics and usage, infrastructure aligned with Ethereum has performed exceptionally well. Among peers, Ethereum and its L2s lead in total value locked (TVL) and fees—11.5x higher than Solana, with L2s alone exceeding Solana by 53%.
In terms of TVL market share, Ethereum launched in 2015 with 100%. Despite hundreds of competing L1s, Ethereum and its modular ecosystem still hold around 75% of the market.
Losing only 25 percentage points over nine years is impressive. Consider that AWS lost about 65 points over a similar timeframe, falling from 100% to ~35%.
But does ETH truly benefit from the “Ethereum ecosystem’s” dominance? Or is the broader ecosystem thriving without benefiting ETH as an asset? In fact, ETH is deeply embedded throughout the ecosystem. As Ethereum scales via L2s, so does ETH. Most L2s use ETH for gas, and ETH typically makes up at least 10x more of L2 TVL than any other token. The table below illustrates ETH’s dominance across the three largest DeFi apps on both Ethereum’s mainnet and their L2 deployments.
Technology Roadmap: Debatable
From a technical standpoint, Ethereum’s decision to modularize its L1 into independent components allows projects to specialize and optimize within their domains. As long as components remain composable, DApp developers can build using best-in-class infrastructure, ensuring efficiency and scalability.
A greater benefit of modularity is future-proofing. Imagine a groundbreaking innovation emerges—one that only protocols adopting it will survive. This has happened repeatedly in tech history: AOL collapsed when it missed the shift from dial-up to broadband, dropping from a $200B to $4.5B valuation. Yahoo faltered by being slow to adopt new search algorithms (like Google’s PageRank) and mobile internet, falling from $125B to $5B.
But if your tech stack is modular, as an L1 you don’t need to catch every wave—you can let your modular partners do it for you.
Has this strategy worked? Let’s examine the actual infrastructure built on Ethereum:
L2s with best-in-class scalability and execution costs. Two novel approaches have succeeded: optimistic rollups (Arbitrum, Optimism) and zero-knowledge rollups (ZKSync, Scroll, Linea, StarkNet). Plus, numerous high-throughput, low-cost L2s. Successfully fostering two distinct blockchain technologies that deliver OOM improvements in scalability is no small feat. Dozens (if not hundreds) of post-Ethereum L1s have yet to deliver a 100x improvement in scalability or cost. Thanks to these L2s, Ethereum has survived blockchain’s “first mass extinction event,” scaling to 100x higher TPS.
-
New blockchain security models. Security innovations are vital for survival—just look at how every major L1 now uses PoS instead of PoW. EigenLayer’s “shared security” model may be the next big shift. While other ecosystems have introduced shared security (e.g., Babylon on Bitcoin, Solayer on Solana), Ethereum’s EigenLayer is the pioneer.
-
New virtual machines (VMs) and programming languages. One major criticism of Ethereum is its Virtual Machine (EVM) and Solidity language. Solidity is low-abstraction, easy to code in but prone to bugs and hard to audit—one reason Ethereum-based smart contracts get hacked. For non-modular blockchains, experimenting with multiple VMs or replacing the original is nearly impossible. But Ethereum is different. A new wave of alternative VMs is emerging via L2s, letting developers use non-EVM languages while still building in the Ethereum ecosystem. Examples include Movement Labs adopting Meta’s Move VM (used by Sui and Aptos); zk-VMs like RiscZero, Succinct, and implementations by a16z’s research team; and teams like Eclipse bringing Rust and Solana’s VM to Ethereum.
-
New scalability approaches. Like other internet or AI infrastructures, we expect OOM improvements in scalability every few years. Even now, Solana has waited years for its next major upgrade, Firedancer, developed by Jump Trading. Meanwhile, new ultra-scalable architectures—like parallel processing from Monad, Sei, and Pharos—are emerging. These could threaten Solana if it fails to keep up. But Ethereum doesn’t face that risk—it can simply absorb these advances via new L2s. That’s exactly what new projects like MegaETH and Rise are attempting.
These modular infrastructure partners help Ethereum integrate the crypto space’s biggest technological innovations, avoid extinction, and co-evolve with competitors.
But there’s a cost. As Composability Kyle noted, modularization adds complexity to the user experience. Average users find monolithic chains like Solana easier to use, since they don’t have to deal with cross-chain transactions or interoperability issues.
Conclusion
So, what does Ethereum’s modular strategy ultimately deliver?
-
The modular ecosystem sent a strong signal in 2023: market appetite for modular infrastructure tokens aligned with Ethereum was equal to demand for Solana. But 2024 tells a different story.
-
At least in the short term, the modular strategy has hurt ETH’s price by reducing fee income.
-
But viewed as a business strategy, modularity starts to make sense. Over nine years, Ethereum’s market share declined from 100% to 75%, while AWS in Web2 fell to ~35%. In the world of decentralized protocols, ecosystem scale and token dominance matter more than fees.
-
Looking ahead, Ethereum’s modular strategy positions it well to survive OOM technological shifts that could otherwise make it the AOL or Yahoo of crypto. With L2s, Ethereum has already weathered the first “mass extinction event” for L1s.
Of course, there are trade-offs. Post-modularization, Ethereum’s composability lags behind tightly integrated monolithic chains, hurting user experience.
As for ETH’s actual price, it’s unclear when—or whether—the benefits of modularity will outweigh the loss of fees and competition from modular infrastructure tokens. Certainly, it benefits early investors and teams behind these new tokens, who capture a slice of Ethereum’s value creation. But many launch at unicorn valuations, meaning economic gains are unevenly distributed.
In the long run, Ethereum may emerge stronger by investing in a broader ecosystem. It won’t lose ground like AWS in cloud computing, nor collapse like AOL or Yahoo in the internet platform wars. Instead, it’s laying the groundwork to adapt, scale, and thrive through the next wave of blockchain innovation. In an industry driven by network effects, Ethereum’s modular strategy may be the key to maintaining dominance as the leading smart contract platform.
Join TechFlow official community to stay tuned
Telegram:https://t.me/TechFlowDaily
X (Twitter):https://x.com/TechFlowPost
X (Twitter) EN:https://x.com/BlockFlow_News
@hack_vc
