Ethereum’s modular architecture is bad for short-term token price performance but offers long-term resilience to the network and ecosystem growth, according to new research.
On November 12, venture capital firm Web3 Hack VC published research and analysis on Ethereum’s modular strategy.
“In the short term, modularization may hurt ETH prices due to lower fees and reduced token burning, but there’s more to it than that,” Hack VC managing partner Alex Pack said.
Ethereum’s future is bullish
Since 2020, Ethereum has been moving to a modular architecture, outsourcing some infrastructure components like execution and data capabilities to layer 2 networks. The concept aims to decentralize and improve the network’s scalability, but it has short-term drawbacks.
This strategy has had a negative impact on ETH prices in the short term due to lower mainnet fees, which lead to fewer token burns through EIP-1559. The study notes that lower fees mean less ETH scarcity, which puts downward pressure on prices.
Until recently, ETH has underperformed this year, while Bitcoin and rival network Solana have seen larger gains. Additionally, the researchers say the proliferation of new L2 tokens in the Ethereum ecosystem could also reduce investor interest in ETH.
However, Ethereum’s modular approach is intended to future-proof the network against technological changes, such as the rise of zk-rollups and shared security models like EigenLayer. This adaptability could help Ethereum avoid becoming obsolete, unlike one-time tech giants like AOL or Yahoo.
The researchers concluded that in the long term, Ethereum could emerge as a strong contender thanks to “investments in fostering the broader ecosystem,” which would lay the groundwork to “adapt, scale, and thrive” in the next wave of blockchain innovation.
“In an industry where success depends on network effects, Ethereum’s modular strategy could be a key enabler in maintaining its dominance among smart contract platforms. This modularity could help Ethereum sustain its growth and continue to lead the pack,” Pack concluded.
ETH Price Cools Off
ETH’s price surged this week, adding more than Solana’s entire market cap in just five days. The asset peaked at $3,424 on November 12 before falling back.
At the time of writing, ETH is trading at $3,177 after falling 2% on the day. However, prices are still 13% higher than the same time last week.
