On Nov. 12, Web3 venture capital firm Hack VC released research and analysis on Ethereum’s modular strategy.

“In the short term, modularization likely hurts ETH price because of lower fees and reduced token burn, but this isn’t the whole story,” said Hack VC managing partner Alex Pack.

Ethereum’s Future is Bullish

Since 2020, Ethereum has shifted to a modular architecture, outsourcing parts of its infrastructure like execution and data availability to layer-2 networks. The notion was aimed to decentralize and enhance the scalability of the network, however, there were short-term drawbacks.

The strategy has negatively impacted the ETH price in the short term due to reduced fees on the main network, leading to less token burn via EIP-1559. Lower fees mean reduced scarcity of ETH, which puts downward pressure on its price, the research noted.

1/ ETH is underperforming BTC and SOL big time this cycle. The reason? Many think that it’s Ethereum’s choice to go modular. Was this a strategic misstep? We pulled a bunch of data and have some answers. pic.twitter.com/eAgqpLX5a2

— Alexander Pack (@alpackaP) November 12, 2024

Until recently, ETH had underperformed this year, with Bitcoin and rival network Solana seeing greater gains. Additionally, the proliferation of new L2 tokens in the Ethereum ecosystem may have also diluted investor interest in ETH, the researchers said.

Nevertheless, Ethereum’s modular approach aims to future-proof the network against technological shifts, such as the rise of zk-rollups and shared security models like EigenLayer. This adaptability could help Ethereum avoid becoming obsolete, unlike past tech giants like AOL or Yahoo.

The researchers concluded that in th