Recently, I came across an important analysis about ETH, and the short-selling firm Culper Research released a highly impactful report. They believe that after Ethereum’s network upgrade at the end of last year, token economics have encountered serious problems.

The core logic is actually not complicated. After the upgrade, the Ethereum network is filled with surplus block space, which leads to a sharp drop in transaction fees. I looked at the data—fee declines are roughly around 90%. This sounds very positive, but the issue is that a large portion of validators’ income comes from these fees. When fees fall, staking rewards also decline, creating a negative feedback loop.

More interestingly, Culper points out that this could gradually sap validators’ motivation, which in turn could threaten network security. Some people have tried to argue that ETH’s fundamentals are improving by increasing transaction volume and active addresses, but Culper dismisses this claim. They believe that much of the surge in activity is due to address poisoning attacks—i.e., scammers send small transactions to trick users into copying malicious wallet addresses.

Another detail worth noting is that ETH co-founder Vitalik has already sold nearly 20,000 Ether this year. Based on the current price of 2.22K, this sell-off amount is quite substantial. In its report, Culper states bluntly: Vitalik is selling, and some bullish participants about ETH’s new situation apparently haven’t reacted yet.

The report’s final conclusion is quite sharp. They say that, by working backward from the logic about practicality put forward by a certain crypto industry leader, if practicality hasn’t truly improved, then Ethereum is now in a death spiral. This is exactly what they believe is happening.

Worth paying attention to is that a large ETH holding firm has accumulated approximately 4.4 million ETH since last July as part of its treasury strategy. Because ETH’s price has fallen from its peak, these holdings are now sitting on an unrealized loss of about $7.4 billion. This is indeed a considerable amount of pressure for the holders.

Overall, this short-selling report’s angle on ETH is definitely worth deeper thought. Whether you’re bullish or bearish, understanding these potential risks can help you judge the market. There has been no shortage of ETH news recently, but this discussion about token economics may be more worth focusing on than price fluctuations themselves.