Why ETH generates value
Editor's Note: This article comes fromBlock Record (ID: BlockchainInsights), published with permission.
Editor's Note: This article comes from
Block Record (ID: BlockchainInsights)
, published with permission.
The ETH supply gate has sparked widespread debate over the past few weeks. Simply put, there are differences in the circulation of ETH among major data providers. Now this issue, although resolved, has brought a lot of controversy to the Ethereum ecosystem.
In response to Supplygate, well-known bitcoiner Anthony Pompliano discussed the issue in a podcast, while digging into Pomp’s stance on Ethereum, ETH as an asset, and the differences between the two.
While Pomp makes many valid arguments and some surprising comments, there are also a handful of misconceptions that I feel compelled to point out and respond to. So here are the arguments against Pomp's stance on ETH.
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Ethereum will succeed, but ETH will not accumulate any value
In short, Pomp's argument puts Ethereum (the network) and ETH (the asset) on a par with Ripple (the company) and XRP (the asset).
Ripple is a software company for banks. They sell financial software to banks, and companies print money—both paper and token. Given Ripple's success, everyone would love to be an investor in the software company Ripple. The problem is that retail investors generally believe that the adoption of Ripple's software and the company's success have driven the value of the digital asset XRP.
According to Pomp, there is no value accumulation mechanism linking the success between Ripple and XRP.
No comment on this as I don't know enough about XRP to make a statement for or against XRP.
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Why ETH generates value
If there is demand for block space on Ethereum, there will be demand for ETH. Any transaction that utilizes Ethereum as a settlement layer must pay a fee to be settled in ETH (which is very expensive right now).
This means that whenever someone wants to lend or borrow assets from Aave, provide liquidity to Uniswap, or bet on some future event with Polymarket, they need to pay ETH in some way. Not to mention someone transacting with the $500+ million in BTC or the $130+ billion in crypto dollars circulating in the Ethereum economy. Or a developer wants to deploy a new smart contract.
In fact, that number recently reached an all-time high, as Ethereum miners earned more than $8 million in fees in a single day — more than six times more than Bitcoin in the same period.
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Transaction fees paid on Bitcoin and Ethereum. The data comes from CoinMetrics
Having said that, I admit that this correlation is not perfect. Transaction fees on Ethereum are reaching new levels, while ETH remains well below previous all-time highs.
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Ethereum price versus transaction fees paid on the network. The data comes from CoinMetrics
2) ETH as trust-minimized collateral makes ETH valuable today
Paying transaction fees with ETH is only part of the story today.
Another part comes from the explosive growth of decentralized finance (DeFi) and the need for trust-minimized collateral. Regardless of which side you are on, the core ethos and long-term goal of cryptocurrencies is trust-minimized money and finance. Separation of state and money.
No one should trust or rely on a single entity, institution or individual to obtain financial assets and services. Whether holding a non-sovereign, fixed-supply digital store of value (Bitcoin), or using decentralized financial applications, the goal of cryptocurrencies is always to minimize trust.
Many of these open protocols require users to lock up capital to access the aforementioned financial services. Want to print your own dollars? Lock assets into Maker, then print yourself some Dai (you have to pay interest).
guess what? Many of these protocols drive the need for ETH as a primary source of capital, advancing the development of these protocols.
Why do you say that? Because ETH is the trust-minimized asset on Ethereum. Any other asset on Ethereum requires the presence of some other protocol or custodian, which forces a higher level of trust than the network's native assets. Ether, as a source of capital, has a priority in the Ethereum economy.
This demand for ETH from DeFi is also evident in the data. There are now more than 4.5 million ETH locked in the Ethereum financial protocol - worth nearly $2 billion. This means roughly 1 out of every 25 ETH in circulation today is locked in DeFi.
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ETH locked in DeFi. The data comes from DeFi Pulse
At the beginning of the year, that was 1 in every 38 ETH. In 2019, that number is 1/58.
Growth is there. If this trend continues, eventually the need for ETH as trust-minimized collateral for open finance will absorb enough ETH to drive ETH's fundamental value.
What happens when that number increases from 4% to 10%? Or even 20% of all ETH?
The laws of supply and demand come into play eventually.
3) Future value proposition of Ethereum as a productive asset
Why are we talking about the value proposition of ETH today? People invest in the future.
You don't invest in Tesla because of what they are doing today. You invest in them because of what they're going to do, what they're going to be. Because the real money is made by those who see the future before anyone else.
While holders of ETH will not benefit from fees today, they will in the future. Ether represents the right to the future cash flow of Ethereum. It is a productive asset!
Equally important, Ether has the right to become the cash flow of Ethereum through both active participation (verification) and passive participation (holding). This is achieved through two mechanisms:
Yes, Ethereum 2.0 is not launched today. Actually, it will take a while. But as mentioned earlier, the real money is made by those who are willing to make this bet before anyone else. Those who take risks today will be richly rewarded in the future if Eth2 launches and succeeds.
Summarize
Summarize this connection.
If anyone believes that Ethereum will be the decentralized core infrastructure of the future, there will be demand for Ethereum block space. If there is demand for block space on Ethereum, there will be cash flow. And since ETH represents the future rights to these cash flows, its value is directly related to the success of Ethereum (the network).
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Summarize
When we tie all of this together, the investment case for ETH as an asset and the causal path for the value of ETH to increase as Ethereum grows is quite compelling.
in conclusion. If Ethereum succeeds as a network, ETH will generate value because:
