4D Explains Why ETH Will Finally Win the Store of Value War
Four reasons why Ethereum will finally win the store of value battle!
Edit: Southwind
Edit: Southwind
Thanks to Justin Drake for inspiring many of the ideas in this article and for reading drafts of this article.
network effectnetwork effectMaking it unlikely that another cryptocurrency will replace it.
As of September 2020, Bitcoin is the only cryptocurrency I hold. Its TAM (total available market) as a store of value was once so huge that it didn't make much sense to allocate capital anywhere else. The broad store of value market could be as high as $400 trillion, and it once struck me that Bitcoin is extremely likely to receive a large percentage of the "money premium" from:
Gold ($10 trillion)
Bonds ($100 trillion)
Equities ($30 trillion)
Real estate ($200 trillion)
Broad money ($100 trillion)
Art, wine, collectibles ($20 trillion)
I used to think, what could compete with this advantage? Also, most other cryptocurrencies are scams, and the few legitimate projects don't seem to have found product-market fit yet.
Then, at the urging of a friend, I reluctantly started buying some ETH. Don't get me wrong, smart contracts and decentralized applications (Dapps) are cool. But at the time it seemed to me that Bitcoin would win the store of value use case, which was the expected outcome, the ultimate reward. I was also not sure how Ethereum's native asset (ETH) would grow in value.
A few months ago, this view of mine began to change. As almost anyone in the crypto space can attest,Once you own something, you pay more attention to it.(Ethereum) Two developments caught my attention: 1)Ethereum Moves to Proof of Stake (PoS)；2) Changes in the agreement's monetary policy. I quickly realized that these changes would have a huge impact on the monetary properties of ETH, possibly even making it a better store of value than BTC.
Of course, I was skeptical at first. After all, Bitcoin already has such a huge lead. It’s a household name, it’s the safest in terms of network computing power, and large institutions like Tesla, MicroStrategy, and MassMutual have started adopting it as a reserve asset.Can Ethereum Really Catch Up?
in my opinion,
in my opinion,Ethereum will win the store of value war for four main reasons:
more scarce
safer
actual income
actual income
I realize that such a suggestion might be considered blasphemous to Bitcoin maximalists. I support these maximalists in many ways, such as the need for an entirely new asset that allows people to preserve their wealth over time. However, I'm not that dogmatic about how to achieve this. I end up backing the asset I think is the most likely. To borrow the words of Paul Tudor Jones,first level title
secondary title
1. Store of value
In my previous article "Why Bitcoin Makes Sense" [1], I wrote a lot about what constitutes a good store of value, so I won't spend too much time discussing definitions here .
The basic premise is that,Money is simply the technology that allows our wealth today to be spent tomorrow.Therefore, over time,The "best" currency brings the greatest purchasing power to its holders.Several factors affect the suitability of a monetary commodity as a store of value, but the most important factor is supply growth or scarcity.
scarcityscarcity. The annual growth rate of gold supply has historically hovered around 2%. Only silver has been able to grow at 5-10% per annum and it is currently around 20%. The extremely low growth rate of supply allows gold to retain its purchasing power over time better than anything else, and the world finally recognizes gold as a store of value.
secondary title
2. Monetary Policy of Ethereum & EIP-1559
The current annual network issuance (ie inflation rate) of Ethereum is about 4.5%, each block is 2 ETH, and each uncle block (plus fees) rewards miners with an additional 1.75 ETH.Ethereum has no fixed supply, because a fixed supply also implies a fixed network security budget. Rather than arbitrarily fixing Ethereum's security, Ethereum's monetary policy is best described as "Minimum issuance to ensure network security”。
Bitcoiners (Bitcoin supporters) hate this ambiguity because they believe that the bottom layer of the financial system should be stable. The development of Bitcoin is deliberately cautious and slow, and the total number of Bitcoin issued will not exceed 21 million.
But the Ethereum community believes in this sacrifice of short-term (issuance) stability for long-term network security, and the fact is that Ethereum does have a history of reducing issuance to estimated minimum levels. also,Moving to PoS will drastically reduce ETH issuance while maintaining the same level of network security. I'll elaborate on this later, but Vitalik has an excellent article on his blog [2] explaining how PoS can provide more security for the same cost.
According to the current Eth 2.0 specification, as part of PoS, the issuance rate of Ethereum will be greatly reduced.New ETH issuance will be issued by validators who have pledged ETH by processing transactions and reaching consensus on the state of the network, instead of handing it over to the miners, and there will be afloating ratio. The current specification will produce the followingAnnual interest rate and inflation rate based on the total network ETH pledge：
Basically, we can expect that after the PoS transition, the annual network issuance (i.e. inflation rate)Will drop from ~4.5% today to less than 1%. The chart below highlights this huge drop:
But this (inflation rate) is still higher than bitcoin, which is capped at 21 million bitcoins and has a long-term inflation rate of 0%. So, how exactly will Ethereum become more scarce? Well, there's more. With the Ethereum Improvement ProposalEIP-1559 Ethereum has begun to address many of the concerns about its monetary policy with the release of a proposal dubbed the "Ethereum's Scarcity Engine"or"Burning Mechanism of ETH”。
EIP-1559 will be implemented this July as part of ethereum's upcoming London hard fork. Digging into the details of this proposal is beyond the scope of this article, but the key aspects to note are that,In addition to improving the user experience of Ethereum gas fees, EIP-1559 will burn (destroy) a portion of ETH transaction fees. This permanently removes a portion of the ETH supply from circulation and reduces the daily net issuance of ETH.
An analysis of network transactions last year showed that EIP-1559 will burn nearly 1 million ETH in 365 days, which is equivalent to almost 1% of the entire network circulation. Many expect this number to increase over time as demand for Ethereum transactions grows. therefore,When this is combined with the lower issuance rate (less than 1%) brought about by PoS, Ethereum will actually have a deflationary monetary policy。
This has led to the recent emergence of the Ethereum community"ultrasound money"(Super Sound Money) This new meme (meme), which was created by Ethereum researcher Justin Drake. The term is a bit silly, but Drake's point is that if bitcoin is "sound money" because its capped supply of 21 million makes it "sound money", then cryptocurrencies with a decreasing total supply should be even better, hence the "ultrasound money "This word.
In the long run, Ethereum will be the scarcer asset. However, I may be more bullish on the short term. With the removal of PoW, the issuance of ETH will drop by about 90%. It is estimated that the pair (Ethereum)miners selling pressuresecondary title
3. Stock-to-Flow Ratio & Migration to PoS
To quantify Bitcoin's scarcity and use it to model Bitcoin's value, the best attempt comes from PlanB's stock-to-flow model [3]. Essentially, PlanB argues that scarcity (defined as supply growth rate) directly drives value, and that the scarcer an asset (i.e., the lower the supply growth rate), the more valuable it is. Here’s a chart he created to prove his point (where “SF” stands for “stock-to-flow” and is calculated inversely to supply growth rate):
Note: SF = Stock (stock) / Flow (flow); Supply Growth (supply growth rate) = Flow (flow) / Stock (stock). The inventory (stock) of an asset refers to the total amount of the asset currently circulating in the market; the flow (flow) refers to the amount of the asset that is newly circulated each year.
As we can see,
As we can see,Based on the model, Bitcoin's value jumps big every four years. This is because the block reward paid to Bitcoin miners is halved every 210,000 blocks (approximately every 4 years. Since the block reward is the only way to mint new Bitcoins, theBitcoin's Supply Growth Halves Every Four Years。
As PlanB clarifies (and quantifies) in his article, the decline in Bitcoin supply growth (i.e. the halving) is highly correlated with the surge in Bitcoin price. This could be caused byThe halving directly reduces the selling pressure of miners by half. Because Bitcoin uses a resource-intensive PoW consensus mechanism,Miners must sell bitcoins to pay for their hardware and electricity costsevery dayevery day900 BTC. This means that minersPer yearThe reduced BTC sold is equivalent to about 1.6% of Bitcoin's market capitalization (approximately $18 billion at today's prices). Under such a large supply shock (drop), we would naturally see BTC prices skyrocket until a new equilibrium level based on this reduced inflation rate is achieved.
Ethereum is also currently using the PoW consensus mechanism. But when it fully transitions to PoS, the current ~4.5% of annual ETH issuance will drop to less than 1%. This is equivalent toPer yearEthereum miners have sold more than about 3.5% of ETH's market capitalization (over $15 billion at today's prices) less. Also, I expect less selling pressure as block rewards will be distributed to stakers (validators) who are not forced to sell (ETH) because hardware and electricity costs are very low. but,To be fair, most stakers will still have to sell some of their ETH to pay income tax on rewards, so the market supply of new ETH will not go to zero。
scarcityscarcitysafetysafetyis also a crucial factor. Just like gold cannot rot, corrode, or undergo other types of deterioration, cryptocurrencies must pass through properincentive designfirst level title
02. Safer
Holding gold, you don't have to worry about security issues. From unforgeability to non-double spendability, the laws of physics apply to it. However, in the case of cryptocurrencies, you have to constantly incur costs (i.e. block rewards paid to miners/validators) to secure the network.
In the case of the Bitcoin network, a new block is created every 10 minutes. Each block containsNewly minted BTC(Right now"block subsidytransaction feetransaction feeblock rewardblock reward". According to Bitcoin's hard-coded monetary policy, the amount of newly minted BTC per block will decrease over time (halving every 4 years), and finally reach 0% in 2140. When this happens occurs, i.e. when no new bitcoins are issued, the only compensation to miners will be transaction fees.
Many Bitcoiners (Bitcoin supporters) think this will not be a problem, because when the block subsidy is exhausted, the dollar value of transaction fees will be high, so the security expenditure (of the Bitcoin network) will be sufficient to keep the network safe. bitcoin supporterDan HeldIn his article "Bitcoin's Security is Fine" [4] he writes:
“My guess is that in current dollar terms, a few hundreds of billions of dollars should be enough security budget, because it is very difficult for a government to justify this kind of behavior by wasting so much money just to attack the bitcoin blockchain. Justified. They also have to publicly respond to attacks like this because their citizens (taxpayers), businesses, and banks are going to invest in Bitcoin.”
In that article he goes on to address some oft-raised concerns about relying solely on transaction fees for network security. I agree with many of Held's points, and understand why Satoshi Nakamoto designed Bitcoin the way he did. Due to the PoW mechanism used, there is always a tradeoff between inflation (block subsidy) and security. Bitcoin has made specific trade-offs, and it will continue to pay less and less fees to its consensus engine (i.e. lowering the block subsidy) in order to maintain scarcity and limit the number of bitcoins to 21 million.
However, I disagree with Held that such dollar-denominated security spending matters, and support Vitalik Buterin's view in a recent reddit post[5]:
“The security needs of a thing must be proportional to its size, because as a thing gets bigger, its enemies get bigger and more motivated. If BTC (the market cap) is 100 times what it is today , then the value (cost) used to destroy it would increase by a factor of 100, and the attackers who would destroy it would be larger and more formidable. This is why all countries have similar military size as a percentage of their GDP. Therefore , actuallyCost of attack divided by market capitalization is the correct number to measure, PoW without (eventually) issuing (new coins) does not look so good in the long run. "
So let's look at Held's most bullish scenario, which is that Bitcoin "survives, thrives, and continues to grow exponentially in market share, as it has done for the past 10 years." In this hypothetical scenario, Bitcoin has a market capitalization of $100 trillion in 2140, and transaction demand for Bitcoin block space generates $365 billion in annual transaction fee revenue for miners (this is Security spending for the Bitcoin network at that time). See below:
Is $365 Billion In Security Spending Really Enough To Protect The Bitcoin Network From Attacks? Maybe. I'm really not sure and don't know what the world will look like in 2140.But I'm sure we can do better. In the above hypothetical situation, Bitcoin's PoW consensus mechanism will make Bitcoin's value-to-security ratio (value-to-security ratio, that is, the ratio of Bitcoin's market value to annual security expenditure) approximately273 to 1. Under the Ethereum-based PoS consensus mechanism, we can get its value and security ratio of about10 to 1. If the market capitalization of Ethereum matches Held's prediction of Bitcoin's market capitalization, the cost of launching a 51% attack on the Ethereum network will be equivalent to about $10 trillion, which is more expensive than the $365 billion cost of Bitcoin predicted by Held.more than 27 times higher. And the only assumption in it is that about 10% of ETH is pledged, which seems reasonable; at the same time, Held's prediction assumes a 500% increase in Bitcoin block size, a 40% increase in efficiency, and users' interest in Bitcoin. Block space has a huge transaction demand.
In addition to a much lower value/safety ratio(Note: The lower the value/safety ratio, the higher the attack cost),Ethereum has one more major advantage in how it responds to attacks. After suffering a 51% attack, the only option for the Bitcoin network was to move from the current Double SHA-256 ASICs to a new PoW system. This new system will have to be based on commodity mining hardware such as GPUs or CPUs, as there is not enough time to manufacture hardware for another ASIC PoW system. Then the attacker can only perform the same 51% attack on normal hardware. Vitalik calls this a "nest attack"(spawn camping attack), that is, a coalition of miners who initiate a 51% attack will attack continuously, making the chain useless.As far as PoW systems are concerned, there is no way to destroy (or punish) an attacker's mining power。
Ethereum (and PoS more generally) are less vulnerable to this attack. This is becauseEthereum network can "slash" or punish attackers. If an attacker does something bad, the network will punish the attacker by forfeiting their staked ETH. This is equivalent to letting Bitcoin destroy the attacker's mining equipment, which is obviously impossible for the protocol.
Ethereum actually hasTwo slashing mechanisms. The first can be called "Layer 1" slashing, which is triggered if you (the validator) do something clearly wrong in the protocol (such as submitting two conflicting proofs), in this case ,The Ethereum network will automatically forfeit at least one-third of your ETH pledge. This will deal with most potential attacks and redistribute ETH from dishonest nodes to honest nodes, giving the system somewhatanti-fragility. If you look at it in terms of what is called an iterated game in game theory,Every attack on the Ethereum system makes it stronger。
Suppose the attacker wants to attack again. He has to get more ETH, attack again, and get slashed again. After each attack, the amount of ETH in circulation decreases, soIn fact, there is an upper limit to the number of times the system can be attacked. For example, there are currently 100 million ETH in total, 10% of which are pledged. For each attack, the attacker will have to buy at least 10 million ETH, and each time he is slashed, he will have to go and reacquire another 10 million ETH. In the worst case, the attacker can only attack the system 9 times. also,The cost of each attack will be higher and higher, as the price of ETH on the open market will likely rise as the supply falls.
Likewise, this antifragility also exists at the level of a single game. If you want to attack the Ethereum network, you have to acquire 10 million ETH (using the simplified numbers from the example above). Due to a simple supply and demand situation, the more ETH you have to buy, the more expensive ETH becomes as there are fewer ETHs available for sale, creating diseconomies of scale, such as your second Buying 1% of the ETH supply for the first time costs more than your first purchase because there is less ETH available to sell after your first purchase of 1% of the ETH supply.
To allay the fear of a miner or pool getting 51% of the hashrate, a common argument (hypothesis) is: even if they got 51% of the hashrate, why would they attack? After all, attacking the network would destroy the "golden goose that lays eggs", which is not in their interest.But in reality, we cannot assume that, this argument assumes not only rationality but also the absence of outside incentives. The whole point of having a high security level is thatPrevent attackers with external incentives from breaking the chain. This is why Vitalik's way of thinking about PoS security is "If they (the attacker) have X billion dollars, how many times can they break the chain before all their funds are forfeited?" This is not an assumption of rationality, but just assumedMalicious actors have limited financial resources。
Perhaps the best argument I've heard in favor of PoW security is that its property being driven by physical hardware (mining rigs) adds resistance to well-funded attackers: you need to wait a year for that hardware to Being created, this process must involve many people, and you have a high risk of being discovered during this process (note: that is, the process of gradually increasing your computing power). This is the real advantage of PoW. Having said that, physical hardware also has a key disadvantage: it is difficult to mine at scale without being detected, and PoS is more censorship resistant.
In terms of security, participating in Ethereum staking does not come with any "footprint", which is a huge advantage: to become an Ethereum validator, all you need is ETH, a Raspberry Pi, an SSD, and the Internet connect. This is in stark contrast to Bitcoin, where becoming a miner comes with a large "footprint": the miner consumes a hugeenergyand use hugestorehouseto store mining equipment. Such a “footprint” makes it relatively easy for governments to detect and shut down mining operations. And in the case of Ethereum, you (the validator) can be anywhere in the world (maybe after passing through the Tor network, you can even hide your IP address). Even if a country were able to find and confiscate your physical Ethereum-verifying devices, those devices are not storing your staked ETH: ETH exists only in the digital world and can only be confiscated by getting the owner to hand over their private keys.
People sometimes forget that when Satoshi Nakamoto created Bitcoin more than a decade ago, it was the world's first successful attempt to create digital scarcity and incentive design for a PoW consensus system. While the pseudonym "Satoshi Nakamoto" is clever, this person (or team) is actually human and it is impossible to reasonably anticipate all of the potential problems arising from Bitcoin's incentive design. And since then, more than 12 years of research and development in the field of blockchain in terms of network security and scalability have taken place.
first level title
03. Organic demand
In 1944, the Bretton Woods Agreement laid the groundwork for a near-global US lock-in of the international monetary system. However, just a decade later, the Bretton Woods system began to unravel. The US started running large fiscal deficits and modestly rising inflation, first with domestic programs in the late 1960s (after WWII the US was boosting its own economy) and then with the Vietnam War. Soon, U.S. gold reserves began to dwindle as other countries began to doubt the backing of the dollar and exchanged dollars for gold. The continued dwindling of gold reserves eventually forced Richard Nixon to end the dollar's peg to gold in 1971.
After the collapse of the Bretton Woods system, every currency was legal tender. This is the first time in human history that all currencies in the world have been converted into paper money without any backing. These currencies have little value in themselves. They are valuable because governments declare them valuable and enforce their use as a medium of exchange and unit of account by making all taxes payable only in that currency, or by enacting other laws to Add barriers to use (or in some cases prohibit entirely) other mediums of exchange and units of account.
Outside of the US, however, there is still little reason for foreign businesses and governments to accept (dollar) banknotes that can be printed endlessly and have no solid backing. But it turns out that the U.S.petrodollar systemCreates a constant international demand for dollars across countries, thereby forcing global adoption of the dollar.
In 1974, the United States and Saudi Arabia reached an agreement. Saudi Arabia (and other OPEC members) willonly sell oil in dollars, in exchange for U.S. protection and cooperation. For example, even if Germany wants to buy oil from Saudi Arabia, they can only buy it in dollars. From then on, any country that wanted oil needed to pay for it in dollars. As a result, non-oil-producing countries began selling many of their exports in dollars so they could get the dollars they needed to buy oil from oil-producing countries. All of these countries hold excess dollars in foreign exchange reserves.
This system has been strengthened over time. As Lyn Alden writes in her excellent article "The Fraying of The US Global Currency Reserve System"[6]:
“In the beginning, countries needed dollars to get their oil. Decades later, with so much international financing done in dollars, countries now need dollars to service their dollar-denominated debt. So,The dollar is backed by oil and dollar-denominated debt, which is a very powerful self-reinforcing network effect. Importantly,Much of this debt is not owed to the US (albeit denominated in dollars), but to other countries. For example, China makes many dollar-based loans to developing countries, as do Europe and Japan. "
It is this "self-reinforcing network effect" that causes everyone in the world to accept scrap paper issued by the US government in exchange for tangible goods and services. This is absolutely the fundamental reason why the dollar has become the global reserve asset. Why is this important? I think,A similar system -- and a virtuous cycle -- is emerging around the Ethereum network。
Over the past decade, the demand side of most crypto networks has beenspeculationdominated by. This is understandable. Speculation finances the construction of the supply side (infrastructure, applications, etc.) of these networks.but this is changing. You need to use ETH to do things on the Ethereum network, and people are doing a lot of things on this network: they buy domains, trade tokens, borrow money, issue bonds, use prediction markets, make payments, buy insurance, buy art, games , buy virtual land in the Metaverse, race horses, and more.All of these things require the use of ETH to pay transaction fees。
As applications built on top of Ethereum become more sophisticated and intuitive to users over time, demand for Ethereum will grow. 94 of the top 100 crypto projects are built on Ethereum, and more than 3,000 Dapps and 200,000 ERC-20 tokens run on Ethereum. The total transaction volume on Ethereum is reaching new all-time highs every day, and the average transaction value on Ethereum is more than twice that of Bitcoin.
Some of these numbers are truly shocking. (At the time of writing) more than $80 billion in ETH is locked in DeFi applications, up from $16 billion in January. Decentralized exchanges (DEXs) like Uniswap and Sushiswap have traded $432 billion on Ethereum over the past 12 months as these automated market makers (AMMs) make token trading easier than ever easier. The stablecoin supply on Ethereum has grown from $19.5 billion in January to over $48 billion today.
Above: Growth in supply of various stablecoins on Ethereum.
Ethereum is not only the settlement layer for almost all leading Dapps, but also for almost the entire digital dollar (i.e. dollar-pegged stablecoin) ecosystem. Even traditional financial services companies like Visa will allow USDC to be used for transaction settlement on Ethereum, showing thatStablecoins are now well beyond the use cases of traditional cryptocurrencies. Just a few weeks ago, the European Union’s investment arm issued its first two-year digital note worth 100 million euros ($121 million) using ethereum.
In addition, the sales of NFTs (non-fungible tokens) on Ethereum have exceeded 600 million US dollars, of which 13 NFTs have sold for more than 1 million US dollars.NFT use cases are exploding。
Likewise, if you want to interact with the Ethereum network in any of the above use cases, you must pay the miners/validators who process your transactions. Ethereum is essentially a decentralized computer, and computing power costs money. These charges are called "Gas" and bear an uncanny resemblance to oil.
The more useful applications built on Ethereum, the greater the demand for ETH will be. It is estimated that DeFi's TAM (Total Effective Market) reaches$2.7 trillion(2%-3% of global GDP). Knowing this, it's easy to see aHow a petrodollar-like system will evolve around the Ethereum network. Let's quote Lyn Alden above, and modify it:
At first, everyoneRequires ETH, so they can use theGlobal Decentralized Computer. Decades later, with so much international financing toETHcarried out, now people needETHto repayDebt denominated in ETH. Thus, ETH is backed by both computational demand and ETH-denominated debt, a very powerful self-reinforcing network effect.
It might seem far-fetched to compare the demand for ETH to the demand for oil, but would it still be far-fetched if the world's financial infrastructure were all on Ethereum? It seems increasingly likely to me that ETH will benefit from this self-reinforcing network effect similar to what makes the US dollar the global reserve currency.
Overall, Ethereum mimics Bitcoin in many ways, but by creating a virtual decentralized computer,Greatly expands potential use cases, providing a substantial improvement.These use cases provide an organic, sustainable and growing demand for Ethereum block space. As these use cases flourish and become more widely adopted, the demand will only grow.
Since the "best" currency brings the greatest purchasing power to its holders,first level title。
04. Actual benefits
Wall Street titan George Soros may become the greatest foreign exchange trader of all time. In his book, The Alchemy of Finance, he reveals a lot about his decision-making process. The third chapter is "Reflexivity in the Currency Market" (Reflexivity in the Currency Market), which describes the vicious circle and the virtuous circle of the currency market. In that chapter, Soros argues that there are a number of complementary factors in traditional money markets that create cycles characterized by large swings in exchange rates, interest rates, inflation, and/or levels of economic activity. This chapter is very technical, but let's focus onspeculative capitalKey drivers of (speculative capital):rising exchange rate(exchange rate) andinterest rate。
We focus on speculative capital because it is one of the three major drivers (fundamentals) of exchange rate movements, the other two being trade and non-speculative capital flows. In fact, the "fundamentals" (the "more scarce" and "organic demand" we discussed in the previous chapters are also the fundamentals of ETH) are also influenced by market participants' expectations for the futureexchange rate expectations(Note: that is, the two influence each other). This is just one example of Soros’ philosophy of “reflexivity,” which is easily seen in Ethereum:Speculation drives many investors and developers to invest their time and money in building network infrastructure and applications on top of it. In fact, speculative capital is critical to fundamentals.
"Speculative capital seeks the highest total return. There are three factors that (affect) total return:Interest rate differentials, exchange rate differentials and local currency capital appreciation. Since the third factor varies from case to case, we can come up with the following general rules:Speculative capital is attracted by rising exchange rates and interest rates. Among these two factors,exchange rate is the most important. It doesn't take much for a currency's exchange rate to fall for the total return to be negative. Likewise, when an appreciating currency also has an interest rate advantage, the total return exceeds anything that holders of financial assets would expect under normal circumstances. "
Let's break it down. The exchange rate (conversion rate) is the most important factor. This makes sense. If I stake ETH at 8.5% and the price drops by 10%, I lose money. soWe really shouldn't be paying attention to interest rates until we can be sure that the exchange rate will go up. This is why most altcoins with annual returns of over 1000% are bad bets, while bitcoin has been such a great bet over the past 12 years. This is why in the first three sections of this article, I will focus on the key factors driving the price of ETH.
Let's assume that Bitcoin and Ethereum share equally compelling monetary properties, and the market expects both assets to appreciate 100% in price this year. In this case, a rational investor should not have a strong preference for one of these two assets. However, if you ask the same investor to get 6% interest on Coinbase by staking ETH (or ask him to run a validator node himself to get 8%+ interest), things start to change. While a 100% expected return on (BTC) and a 106% return on (ETH) don’t appear to be much different,But in the long run it makes a huge difference. This is especially true as cryptocurrencies become less speculative and markets become more efficient, with expected asset appreciation dropping from 100% to more reasonable levels.Over time, this additional 6% staking yield could account for an increasing proportion of ETH's expected total return。
By staking ETH, you can obtain an additional risk-free staking return of more than 6%, which willIncentivize some investors to move funds from Bitcoin to Ethereum. This is how the market works. For example, since 2008, foreign investor inflows into the United States have amounted to approximately $8.5 trillion, with most of this increase beginning in 2011 as investors sought higher returns in the form of arbitrage (US Bond yields are higher than zero or negative yields in Europe and Japan).Speculative capital will naturally flow to assets with the highest expected real rate of return。
A virtuous cycle for Ethereum will become a vicious cycle for Bitcoin. As more and more speculative capital flows from Bitcoin to Ethereum in search of higher real yields, expectations for the exchange rate between the two currencies will also change.This won't happen overnight, but over time, I expect the market to expect more price appreciation for Ethereum than Bitcoin. When that happens, Bitcoin could be in dire straits. As Soros wrote:
"The longer the virtuous cycle lasts, the more attractive it is to hold financial assets in appreciating currencies, and the more important exchange rates become in calculating total returns. Those who tend to fight the trend are gradually weeded out, and eventually onlytrend followerSurvive as an active participant. As speculation grew in importance, other factors lost their influence. The speculator is guided only by the market itself, and the market is dominated by trend followers. These considerations explain how the dollar can continue to appreciate in the face of a widening trade deficit. "
I love Bitcoin and everything it stands for, but this is looking more and more likely. I wonder what would happen if the market capitalization of Ethereum surpassed that of Bitcoin for a period of time. If Bitcoin isn't the most liquid asset in cryptocurrency, what is it?
Another aspect that I won't spend too much time discussing is that for most large ETH holders, (using ETH for)Staking and Yield Farming in DeFi(liquidity mining)Sufficient to provide passive daily incomefirst level title
05. Risks & Concerns
secondary title
1. Scalability challenges
Currently, transaction speed suffers when the (Ethereum) network is busy, making certain types of Dapps a poor user experience. As the network gets busier, gas prices rise as transaction senders bid against each other. This makes using Ethereum very expensive. A few months ago, the gas price for a simple transaction was as high as $100-$200, butPrice drops as Berlin upgrades, coincides with ETH price reaching new all-time high。
This may be the most critical risk for Ethereum becauseIt opens doors of opportunity for competing projects, such as Solana is doing some interesting things in this area. But ultimately, Ethereum has many options to improve the speed, efficiency, and scalability of the network.Layer 2 solutions and sharding are probably the most notablesecondary title
2. Other Layer 1 solutions
I can’t help but wonder if Ethereum will eventually be replaced by a cryptocurrency that learns from Ethereum’s experiments and improves upon it in some fundamental ways. There are many "Ethereum killers" trying to exploit Ethereum's weaknesses to become the boss, including Polkadot, Solana, Cosmos, Cardano, etc.
As Peter Thiel (billionaire venture capitalist) explained in his Stanford Entrepreneurship Lecture, “People often talk about ‘first mover advantage.’ But focusing on that can be problematic; you can get a head start and then slowly disappear. It’s more important to be a latecomer than a first mover. You have to be persistent.”
Two years before Amazon, there was Book Stacks Unlimited (an online bookstore). Four years before Google, Yahoo! created the original global search engine. Before Facebook, MySpace dominated social media. The list goes on. In the history of technology, there are countless examples: the first mover became interested in a concept or product, and then the latecomer took advantage of it and improved the existing product.
But Ethereum has strong protections against this risk of obsolescence. It has many of the same network effects as Bitcoin, and it's probably just as important that the Ethereum community and protocol are innovation-friendly. "Bitcoin will absorb all innovation" is a meme that never materializes. In fact, Ethereum has the opportunity to do this largely because they have "functional escape velocity" at the EVM level.
secondary title
3. Monetary Policy Stability
Bitcoin may be the most immutable encryption system ever created. Bitcoiners believe that this is where Bitcoin's true value lies. It's a reliable neutral system based on code (not humans) that you can rely on for decades.
Ethereum’s human-managed hard forks and relatively centralized development teams pose risks. How can we be confident that Ethereum’s monetary policy won’t change again? How can we ensure that one adverse (protocol) change does not occur? Even if the Ethereum community agrees that it will never change, and respects that, it will always be 12 years behind the trust that Bitcoin has built.
secondary title
4. Increased complexity
secondary title
5. Fair start
Some argue that Bitcoin "has a monopoly on fairness" because when it launched, no one knew what it would become. This, they argue, is something that can no longer be replicated and gives Bitcoin some of its best attributes. Anything that has a pre-sale cannot be considered fair. In addition, Bitcoin's PoW system isDistribution of BTCThis is an excellent enforcement feature, since miners must sell bitcoins to pay for their hardware and electricity costs. PoS does not have this property. Ethereum stakers will only accumulate more ETH and will not be forced to sell ETH because PoS is very efficient with very low hardware and electricity costs. Therefore, Bitcoiners believe that PoS will establish a permanent plutocracy system.
However, as stated in the above question, this is a misunderstanding becauseincome tax(approximately 50% in many jurisdictions) will function as economic coercion. also,Ethereum has used the PoW system for nearly 6 years, and many Ethereum supporters believe that this has resulted in a good distribution of ETH. Furthermore, do most amorous market participants really care if the network is fair? I would say that most of them are just acting out of self-interest and buying whatever asset they think will make them the most money. Also, who gets to decide what is a fair distribution and what is not?
Editor's Note: This article only represents the original author's point of view, and the translation has been slightly abridged. For the original English text, see:
https://michaelmcguiness.com/essays/why-eth-will-win-store-of-value
