The Ethereum Narrative Is Shifting: "Triple Point Money" and Ultra-Sound Money
Edit: Southwind
Written by: Packy McCormick
Edit: Southwind
Would you be interested if I told you about a company with strong network effects, 200x annual revenue growth, plans to pay a 25% dividend, and have a perpetual share buyback program?
This is Ethereum. It's one of the most intriguing and high-profile assets in the world, but its story has been blurred by complexity and people's fear of cryptocurrencies.
Ethereum consists of so many things at the same time, they all depend on each other. The Ethereum blockchain is a world computer, the backbone of the decentralized internet (web3), and the settlement layer of web3. Its native cryptocurrency ETH is:
internet currency;
Ownership of the Ethereum network;
The most commonly used Token in a large-scale online game involving CEOs, artists, researchers, investors and the general public;
generate income;
Store of value (SoV);
Betting on more on-chain activity or the future of the Web3 network;
Because Ethereum is so many things at the same time, it is difficult to understand. This article attempts to help readers understand Ethereum. For those interested in tech enterprise, finance and strategy, it is more attractive than Bitcoin, but it comes at a price. It's harder to understand than Bitcoin, and because of that, it doesn't get the same mainstream or institutional attention as Bitcoin.
Bitcoin is easy to understand. It is digital gold, a store of value (SoV). It just stays there motionless.
This is its value prop. It is immutable and the most decentralized asset in the world. It is the OG (Old OG) and the hardest chain to attack. Based on this, your Bitcoins will not disappear overnight (though there are arguments that Bitcoin and other cryptocurrencies (including ETH) can be manipulated). It will continue to have value as long as others believe in its value. Technically, a capitalized Bitcoin refers to the Bitcoin blockchain, and a lowercased bitcoin refers to the cryptocurrency BTC, but in summary, the two are interdependent and inseparable. The Bitcoin blockchain (Bitcoin) exists to mint and track bitcoins (BTC). It's pretty good at what it does.
Ethereum is much more than just a cryptocurrency. It is a "world computer", the "value layer" of the Internet. It allows people to develop Apps and products using the "currency" written into the code. If you believe that web3 will continue to grow, then you will likely believe that over time Ethereum will become a new settlement layer for the internet. That is, all types of transactions (transactions, also translated as "transactions"), whether they occur on Ethereum or another blockchain, or even Visa, will turn to Ethereum to exchange funds and keep them safe , Records that cannot be tampered with. A year ago, I wouldn't have said that.
Until last year, much of Ethereum's value existed in a theoretical state, in the idea of what _could_ happen on a decentralized global internet. Personally, I used to think it was something more interesting, sort of like bitcoin, but with less upside and maybe higher? So after buying ETH for fun in 2017, I sold my remaining 15 ETH in June 2020 for a break even. Lack of understanding = playing a weak hand.
As you know, I'm an idiot. Even after the recent drop, the 15 ETH is worth more than $30,000. I missed a 10x upside opportunity. But to be fair, you shouldn't invest in this stuff unless you understand it, which I didn't. I'm starting to understand it now.
Between then and now, a few things happened that took me from being moderately curious about Ethereum to being very curious and very optimistic:
Explosion of use cases: DeFi, NFTs, and DAOs have become real use cases for Ethereum and have seen incredible growth over the past year.
Ultra Sound Money: With the imminent implementation of EIP-1559, Ethereum could be deflationary, removing its biggest monetary weakness.
Eth2: Ethereum is currently running a (merged) test chain that will merge with the Eth1 chain in about 6 months. At that time, the Eth1 chain will switch from PoW to PoS, and ETH holders will capture more value.
Narrative: The narrative surrounding Ethereum is gaining momentum and jumping from crypto users to mainstream adoption. Last week, U.S. investor Patrick O'Shaughnessy (saying that Ethereum is "much more interesting than Bitcoin"), ARK Investment analyst James Wang (clarifying that Ethereum's April transaction fees were "on par with AWS in 2015"), and The narratives of people like Bloomberg TV host Joe Weisenthal (whose recent interviews say a lot about being bullish on Ethereum and DeFi, such as why DeFi can attract financial professionals while Bitcoin doesn't) have been widely followed. This article is a small extra boost.
Currently, Ethereum is at a narrative turning point, which is especially important for any blockchain.
I am increasingly convinced that ETH will be one of the best assets in the next 5 years. In simple terms, this is the bull case of Ethereum:
Holding ETH is like owning stocks on the Internet. With the popularity of web3, the demand for ETH will rise, and the upcoming changes (including the implementation of Eip-1559 and the merger of Eth2) will reduce the supply of ETH, allowing holders to capture more value. It's like tech stocks, bonds, a ticket to web3, and currency rolled into one.
To gain a better understanding of this, we need to understand why Ethereum will survive, why its adoption will grow, how holding ETH yields returns, and the difference between ETH and tech stocks. In the following, we will discuss:
Ethereum is the Excel of the blockchain
How to "make money" by holding Ethereum
Legitimacy and the Lindy Effect
L1 ecology
Ethereum’s bull case
Risks, Cautions and Conclusions
To make ETH valuable and make its bull case work, the premise is that Ethereum needs to survive and develop. It faced challenges and competition from some other dedicated L1 blockchains early on, and the past week has been dire.
To understand why Ethereum won't die, let's start with an analogy.
Ethereum is the Excel of the blockchain
If you’re going to be bullish on Ethereum, the first thing you need to believe is that it’s going to be around for a long time, and that more and more people will continue to use it, and so will everyone else.
You will be comforted that Ethereum is like the Excel of the blockchain.
The analogy isn't quite right and doesn't work in some places. But for our purposes, it's good enough. Compare it to Bitcoin first.
Bitcoin is like a database. That's what a blockchain is - a distributed ledger of transactions. The Bitcoin blockchain allows people to send bitcoins (BTC) to each other and keep track of who owns which BTC at any given time. It could also reward those who secure the database (miners) with BTC for converting electricity into solutions to mathematical problems. It does one thing really well: track ownership of BTC.
Bitcoin is a bit like a spreadsheet, and many people compare the blockchain to a spreadsheet, but that's not what I mean when I say Ethereum is like Excel. I mean, the same elements that drove Excel for almost 40 years also exist on Ethereum.
The first is flexibility. Ethereum is a Turing-complete, programmable blockchain where anyone can build full-fledged applications using smart contracts. People can build various decentralized applications (dApps) on top of Ethereum, connecting applications to this blockchain and the surrounding ecosystem, providing everything from security, identity to payment. Decentralized finance (DeFi) applications, NFT trading marketplaces, decentralized autonomous organizations (DAOs), games, and virtual worlds can all be built on top of Ethereum, all powered by the native currency of the Ethereum blockchain, ETH .
This kind of flexibility is really hard to do.
Ben Rollert and I wrote an article about Excel's staying power in tech - "Excel Never Dies" [1], even though the space is usually replaced by new products every few years old product. We wrote:
If there's one core product design lesson to be learned from Excel, it's that combining usability and flexibility is very difficult, but also very rewarding.... The developer's design principle is to make any piece of software truly Being good at one specific thing intentionally limits its capabilities to specific areas, but Excel is a truly remarkable exception to this rule...
You could use the word "Ethereum" instead of "Excel" in the quote above, and it would make sense. Ethereum's early usability challenges depended on its flexibility.
Beyond this product philosophy, there are some specific similarities between Ethereum and Excel:
Turing completeness. If something is Turing complete, it means it can solve any reasonable computational problem. Excel became Turing complete with the introduction of Lambda, which allowed users to create their own formulas. Similarly, with Ethereum, you can write smart contracts to solve any reasonable problem.
composability. In Excel, "you can chain functions, passing the output of one function as input to another function, allowing a large number of potential computational pipelines. Excel's power and flexibility are multiplied with each additional function, because New features can be bundled with a large number of existing features." This is very similar to the idea of composability or "money Lego" on Ethereum.
Turing completeness and composability mean you can build smart contracts on Ethereum to compute anything, and then chain them together to build increasingly complex things faster. It takes time to get the engine up to speed, but once it's started it's able to go fast.
image description
Source: James Wang, "Ethereum Announces First Quarter 2021 Results"
These are absolutely huge numbers, spanning a broad range of Ethereum use cases. This is a sign of momentum and composability in the field, where improvements in one lead directly to improvements in the other:
Trading volume on decentralized exchanges (DEXs), including Uniswap, increased 76-fold, from $2.3 billion in Q1 2020 to $177 billion in Q1 2021.
The total value of staking (locked positions) in DeFi increased 64 times from $800 million to $52 billion.
Outside of DeFi, NFT art sales increased 56.2x from $700,000 to $396 million.
The use of the Ethereum network has exploded in the Q1 quarter of this year. Although the sales of NFT transactions have slowed down, partly due to high Gas fees, and partly because the initial enthusiasm has subsided, DeFi is still strong:
Above: The transaction volume growth trend of Ethereum DeFi applications since 2021. Source: DeFi Prime
As can be seen from the graph above, from May 1 to May 22, the two largest Ethereum DEXs, Uniswap and Sushiswap alone, processed $78 billion in transaction volume. This year's Q2 quarter will beat Q1!
While activity and transaction volume on the Ethereum network has exploded, the question remains: what does this mean for ETH?
How to "make money" by holding Ethereum?
I have known Ethereum for a long time. I first bought (and then sold) ETH in 2017, but it was speculative and I didn't understand Ethereum at the time. My biggest question about Ethereum is how it makes money. How does more activity on the Ethereum network translate into higher prices for ETH?
In the near future, more network transactions will mean higher returns for ETH holders and a reduction in ETH supply. But not yet.
Let's start with how Ethereum works, and look at the current challenges Ethereum faces, what solutions have been proposed, and what it will look like in the future.
Today, when you want to trade on Ethereum, you need to use ETH to pay the Gas transaction fee. There are currently about 116 million ETH in circulation, and its price is loosely influenced by supply and demand. All else being equal, more transactions on the Ethereum network means more demand for ETH, which means a higher ETH price.
When you trade, if you send ETH to another person, this happens:
You send 1 ETH, the other party receives 1 ETH
You need to pay Gas fee, such as 0.01 ETH
Your on-chain account balance has decreased by 1.01 ETH, while the other party’s account balance has increased by 1 ETH.
To keep Ethereum running, it uses a PoW consensus mechanism to bring nodes to a consensus on the state of the blockchain. Bitcoin also uses PoW, and Ethereum later inherited this mechanism, although Bitcoin mining has 20 times more miners than Ethereum and is therefore more decentralized.
We know that when someone else transfers funds to you through the bank, your account balance will increase and the other party's account balance will decrease. PoW also achieves the same thing, except that there is no centralized banking institution in the PoW mechanism, but a distributed network of miners to reach a consensus on these transactions and balance updates, that is, to maintain a distributed ledger.
To do this, miners around the world compete to solve increasingly difficult cryptographic problems in order to create a new block on the blockchain that includes new transactions, earning block rewards and transaction fees. These cryptographic problems are often difficult to solve (computationally) -- requiring a lot of energy -- but easy to verify. When a block is added to the blockchain, the transactions contained in the block officially become part of the blockchain ledger record. As far as Ethereum is concerned, miners who currently successfully create a new block will receive a block reward of 2 ETH (reduced from 5 ETH at the beginning to 2 ETH now) and all transaction fees within the block.
These transaction fees, known as gas fees, are what people pay miners to have their transactions included in blocks. When a user sends ETH to someone on the Ethereum network, or mints an NFT (non-fungible token), or does anything that needs to be verified on the blockchain, a Gas fee is required. These Gas fees are used to incentivize miners to spend costs (buying mining machines, consuming electricity, etc.) to solve cryptographic problems and create blocks.
challenge
challenge
There are some challenges with the current Ethereum system:
It's slow. Currently the Ethereum blockchain processes approximately 19 transactions per second. By comparison, Visa processes about 1700 transactions.
It's expensive. The simplest transaction requires a gas fee of about $5, and when Jack Butcher and I minted the article "The Great Online Game"[3] into an NFT a few weeks ago, its minting and auction cost nearly 1000 cost in dollars.
It is volatile. The gas fee is based on the "highest price auction" mechanism, and the fee level changes at any time according to demand. This makes transaction fees very difficult to predict.
It is inflationary. Unlike Bitcoin, where there is theoretically no hard cap on the amount of ETH that can be minted, PoW mints large amounts of new ETH, meaning that network growth leads to dilution of value for existing ETH holders.
It is not environmentally friendly. Mining requires a lot of electricity.
It is inefficient. Most of the money spent on transaction fees leaves the system -- miners are forced to sell the ETH they earn to pay for electricity, hardware, and taxes.
The fact that Ethereum has achieved widespread adoption despite all these challenges is impressive, although these are still real challenges. When I asked people on Twitter why they didn’t buy ETH, many of the replies revolved around one of the above challenges, the most common being Gas cost and ETH’s inflation.
Additionally, increased demand for Ethereum-based dApps -- more DeFi, more NFTs, more DAOs, more games -- means more transaction fees that don't really benefit ETH Holders - These fees leak out of the system to pay miners the actual cost of fiat in the PoW mining process.
So, the price of ETH today is based on the demand for more ETH, just like Bitcoin and USD. It's not tied to revenue like a company is, but soon it will be.
Proposed solution: EIP-1559 and Eth2
One of the favorite things about Bitcoin maximalists is that you can't really change it. One of the reasons they don't like Ethereum is that you can change it. While it's not easy, it's possible.
To address the above challenges, the Ethereum blockchain will make two changes:
The EIP-1559 proposal divides the gas fee into two parts - the base fee (Base Fee) and the tip (Tip). Based on EIP-1559, the base fee will be burned with every transaction, while miners (soon to be validators) will keep the tip. This sounds boring, but the impact of this proposal is huge, because the burning mechanism may make ETH deflation; in addition, tips (Tips) also allow those who value block space more to pay more (to make themselves transactions are packaged faster), which could be important for DeFi participants trying to execute arbitrage, for example. The proposal was approved in March of this year and will go into effect in July (as part of the ethereum London hard fork).
Eth2 is an upgrade to the Ethereum blockchain protocol, which will transfer the consensus mechanism from PoW to PoS and introduce sharding. Eth2 promises to make Ethereum more scalable, secure and sustainable. The Ethereum PoS chain (aka the beacon chain) is already live and is expected to merge with the current Eth1 chain sometime in late 2021 or early 2022.
PoS is a shift in how the Ethereum network is secured, who gets rewarded, etc. This transformation means that no one needs to solve the number sequence problem to mine the block, but any ETH holder can verify the block (that is, become a validator by staking ETH). Validators secure the network in exchange for newly minted ETH rewards and transaction tips. PoS will also be safer, because the verifier needs to pledge ETH, and if the verifier does evil, the pledged ETH will be confiscated. Although critics claim that this staking mechanism results in more power in the hands of those who hold (and stake) more ETH, making the network less decentralized and therefore less secure.
In terms of scalability, sharding aims to increase throughput (i.e. transactions processed per second) by a factor of 100 by creating 64 shard chains to verify transactions in parallel. Each shard chain only needs to verify a part of the entire Ethereum chain, unlike the current PoW Ethereum chain where each miner needs to verify the entire chain (note: that is, each mining node is required to verify each trade).
In addition, third-party Layer 2 solutions, such as Polygon and Optimism, have made efforts to speed up transactions and reduce transaction fees, mainly by batching transactions off-chain (that is, computing and storage state), and regularly "aggregate" a large number of transactions under the chain into one transaction and submit it to the chain for settlement (although it is a bit complicated, this is already in sight). L2 solutions can increase throughput by another 100x, and if the theory holds true in practice, the combination of Eth2 and L2 solutions can increase throughput by 10,000x.
Collectively, EIP-1559 and Eth2 could be revolutionary for ETH holders as they improve the performance of the Ethereum network while significantly changing value capture in the Ethereum ecosystem.
The Future: "Triple Point Money" and Ultra-Sound Money
In 2019, David Hoffman wrote an article called "ETH: A New Currency Model". If you want to go deeper, you should read this article. In the article, he cites a 1997 paper by Robert Greer, What Are Asset Classes? "(What is an Asset Class Anyway?)[4], the paper describes three asset superclasses:
Capital Assets are productive and capable of generating value or cash flow. Examples include stocks, bonds, or rentable real estate.
Transformable/Consumable Assets (Transformable/Consumable Assets) can be consumed once and converted into another asset whose consumption can generate economic benefits. For example energy or commodities.
Store-of-Value Assets cannot be consumed, but can only be transferred, and their value will persist over time and space. Examples include gold, currency, art, or bitcoin.
Hoffman believes that ETH, as a Turing-complete programmable currency, can simultaneously become these three asset classes with the help of EIP-1559 and Eth2. He calls it "triple-point money." The triple point refers to the concept in thermodynamics that a substance can simultaneously exist as a solid, liquid, and gas at precise temperatures and pressures.
That is to say, through EIP-1559 and Eth2, ETH will simultaneously become:
Store of value assets: ETH is locked in DeFi as collateral to facilitate DeFi transactions. For example, you can deposit ETH to DeFi to get loans or provide liquidity to DEX. Currently, nearly 10 million ETH is locked in DeFi.
Source: DeFi Pulse
Consumable Assets: Through EIP-1559, the gas fee acts like gasoline in a car: any time a transaction occurs in the Ethereum network, the Gas base fee paid will be destroyed, thereby reducing the circulation of ETH.
Capital Assets: ETH will serve as a capital asset in several ways. Owning ETH means owning a "share" of the Ethereum network, just like owning equity in a company. Once staked, ETH will give its holder the power to become a verifier to perform verification work for the network and to charge fees generated by the network.
Source: David Hoffman
So how does ETH make money? That is, how to capture value through ETH?
There are many ways to capture value with ETH, such as participating in staking, yield farming, liquidity pools, validation, etc., but let's look at the simplest method, which is to hold ETH like a stock.
Once EIP-1559 is implemented and the Eth2 merger is complete, ETH holders will capture value in several ways:
Tip and issue. Tips and newly issued ETH will no longer be used by miners to pay for hardware and electricity costs, but will remain in the system (tax deducted) and be captured by ETH holders participating in staking;
Gas base fee for burning. The burned Gas will permanently remove a portion of the ETH supply from the ecosystem, and at a certain transaction rate (i.e. throughput growth), will reduce the total ETH supply every year.
We will discuss the impact of these two things on the Ethereum Bull Case below, but before that, we need to understand why Ethereum has a defensive advantage and why other L1 public chains cannot steal its traffic.
Legitimacy and the Lindy Effect
Since Ethereum operates somewhat like a business, with the added benefit of its native currency, ETH, we can analyze the strategic position of Ethereum like a business. In short, Ethereum benefits from branding and network effects.
In March of this year, Ethereum co-founder Vitalik Buterin wrote an article titled "The Most Important Rare Resource is Legitimacy" [5], in which he stated that any cryptocurrency The true value of an asset does not come from actually owning it, but from legitimacy. He defines legitimacy this way:
Legitimacy is a higher order acceptance paradigm. If people in a social context widely accept and play their part in crafting a certain outcome, and everyone does so because they expect everyone else to do the same, then the The result is orthodox.
If people believe that others believe something, it makes more sense that they believe it and act accordingly. On the popular ethereum podcast Bankless, hosts Ryan Sean Adams and David Hoffman called legitimacy the “cryptocurrency theory of everything.” They list a series of questions people often ask about the field:
Why is the total market capitalization of cryptocurrencies over $2 trillion?
Why are NFTs valuable?
Why can't you fork your own Bitcoin and make it valuable?
Why do we believe that Ethereum's monetary policy will only change in the direction of reducing inflation?
According to Adams and Hoffman, the answer to all these questions is orthodoxy.
In his article, Vitalik highlights six ways to gain legitimacy. Two of them are particularly relevant:
Legitimacy of effectiveness: A process can acquire legitimacy if its output leads to desirable outcomes (for example, successful dictatorships are sometimes described in this way).
Continuity of orthodoxy: If something is orthodox at time T, it is by default also orthodox at time T+1.
Effectiveness and continuity create the Lindy Effect, where the longer something has been going on, the longer it can be expected to last. Something that's been around for a year might be around for another year, but something that's been around for 100 years might be around for another 100 years.
This is an observable phenomenon. Amazon is more likely to be around in 30 years than some new startup; our kids are more likely to listen to the Beatles than to Olivia Rodrigo our grandchildren's grandchildren's grandchildren are more likely to read Socrates than Dan Brown.
Legitimacy helps explain this Lindy effect. The longer something exists, the more people expect others to continue using it. In addition, in the article "Excel Never Dies", we also described several reasons that can also bring about this Lindy effect:
quality. Some things are just better than others, and the quality that has allowed them to survive the present will also allow them to survive in the future.
network effects. As people realize the quality of something, and as it lasts longer, more people use it, so more people build on it. This creates a two-sided platform network effect (Two-Sided Platform Network Effect). More users attract more developers, more developers attract more users, and so on.
For Excel, this network effect comes from the fact that the developers (i.e. the people creating the models in Excel) know that other people are using Excel, so they create their models there, which means more people The need to use Excel, which in turn means the next person to create the model is more likely to use Excel to create the model.
In the case of Ethereum, it makes sense that more dApps on Ethereum means more users on Ethereum, and more users means more developers building dApps.
iOS is also an example of a two-sided platform network effect. The more people who own an iPhone, the more likely developers are to build iPhone apps, and the more iPhone apps there are, the more likely people are to buy an iPhone. In Apple's case, this network effect is so powerful that the App Store has been taking a 30% commission on revenue from third-party apps. While Apple has been doing this for several years, the model has started to show cracks. Epic Games, the developer of the "Fortnite" game, is battling Apple in court over the commission, and just last week, Twitter also tweeted that Apple would get money from Twitter's upcoming Twitter Spaces feature. More revenue than Twitter itself. Monopoly or not, Apple's fees feel like extraction.
And what makes ethereum’s network effects potentially stronger and more durable is that it aligns incentives in ways that traditional software doesn’t.
Both users and developers hold ETH and benefit from its appreciation. With the implementation of EIP-1559 and the consolidation of Eth2, the more ETH is used, the more value is captured by ETH holders. Also, the higher the value of ETH, the harder it is to attack Ethereum.
In "ETH: A New Currency Model," Hoffman stated that the fees paid to Ethereum validators are like a wall protecting Ethereum: "The height of this wall is highly correlated with the total fees generated by the network. The height is also the cost of attacking Ethereum.”
When I spoke to Ben Sparango, head of strategy at Solana (the public chain project), he went a step further and explained to me that the value of the underlying blockchain exceeds the value of all dApps built on top of it, which is in line with the expectations of all involved best interest. If this is not the case, bad actors will be incentivized to attack the blockchain at all costs to drain the value of these dApps.
The implication is that projects built on top of certain blockchains are actually financially incentivized to support the value of the underlying blockchain, thereby ensuring the security of their projects. These applications do not pay for AWS or security software, and the hosting and security of the applications are provided by the underlying blockchain. This is a network effect that is different from other platforms. It's hard to imagine an app voluntarily paying to drive up Apple's stock price.
Importantly, increased demand for ETH will not only push up the price, but will also shift some of the security responsibility from builders to investors, thereby raising the wall, making the network more secure, and increasing the attractiveness of building applications on Ethereum Force, make ETH more valuable, then further increase the wall, and so on.
By definition, most of the value is captured by Layer1 (L1) and those who hold L1 tokens. This makes the current Layer1 in the first place in the entire value chain, and everything is built on top of L1.
Because of this, and because of Ethereum’s shortcomings so far, a number of other L1 altchains have sprung up to try to challenge Ethereum’s dominance, or at least try to capture some of its use cases.
L1 pattern
When I first made the connection between Ethereum and Excel, I didn't realize how similar the two were. In Excel Never Dies, Ben and I write: "Excel's flexibility allows businesses to build a variety of workflows and processes within a simple spreadsheet. This creates an emerging product line for the B2B software industry Figure.” The result is the unbundling of the Excel use case to create software companies with a combined value of $500 billion:
Similarly, some blockchains/L1s intend to thrive where Ethereum is weak. To recap, Ethereum, Bitcoin, and other blockchains are L1 of the Web3 technology stack (see diagram below). For Bitcoin, except for the Lightning Network, almost everything happens in L1. For Ethereum, the most amazing thing is the interaction with L2 (that is, the application layer). See the diagram below:
Above: Different layers of the Web 3 stack and corresponding examples. Source: readthedocs.io
The second layer is where builders create protocol "lego blocks" and smart contracts that can be integrated into countless combinations and products for directly enabling anything from minting art NFTs to trading cryptocurrencies , without the need for a third party. This is also where L2 scalability solutions such as Polygon and Optimism exist.
When I ask on Twitter what compelling reasons not to buy Ethereum, the most common nonsensical responses come from those other L1 chain maximalists who believe these other L1 chains are the only solution.
To be fair, after digging deeper, I also thought other L1 chains were the biggest risk to Ethereum. But after talking to some wise men in the field, and comparing the situation to Excel, I think the most reliable L1s are complementary, and those that try to compete directly will fail utterly.
Chief among its (Ethereum) direct competitors is Cardano ($ADA). A lot of people responded to my tweets by pumping up Cardano. Then I looked at Cardano's website:
“Cardano is a blockchain platform for changemakers, innovators and visionaries, providing the tools and technology needed to create possibility for the many, as well as the few, and bring about positive global change.” I don’t know What does it mean. The whole site has a strong Quibi (a defunct short video content platform) vibe. Also, it's trying to compete directly with Ethereum with smart contracts and faster speeds, and somehow based on peer-reviewed research? It won't work.
In contrast, other L1 chains such as Avalanche and Hedera appear to be built for enterprises. It's an interesting approach, but doesn't pose a huge threat to Ethereum's promising path.
However, there are other more interesting and less directly competing L1 projects that aim to serve use cases that Ethereum doesn't serve well. They will optimize certain features and may use Ethereum as a settlement layer. Two of the L1 public chains that have adopted this approach and I am most interested in are Flow and Solana.
Flow
When Axiom Labs launched its first NFT use case, CryptoKitties, their massive transaction volume overwhelmed Ethereum, making transaction fees overwhelming for buyers. To this end, the team established Dapper Labs and built the Flow blockchain.
Dapper Labs and its NBA TopShot are the darlings of the recent NFT craze. They recently raised a funding round at a $7.5 billion valuation, led by Coatue Management, to continue building Flow and expand the ecosystem on top of it. Over the past few weeks, I've spoken to a number of NFT startups who are building apps on Flow with funding from Dapper Labs. It’s a win-win for both parties: the startup gets funding and support from the company that has been wildly successful in the NFT space, and Dapper Labs gets more Flow usage and users.
While participating in the Invest Like the Best [6] blog, a16z partner Chris Dixon explained how Flow and Ethereum might interoperate:
Imagine a world where you are playing a game with virtual goods that interact with the Flow chain. But then some of your virtual goods can become very valuable. And you say "You know what? If only I could deposit these (virtual goods) in the bank." So you use a trustless cross-chain bridge (bridge) to transfer them to the Ethereum network, which is NFTs and encryption A way for money to move between blockchains. Maybe I pay more on Ethereum because Ethereum makes different tradeoffs. This is at the cost of performance for greater security.
As Flow brings more non-cryptocurrency users to Web3, both Flow and Ethereum stand to benefit.
Solana
Besides Ethereum, the L1 public chain I'm most excited about is Solana (disclosure: I own some SOL).
Solana is probably the fastest and cheapest blockchain in operation today, capable of processing 50,000 transactions per second (TPS) at a transaction cost of less than 0.1 cents, compared to Ethereum's current transaction speed of 19 TPS .
I spoke with Anatoly Yakovenko, the founder and CEO of Solana, and he told me that what Solana is trying to optimize is instant censorship resistance in a very short period of time, thereby creating fair and open access to market data. He wanted to build an execution layer for finance, not necessarily to compete with Ethereum, but to compete with the New York Stock Exchange. As for where these transactions are settled, where people put their coins, it doesn't matter to him.
Like Eth2, Solana uses a PoS consensus mechanism, but unlike Eth2 or most other scalability solutions, Solana is single-shard. Everything happens on the same chain. They do this by using something called Proof of History (PoH), which is not a consensus mechanism but a source of time, or as Anatoly explains it, "the arrow of time at An implementation in mathematics." PoH uses cryptographic timestamps to sequentially order every transaction that occurs on Solana, providing a verifiable ordering without requiring all nodes to reach consensus at the same time.
Solana is building compatibility with Ethereum, which will allow Solana to function like an Ethereum L2 network, but with L1 features, including direct USD deposits at very low fees. More on-ramps are positive for the entire ecosystem, and Ethereum is at the center of this ecosystem.
Just like nothing can kill Excel's core use case, and many billion dollar companies have built their businesses by focusing on specific use cases, so-called Ethereum killers cannot kill Ethereum. On the contrary, given the nature of web3 and how early the ecosystem is, it is positive that more complementary chains bring more demand.
Ethereum’s Bull Case
More demand and less supply will lead to higher prices. The more fees the network generates and burns, the less ETH becomes available.
I've written a lot of words so far, but if you believe a few things, the reasons to be bullish on Ethereum are as simple as this:
Web3 will continue to grow. There are too many brilliant people creating so many fascinating things that would not be possible without this technology.
EIP-1559 and Eth2 will be implemented smoothly. Of course there are risks, but people seem optimistic.
Ethereum will still be the main L1 of web3. At this point, Ethereum’s network effects are too strong to be hacked. Developers, users, and even other L1s are building on or compatible with Ethereum.
demand will continue to grow
From Q1 2020 to Q1 2021, all application categories on Ethereum (from DeFi to NFTs to virtual worlds) have seen a huge increase in demand. Transaction fees increased by 200 times!
All of this was happening at a time when ethereum was still rough in usability and fees were prohibitive. Things will only get better from now on, for several reasons.
First, assuming everything goes according to plan with the merger of EIP-1559 and Eth2, Ethereum’s transaction speed will increase and Gas fees will become lower and more predictable. This way transactions will be faster and cheaper. Lower transaction fees and faster transaction times should lead to more transaction volume.
Second, even though what we have just experienced is a bubble, short-term bubbles are useful in the long run. They attract money and talent into the space, and money and talent will combine to create new businesses that attract new users and more demand. product. In the past few months alone, I have seen many strong teams leave traditional startups to create web3 products, many of which are built on top of Ethereum. More products and better experience will attract more users. ETH is an exponential bet on this growth rather than a bet on the success of any single project.
Strong trends, lower fees, better experiences and new products = growing demand.
less supply
For many ETH bulls, this is the crux of the argument: EIP-1559 means ETH will become deflationary.
The upper limit of bitcoin circulation is 21 million pieces, which is the strongest bull case for bitcoin. You can't print more bitcoins like a central bank, there is a limit to the amount that can be issued. For this reason, many people call it sound money.
Therefore, the fact that Ethereum's supply is not capped is often a point of criticism. In theory, enough Ethereum users could continue to mint ETH, increasing the supply. If you want to own an inflationary asset, why not just use fiat currency, right?
But EIP-1559 and Eth2 have made a big reversal in this regard. With Eth2, the amount of new issuance of ETH rewarded to validators is expected to drop significantly compared to PoW rewards. At the same time, with the help of EIP-1559, by destroying ETH in each transaction, assuming that 70% of the Gas fee is destroyed every day and 30% is sent to the validator as tips (Tips), then the amount of ETH destroyed every day will exceed the number of newly issued ETH . After EIP-1559 is implemented and Eth2 is merged, the supply of ETH will actually start to decrease.
It's better than sound money, it's ultra-sound money.
To understand these numbers, look at two models created by Justin Drake: "ETH Peak Supply"[7] (ETH supply peak) and "The Road To 100M ETH"[8] (Road to 100M ETH in circulation ). Straightforwardly, this means a reduction in the supply of ETH, in line with growing or accelerating demand, which should lead to an increase in value.
Even crazier, if people and institutions are holding Bitcoin because it is a non-inflationary store of value, will they switch to Ethereum if the ultra-sound money argument works? Can Ethereum Invert Bitcoin Into The Most Valuable Cryptocurrency?
But ETH didn't stop there, because ETH is more than just a store of value.
Value Captured by ETH Holders
ETH ownership also grants ETH holders the right to become validators working for the Ethereum network and earn a share of fees.
In PoW, miners need to sell the ETH they earn to cover costs. According to another model by Justin Drake[9] (see figure below), this creates a daily selling pressure of 22,300 ETH from Ethereum miners -- which means that 22,300 newly issued ETH are thrown on the market every day, worth about $50 million. In PoS, the only cost for the verifier is the tax. Drake assumes that the tax is 50%, and the daily newly issued ETH will drop from 13,500 ETH in the current PoW to 2,100 ETH in the PoS (based on 20 million ETH pledged into network). This will bring about a reduction in the net selling pressure of PoS validators from 22,300 ETH to 2,600 ETH per day.
summary:
summary:
Ethereum has a strong network effect and will continue to be at the center of the web3 ecosystem as it continues to grow, generating more transactions and more fees;
As demand for ETH increases, it will become a deflationary asset;
ETH will become a capital asset earning high APR for holders.
Risks, Considerations and Conclusions
Part of the reason I am so bullish on ETH assets is that I am excited about the potential and technology of Ethereum. ETH is a ticket to web3, but it also pushes us to keep going down this rabbit hole. What I'm looking for in investing (return + engagement + education + fun) may be quite different from what you're looking for.
This past weekend has shown just how volatile cryptocurrencies are, and how much everything is still tied to Bitcoin. If you are looking to use ETH for short-term trading, the past week may have disgusted you. And if you want to understand and explore Web3, then this is a good time to buy more Tokens at half price and participate in this game.
Although I am bullish on Ethereum in general, Ethereum actually still faces macro and specific risks.
On the macro front, what would happen if Tether (USDT) crashed? What if the government cracked down on cryptocurrencies in general? What if Elon Musk tweets again? One of the scariest things about last weekend's sell-off was the absence of a clear and obvious catalyst. The crypto market can be wild.
There is also a question between the micro and the macro: what if people outside of the early adopters don't really care about decentralization? What if more centralized solutions like Binance Smart Chain (BSC) were decentralized enough to perform better? After all, Binance Smart Chain has a built-in user base of millions trading on Binance.
On the micro side, Ethereum faces some real challenges. What if EIP-1559 is not implemented as planned? What if the Eth2 merger is delayed? What if sharding doesn't work as planned and creates more problems than improvements? One very real possibility is that sharding makes the Lego blocks built on Ethereum less composable, undermining one of the most exciting aspects of the network (namely composability).
Perhaps the biggest problem facing ETH is the adoption of many fragmented L2 scalability solutions. While L2 schemes have the potential to significantly improve the performance of the Ethereum network, they present two major challenges, one for Ethereum and the other for ETH:
Ethereum: Adopting a fragmented L2 solution may make composability more difficult, as execution happens in L2, settlement is made on L1, and then returned to another L2 to complete another part of the transaction. Ideally, one or two L2 solutions win out, but adopting multiple L2s may strengthen Ethereum's network effects while also weakening the product experience.
ETH: Rollups, an L2 solution, aggregates multiple transactions into one transaction and settles it on L1, maybe 100 transactions occur on L2, and this group of transactions only appears as 1 transaction on L1. This would result in a 100x reduction in transaction fees, but only if L2's better performance and lower price leads to a 100x increase in transaction volume, or if L2 handles new transaction requirements that cannot be achieved at current L1 speed and cost.
Admittedly, I don't know enough about the topic to form a strong opinion. This is an area that needs more exploration. But I hope this article changes the way you think about Ethereum and makes you want to keep exploring on your own. That's where the fun comes in.
The Ethereum narrative is changing and the ETH bull case will be understood.
Source link:
[1] https://www.notboring.co/p/excel-never-dies
[3] https://notboring.mirror.xyz/tw9hW87Sd1YXz_IqcvJXIS9pCxSSYBFVtZ2umBOdng0
[4] https://jpm.pm-research.com/content/23/2/86
[5] https://vitalik.ca/general/2021/03/23/legitimacy.html
[7] https://docs.google.com/spreadsheets/d/1ZN444_qkPWPjMJQ_t6FfqbhllkWNhHF-06ivRF73nQ/edit#gid=0
[8] https://docs.google.com/spreadsheets/d/1XmeYkWEmaaZEUZ078A-lolchzNUrnlUllLkVXSGPzAU/edit#gid=0
[9] https://docs.google.com/spreadsheets/d/1TsrdbdusUop4NJbvjGBbOWTUwYH-Jgg1QBkQ5CtY_-k/edit#gid=0
[10] https://docs.google.com/spreadsheets/d/1FslqTnECKvi7_l4x6lbyRhNtzW9f6CVEzwDf04zprfA/edit#gid=0
Source link:www.notboring.co
