Bankless: 5 Reasons to Be All-in on Ethereum
Main points:
Original title: "Betting It All On Ethereum》
Compilation of the original text: Guo Qianwen, Chain Catcher
Main points:
None of the mainstream blockchain protocols are currently economically viable in the long run, i.e. revenues exceed the blockchain’s operating costs.
The real power of cryptocurrency technology is decentralization. If you want a network to be decentralized, you can't just flip the "blockchain switch". For it to work, a powerful social force is needed — legitimacy.
In a blockchain ecosystem, legitimacy grows and is maintained within the community, which maintains legitimacy and assigns responsibility.
A blockchain cannot be decentralized if ordinary community members cannot run nodes.
The Ethereum merger is a historic upgrade that will likely make Ethereum the first economically viable long-term blockchain.
ETH is the native currency of Ethereum. It has multiple functions - it has value (can be used to pay for transactions), drives the world's largest decentralized computer; Profit; ability to store value (as currency in Defi) - these functions complement each other.
The cryptocurrency ecosystem contains assets that, over the past decade, have been the best performing assets in the world, with the best risk/reward ratios. (such as BTC and DOGE). For many of us, this is the main reason we became interested in cryptocurrencies. However, from an investor perspective, I think ETH is the asset with the best risk/reward ratio right now.
Top five reasons why I am bullish on ETH:
1. Solve the scalability problem
2. Network Effects
3. “The most important scarce resource is legality”
4. Make friends with Moloch
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Solving the scalability trilemma
The trilemma is that if you use "simple" technology, you can only achieve two of the three main features that blockchains try to achieve (scalability, decentralization, security). There are currently three "simple" solutions ", which can realize some of the two features:
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Have we solved the scalability problem?
Currently, no blockchain has solved the scalability problem, which is akin to hoping to download a movie in a minute in the 1990s; the technology and adoption simply wasn’t ready then.
People invest time or money in Internet projects for profit. However, what is shocking is that none of the mainstream blockchain protocols is economically viable, which means that the rate benefits should be greater than the blockchain operating costs.
Bitcoin fully serves its main function: store of value; but it requires "printing" BTC to pay for security. It "prints" about $31 million worth of BTC per day and only generates about $300,000 in BTC transaction fees (July 2022). Will Bitcoin be economically viable after several halvings, or when all 21 million BTC have been mined (estimated to be in year 2140)? Nobody knows. I think most people would agree that as more halvings happen, its economic viability will necessarily decrease (if everything else remains the same).
After Ethereum upgrades to Proof-of-Stake, it will likely become the first economically viable long-term blockchain, as network maintenance costs are expected to be lower than the fees incurred for creating blocks. In fact, after EIP 1559 (BASEFEE burn), Ethereum has produced some deflationary blocks.
network effect
network effect
On the Ethereum network, roles such as the core team, investors, validators, developers, and users interact using the same currency, creating a beautiful positive feedback flywheel that builds a stronger community.
Why the "Crypto Use Case Explosion" Happened to Ethereum DAOs, NFTs, and DeFi didn’t magically appear in 2016-2018; these use cases have been incubating since the Ethereum white paper, created by the most innovative minds in the industry who have tirelessly built, updated, and updated over the years Network and develop dApps. dApps attract users (and money), which in turn attracts more developers, builds more dApps, attracts more users, and so on—creating a positive feedback loop known as the “two-sided platform network effect.”
"...the really distinguishing feature of a two-sided network is that it has two distinct classes of users: those on the supply side and those on the demand side. They each come to the network for different reasons and generate complementary value for the other .” - James Currier, The Network Effects Handbook.
Is it still too late to invest in Ethereum?
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"The most important scarce resource is legality"
Blockchain technology is different from many other technologies in that if you want to decentralize a network, you can't just flip a "blockchain switch". In order for it to work properly, a powerful social force is needed — legitimacy.
Legality is defined in Vitalik's post as:
"Legitimacy is a higher-order mode of acceptance. If in a social environment people are widely accepted and are doing their part to achieve an outcome, and each of them does so because he expects others to do the same, then The outcome in that social environment is legitimate."
To understand this idea of legality, ask yourself:
Why Can Ethereum Pay More For Security Than Any Other Smart Contract Blockchain?
Why Blockchain Can Recover From 51% Attack?
Why are some hard forks worth more than technically identical forked blockchains (eg, Ethereum vs Ethereum Classic, Hive vs Steem)?
Why are some NFTs more valuable than others despite using the exact same image to represent them?
The answer to all these questions is legality.
Why is community so important?
In a blockchain ecosystem, legitimacy is developed and maintained within the community. Not only does the community carry legitimacy, here power and responsibility for maintaining the blockchain is also assigned to members, making the network more decentralized and decentralized.
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Befriend Moloch
Early on in my cryptocurrency career, I realized that understanding how blockchain technology can help us solve big problems is the only way to understand its value. I spent a lot of time trying to understand the failure of collaboration, it's called Moloch's plague.
Moloch has many definitions, my definition of it is - it explains "why we can't have good things". I think the nature of the god Moro is best illustrated in this failed fish farming collaboration.
As a thought experiment, let's consider raising fish in a lake. Imagine a thousand identical fish farms in one lake, owned by a thousand competing companies. The profit for each fish farm is $1000/month. For a while, everything was fine. But every fish farm produces waste that pollutes the lake. Assume that each fish farm generates enough pollution to reduce productivity in the lake by $1 per month.
A thousand fish farms generate enough waste to reduce productivity by $1000/month, meaning that not a single fish farm is making a profit. That's where capitalism is needed: someone has invented a sophisticated filter system that removes the waste. It costs $300/month to run. All fish farms voluntarily installed the system, so the pollution ended, and the fish farms are now making $700/month in profit - still a solid amount.
But one farmer (let's call him Steve) didn't want to spend money to operate the filter. Now waste from a fish farm pollutes the lake, costing $1 in productivity. Steve's profit is $999 and everyone else's profit is $699.
The others saw that Steve was not spending money on maintenance on the filter, so they disconnected theirs as well.
Once four hundred people disconnected their filters, Steve's monthly income dropped to $600 - less than he would have earned if everyone had kept their filters, and those poor, ethical filters The user earns only $300. Steve says to everyone "Wait! We all have to voluntarily agree to use filters! Otherwise, everyone's productivity will drop."
Everyone agrees with him, they all sign the Filter Pact, except for one guy who's a bit of a jerk, let's call him Mike. Now everyone is using filters again, except Mike. Mike earns $999/month while everyone else earns $699/month. Slowly, people start thinking they too deserve big bucks like Mike, disconnecting their filters for an extra $300 profit….
A selfish person would have no incentive to use a filter, but would have some incentive to sign a protocol that lets everyone use a filter, but in many cases he would have a greater incentive to wait for others to sign a protocol, but I don't participate. This could lead to an unreachable balance where no one would sign such an agreement. "
Why is this such a big problem?
One way to measure human progress is to see if we can develop better ways to work with each other. Languages, religions, governments, states, constitutions, monetary systems, scientific methods, and the Internet are all fruits of the tree of human collaboration. Each of these inventions was a small battle won against the god Moloch (although they all came with their own sacrifices). But there are many more battles that we have yet to win: corruption, censorship, privacy, fair trade, economic justice, and more.
"Finding, discovering, and building a system that would enable unstoppable human collaboration is so aspirational to humanity that even the grandest science fiction writers can't imagine what future we can build with this technology." David Hoffman , Revenge: Killer of the God of Moloch.
What does Ethereum have to do with all of this?
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The world computer goes green
The merger is the most anticipated cryptocurrency event of the year and a historic upgrade for Ethereum. According to the latest estimates, the merger is expected to take place between September 14-15, 2022. In short, the merger means switching the engine of block production from Proof of Work (POW) to Proof of Stake (POS).
I want to focus on why the value of ETH will appreciate in the coming months, it all has to do with the concept of Ultrasound Money.
Ultra-sound money can be immediately understood as a culture that believes that the combination of EIP 1559 (BASEFEE burning) and this merger may lead to a decrease in ETH supply. After the merger, ETH issuance will be reduced by approximately 60-90% (depending on staking participation), an effect equivalent to at least two Bitcoin halvings.
Hal Press, a cryptocurrency analyst at North Capital, wrote an article, writing that "from a price change perspective, it currently takes about $5 million a day in new money to enter the asset environment to maintain its current price, and that will change. For existing holders who only need about $30 million to sell their tokens per day, the price can be maintained.”
This is a huge permanent buying pressure for ETH.
After the merger, ETH will meet ESG standards (ESG means environment, society and governance; here it means that ETH will no longer have high energy consumption miners), enabling new institutional investors to invest in ETH. And we've already seen Swiss bank SEBA making the move.
risk
risk
Based on its performance over the past cycle, I don't think ETH is much riskier than BTC (the current "less risky" cryptocurrency). It is true that ETH is more volatile at the moment, and it generally does not perform as well as BTC in bear markets (although ETH/BTC is currently making new local highs). However, many of the risks involved with BTC could also hit the entire cryptocurrency market, including ETH.
What are some of the additional risks involved with ETH?
challenge
challenge
Is it environmentally friendly? It has no finite supply, so is it sound money? It has a high security cost, is it efficient enough? All of these challenges can be answered simply - they will likely be resolved post-merger.
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positive closing
ETH offers one of the best risk/reward ratios out there. It is arguably the best candidate for solving the scalability trilemma; it is the smart contract chain with the greatest network effects and the greatest legitimacy; its coordination mechanism can help solve some of the world's biggest problems; become a deflationary asset. All of these features bring stable advantages to ETH, supporting its protocol. Let’s not forget that blockchain ecosystems have the potential to untangle failures in human collaboration to create enormous value—and most of them, are still on the way, waiting to be explored.
