Ethereum

A case for ETH

Overview

  1. Ethereum is currently the second most valuable cryptocurrency.
  2. ETH is also one of the most fundamentally important cryptocurrencies, after BTC. Today, most crypto projects depend on the fundamental theses of BTC and ETH being realized in addition to their own. This is true even for projects that aren’t technically built on either platform. ETH is completely separate in its technical implementation from BTC.
  3. ETH is a platform to run smart contracts. These are contracts which are created and enforced in software instead of a legal system. ETH can be thought of as self-enforcing programmable money.
  4. Almost any crypto can be built on top of ETH. Though alternatives exist, ETH currently hosts most of the other cryptos that are currently being used today.
  5. Virtually all of Decentralized Finance (DeFi) is built on ETH. DeFi is a collection of projects that work to replicate every common function of a traditional bank, but in a decentralized way using crypto. DeFi also makes possible many new features that can’t be replicated in the existing traditional finance system.
  6. ETH can also replicate most of the functionality of BTC, but it was built for a different purpose than payments or digital gold. Importantly, it currently has no permanent monetary policy (unlike BTC).

Major Bullish Arguments

  1. ETH is the most widely adopted platform for cryptocurrencies. Most projects that are currently in use build on it directly.
  2. Almost all of DeFi is built on ETH.
  3. ETH has confirmed that it will deploy changes to token issuance in July 2021. Specifically a portion of the payment previously paid to miners (those running the network) will be burnt (destroyed). The busier the network becomes, the more is burnt. This changes ETH from net-inflationary to net-deflationary, meaning less tokens will be available and so should pump the price.
  4. ETH is currently undergoing a major transformation that will significantly increase efficiency by many orders of magnitude.
  5. ETH is working to transition from proof of work (PoW) to proof of stake (PoS). In PoW, like BTC, miners waste electricity as proof of their truthfulness and sell their coins to cover costs. This increases supply and brings the price down. In PoS, stakers lock up their coins as proof of their truthfulness and do not need to sell their coins. This reduces supply and so also pumps the price.
  6. ETH has an army of the wold’s best and brightest working on the protocol and on top of it.

Major Counterarguments

  1. The consensus mechanism of Proof of Stake (PoS) may be less secure than Proof of Work (PoW).
    • In practice PoW can be understood as a subtype of PoS, with the stake being in specialized computer equipment available only in part of the world. No consensus mechanism is without tradeoffs or is above the potential for attack. Instead, they focus on making any attack cost the attacker more than anyone else. Billions of dollars have been successfully secured across several chains without major attack.
  2. ETH is too inefficient compared to alternatives.
    • As the founder of the smart-contract space, ETH originally prioritized adoption over efficiency. Today it is the most used and most valuable platform-type crypto in the world. It is also undergoing massive and continual improvements. It is likely that its vastly improving efficiency will continue to be sufficient for many projects.
  3. Transaction fees are too high.
    • This is due to the inefficiencies just mentioned which are being addressed. This also showcases the magnitude of the demand for the market that ETH is addressing as people still are paying higher fees.
  4. ETH is taking to long to implement changes.
    • ETH’s development has taken a long time. However, key milestones have been eventually met if sometimes delayed. Some projects may not wish to wait for ETH’s scaling improvements and launch on a different platform. However, while many alternatives are being developed few are ready for adoption and none have ETH’s successful track record nor network effect. Time will tell if these advantages will prove sufficient.

Price Potential

  1. The smart contract (programmable money) that ETH pioneered could become as transformative to the world as was the internet itself. It is impossible to know how much value will be added to the world because of it. However, even if smart contracts were to become used by virtually all individuals and businesses it is also difficult to know just how much of that market the platform would capture vs the applications that are built on top of it.
  2. ETH could overtake the $370 Billion cloud computing market. However, this is likely a poor pricing model as ETH is much less efficient and more expensive than cloud providers as it’s not built for that purpose. ETH is already 170 Billion in 2021 with just a few users compared to the internet.
  3. ETH could take over global $69 Trillion equity funding markets. Any company can use it to receive funding for securities that are globally tradable in a 24-7 market. The 2017 ICO (Crypto Initial Public Offering) bull market was largely fueled by companies being able to easily raise seed capital directly from global investors. However, this led to several problems. Even if the entire world were to use ETH to issue securities it is difficult to guess how much of that valuation would remain in ETH as a protocol vs in the tokens that run on top of it.
  4. ETH’s changes to make it net-deflationary July 2021 in EIP 1559 make ETH usable as an alternative store of value to Bitcoin. It has been argued that for this reason ETH could potentially exceed the market value of Bitcoin. However, the use of ETH is much more nuanced and so is perhaps unlikely to overtake BTC as a store of value.

Major Risks

  1. If Bitcoin were to suffer a large-scale catastrophe such as an inflation bug the entire crypto market would likely acutely suffer for a time. However, even if such a thing were to occur some fix would be made or alternative created and the market would eventually recover with near certainty.
  2. If competing platforms manage to provide a stable scalable solution and progress on ETH’s upgrades are too long delayed other platforms could overtake market share.

Additional Resources

  • A great macro analysis of the investment in ETH both positive arguments and risks
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