With the recent wholesale crash of the cryptocurrency market, many investors will be reevaluating their positions and considering the true value of Ether. Why is each Ethereum token worth $200, or for that matter – why was it worth $400, and how could it possibly be worth over $1,000 as so many were claiming during the frenzied hysteria of May and June. This brief piece will look at some of the fundamental considerations of the Ethereum blockchain, which may go some way to helping you to decide on whether Ether is priced fairly, or whether it is still sitting within a giant cryptocurrency bubble.
What is the supply of Ether?
The current circulating supply of Ether at the time of publication is ~94 million. 5 Ether is “minted” roughly every 15 seconds (mining). However, an “ice age” is coming, whereby mining will become so difficult that it is no longer feasible, and Ether issuance through mining will fall to zero. Instead of mining, users will commit to “staking” instead (discussed further below). The Ether payout for this new consensus mechanism will have a much smaller payout, as the costs of staking are negligible compared to the costs of mining (electricity). As a result, it has been estimated that the inflation rate of Ether will be in the region of 0-3% when this new consensus mechanism – called Proof of Stake – comes into play in early 2018. Inflation may even be negative.
Why is there demand for Ether today?
When discussing demand, we are looking at clear reasons as to why an individual or institution would buy and hold Ether. Someone may wish to purchase Ether to participate in an ICO, but demand such as this is largely irrelevant as a significant proportion of Ether raised during an ICO will be sold off to pay for operating costs. The same applies to remittance markets, where the demand for Ether is quickly offset by its subsequent sale. Why would someone choose to buy and hold Ether today?
- Untethering from fiat systems
- Buying Ether to hold
Ethereum is a volatile currency, however it does not experience volatility for the same reasons that the US Dollar or Euro might. By untethering from the fiat system, individuals and businesses are able to sidestep fiat currency risks whilst taking sovereignty (and privacy) over their own wealth.
Speculation is by far the biggest driver of demand today. Investors will purchase Ether to buy and hold over the long term, believing that in the years to come, there will be an overwhelming demand for Ether and the need to interact with the Ethereum blockchain.
Why will there be demand for Ether in the future?
The use cases for Ethereum are fairly limited in today’s terms, however there is an enormous amount of development underway which could see this blockchain reach billions of people much like the internet does today.
- Regularly interacting with smart contracts and IoT
- Staking Ether in validating contracts
- Interacting with an enterprise framework being developed by the EEA
In the not too distant future, IoT devices will need to transact value autonomously. Using smart, rapid and cheap microtransactions will be essential, and Ethereum provides the most secure blockchain for making such transactions. Smart contracts will also be an essential application for many different industries, reducing operational costs for those in insurance, gambling and logistics among many others.
Following the “ice age” and a move to Proof of Stake consensus as a means to secure the Ethereum blockchain, it will be possible for Ether holders to stake coins in specialized smart contracts. These contracts will reward the staker with “interest” paid in Ether, but will require that the amount staked (the deposit) is time locked for a minimum length (likely to be months). Once Proof of Stake is introduced, the circulating supply is expected to drop significantly as millions of Ether get time locked in these staking contracts. Demand may too increase as investors look to earn passive income through these interest payments.
The Enterprise Ethereum Alliance is a collection of Fortune 500 companies as well as startups and individuals who are working together to produce the industry standard for building businesses on Ethereum. These companies include BP, Microsoft, BNY Mellon, JP Morgan, ING, Deloitte and dozens of others. If the time and cost saving impact of technologies like JP Morgan’s Quorum are to be believed, then future demand for Ethereum tokens by large corporations could be huge.
Smart contracts stand to improve the lives of billions of people through their transparent and trustless nature. These same smart contracts could connect billions more devices, making the need to hold Ether (human or machine) a necessity. With an effective supply cap estimated to be roughly 100m, Ether could become a highly demanded and scarce resource whose price has no upper bound. The only question that remains is whether these smart contracts can deliver on a massive scale.