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The Ethereum Investment Case March, 2023

Ethereum is a foundation for building a digitally-native, open and trustless financial system that is accessible by anyone with an internet connection.

This new financial system requires an underlying asset to power it, one which can be used as an incentive to maintain security as well as a “fuel” for the system’s transactions.

Ethereum is underpinned by the network’s native asset, Ether, a trustless and permissionless asset. As it stands today, there are two main drivers behind the value of Ether.

  1. The network as a secure settlement layer
  2. The demand for Ether as a trustless reserve asset to power decentralized finance and other applications

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The Network as a Secure Settlement Layer

While many community members tend to brush off the price of Ether as a non-factor, it does serve a vital role in the security of the network at large.

Similar to Bitcoin, a strong price of Ether drives an incentive for miners to contribute computing power and secure the network. As such, one of the core value propositions of decentralized networks is its security and immutability for settling transactions, meaning the more secure the blockchain as a settlement layer, the more valuable it is to store data and transact on the network.

This creates a positive feedback loop. As more computing power is contributed to the network, the more secure it becomes, and in turn, the more valuable the network becomes, which drives a larger incentive to contribute computing power to the network.

The price of Ether plays an even more important role in security when the network eventually transitions towards ETH 2.0 and Proof of Stake. The more Ether locked in the system for consensus, the higher the security for the network. Taking this a step further, a higher price in Ether creates a more secure network as it becomes increasingly more expensive to gain control over a majority of the circulating supply.

Demand for Ether as a Permissionless, Trustless Reserve Asset

Unlike Bitcoin, Ethereum enables a new technology for developing applications that are backed by this trustless asset (ETH). This value layer allowed for new applications to be built on Ethereum’s permissionless financial network.

While it is not usually considered decentralized finance, the Initial Coin Offering (ICOs) bubble in 2017 established a new paradigm for permissionless crowdfunding.

In 2018, we saw the likes of MakerDAO launch its permissionless stablecoin, Dai, which has become a core technology in the blockchain space – allowing users to transact without the exchange rate risk commonly associated with cryptocurrencies.

In 2019, we saw the “cambrian explosion” of Decentralized Finance with the emergence of permissionless lending, derivatives platforms like Compound, Synthetix, along with open, permissionless exchanges like Uniswap.

All of these DeFi applications drive demand for Ether as the asset is used as collateral for the application protocol. Ether, therefore, is the primary reserve asset acting as “economic bandwidth” for permissionless finance on Ethereum.

MakerDAO’s Dai is almost entirely collateralized by Ether and Compound’s biggest lending markets are Dai-based. A growing demand for Dai is a growing demand for Ether, as it is the primary reserve asset for creating new Dai.

Decentralized Exchanges (DEXs) like Uniswap leverage liquidity pools to provide users with liquidity on the underlying assets. All of these liquidity pools are 1 part token and 1 part Ether.

Ether is the backbone for fuelling decentralized finance and other value applications. As the proliferation of DeFi continues to take place on Ethereum’s permissionless financial network, more Ether will be locked away, driving up the scarcity of Ether as well as the demand for the asset at large.

On January 1st 2020, roughly 3,000,000 ETH had been locked in decentralized finance applications – about 2.5% of the total ETH that will ever exist.

Investment Speculation and “FOMO”

Ether and crypto assets at large are an entirely new and evolving asset class. Unlike traditional capital markets that have existed for centuries and have had the ability to mature alongside a robust set of valuation models, crypto assets have only been around for a decade where Ether has existed for less than half of those years.

As Ether is an entirely new model for money, it has yet to establish a common framework for evaluating the asset. Ether and crypto assets more broadly are extremely volatile due to their immaturity and the lack of common understanding surrounding their future role in the global financial system.

We’ve seen this immaturity play out in the past few years as Ether and ERC-20 tokens continue to be subject to enormous volatility in both directions. In January 2017, the price of Ether was just $10. By the following year, Ether had surged to over $1,400, returning 13,900% to early adopters at its peak. Nearly a year after the massive run-up in 2017, the price of Ether decreased by -94% as it bottomed out at ~$80 in December of 2018.

The nascency of ETH has created a highly speculative environment, generating a great deal of volatility as the market attempts to discover a fair value for the asset.

Until there’s a greater understanding of Ether, common practices for accurately evaluating the asset and a significant increase in overall liquidity, we’ll likely see Ether continue to exist as a hyper-volatile asset.

The Ethereum Investment Case
Supply-Side Economics

Unlike Bitcoin’s programmatic monetary policy where block rewards are halved every four years, Ethereum has taken a more dynamic approach to its issuance policy.

Ethereum’s monetary policy strives for minimal necessary issuance to provably secure the network from any malicious attacks. As the price of Ether has increased over the past few years, we’ve seen numerous issuance reductions implemented via protocol upgrades.

As a brief summary, in October 2017, the network reduced block rewards from 5 ETH to 3 ETH (-40% change). In February 2019, the Constinople hard fork introduced another issuance reduction from 3 ETH to 2 ETH (-33.33% change). The current issuance rate stands at 2 ETH per block.

It is important to note that Ethereum does not have a fixed supply cap. However, it is a common belief in the community that, with the introduction of Ethereum 2.0 and a few key features, it is unlikely for Ether to ever surpass 120M in total circulating supply.

ETH 2.0 Issuance

With the launch of Ethereum 2.0 and Proof of Stake, the network is able to drastically reduce issuance rates as the cost of maintaining a validator node is significantly lower relative to hardware mining.

The current discussions surrounding issuance rewards are centered on ensuring that running a validator node is profitable for the average individual while also incentivizing high enough participation to secure the network.

As such, the suggested returns for validators are as follows:

Data via EthHub
ETH Staked Issuance Rate Est. Validator Return
1,000,000 0.17% 18.10%
3,000,000 0.30% 10.45%
10,000,000 0.54% 5.72%
30,000,000 0.94% 3.30%
100,000,000 1.71% 1.81%

In ETH 2.0, it’s very likely that annualized issuance rates will drop below 1%. The above rates do not account for rewards via transaction fees and are strictly the returns generated by block issuance.

According to EthHub, Ethereum is currently paying out around 600 ETH a day in fees, or around 219,000 ETH a year. How these rates will be affected by the introduction of EIP 1559 (more on this later) as well as any increase in network usage creates some ambiguity surrounding the future of Ether’s monetary policy.

The Ethereum Investment Case
Demand-Side Economics

In 2019, we saw the proliferation of Decentralized Finance (DeFi) on Ethereum, establishing a key narrative for the future value proposition of the blockchain.

By leveraging open-source software, Ethereum provides permissionless financial services to anyone in the world with an internet connection. However, in order to provide permissionless financial services, you need a trustless, permissionless asset to back it.

Ether is a trustless, permissionless asset acting as the main source of economic bandwidth for Ethereum’s permissionless finance.

In 2019, the network saw 2.934M Ether or $381M in value (at $130 per ETH) locked away to fuel financial applications. The growth in DeFi and its consumption of Ethereum’s economic bandwidth has severely outpaced the growth of its liquid market cap. In January 2019, DeFi soaked up around a mere 1.91% of Ethereum’s total available bandwidth. A year later, this number surged to nearly 5%.

economic bandwidth of Ethereum

Graphic via 0x_Lucas on Twitter

It is becoming apparent that DeFi and permissionless finance is one of the first clear use cases for Ethereum. Projects like MakerDAO, Compound, and Synthetix comprise of the big three DeFi protocols, establishing the basis for permissionless stablecoins, permissionless lending, and permissionless derivative issuance.

Should the current growth rate of DeFi applications continue, these money protocols – which are reliant on ETH – may well begin to capture a slice of existing capital markets, increasing the demand for ETH with it.

To give some broader context on the potential for permissionless finance, US money supply M0 consists of nearly $3.35T dollars with the broader currency markets trading at $5.1 trillion dollars in daily volume. The derivatives market is worth hundreds of trillions in outstanding contract value while lending markets act as the foundation for global banking.

Ultimately, it will only require DeFi to capture a small sliver of existing capital markets to begin consuming Ethereum’s economic bandwidth at an alarming rate. As a result, Ether as trustless, permissionless collateral will only grow in importance as it powers the next global revolution in finance.

Are other assets used as collateral in Ethereum’s DeFi economy?

Those familiar with decentralized finance will know that ETH isn’t the only type of collateral. Maker, which powers the world’s largest decentralized stablecoin, DAI, allows for multiple asset types to be used as collateral for borrowing this stablecoin. Other collateral types include Basic Attention Token (BAT) and other Ethereum tokens.

While it is possible that non-ETH tokens will increase their share of the underlying collateral in Ethereum’s DeFi economy, it is likely that ETH will forever play a dominant role. The most compelling argument for this is that ETH is the native asset of Ethereum and is inherently the most secure. Going further, assets built on top of Ethereum not only lack the same security guarantees that ETH holds but are also less liquid. ETH, then, is the most liquid and most secure/trusted asset on Ethereum – facets that make for a superior form of blockchain-based collateral.

Does DeFi have to be based on collateral? Why not credit?

Blockchains like Ethereum are successful because of their cryptography – mathematics used in a way that provides guarantees about what is true and what is not. For this reason, blockchains are a perfect fit for accounting and ensuring that a system (ultimately based on the transaction of numbers) cannot be defrauded. In a system like this, collateral-based loans and derivatives can be implemented in a way that is entirely trustless – retaining the blockchain’s security guarantees without the myriad of risks associated with credit.

Multiple teams are working on decentralized identities (DIDs), including the likes of Microsoft, however these identity systems are several years away from being implemented and will only be the first step towards a decentralized credit system. At this early stage, it is very hard to predict how DIDs will impact DeFi on Ethereum and the value of ETH as collateral.

Future Applications

While permissionless finance may dominate Ethereum’s usage in the future, there’s also plenty of potential for other markets and use cases to emerge for a decentralized smart contracting platform. Identity, gaming, NFTs and the broader enterprise market are some of these use cases and may likely all find their own niche within the network and drive up transaction usage.

The only question for investors considering the ETH investment case, is to ask whether the platform can effectively scale to cater to this demand.

ETH 2.0

Permissionless finance, non-fungible tokens, and other use cases are all examples of application-specific demand for Ethereum and its underlying asset.

Taking a step back, there are a number of reasons for a drastic increase in demand for Ether at the protocol layer.

The introduction of Ethereum 2.0 and Proof of Stake will shift the network’s reliance on computing power for securing the network towards relying on capital, in the form of Ether, to secure the network.

Proof of Stake will create a ubiquitous mechanism for driving demand to the asset as there would now be an incentive for holding it.

By running a validator node or contributing to a staking pool, Ethereum users will be able to earn a passive return by locking up their Ether on the protocol layer.

The minimum requirements for running a validator node is currently 32 ETH along with needing a reliable internet connection and some basic computing hardware to run the software (like a laptop or Raspberry Pi). In addition to Proof of Stake, Ethereum will also introduce new demand mechanism via EIP 1559.

EIP 1559

The final piece to Ether’s demand-side economics is the future introduction of EIP 1559 which burns a portion of all transaction fees processed by the network.

EIP 1559 creates a new mechanism that not only drives scarcity to all token holders equally but also opens up the potential for Ether having a deflationary monetary policy.

If the network is processing a large enough number of transactions per day, it is entirely possible for more Ether to be burned on a daily basis than minted through native issuance. As such, the narrative that crypto assets require a fixed supply to drive price up over time is negligible with EIP 1559.

EIP 1559, combined with increasing demand from ETH 2.0 and permissionless finance applications, could create a great deal of upwards pressure on the price of Ether.

The Ethereum Investment Case
Ether: A Triple-Point Asset

All of these concepts converge to create an entirely new asset that has been described by David Hoffman as the world’s first triple-point asset.

Popularized by Robert Greer in 1997, there’s three types of superassets:

  • Capital Assets are assets that are productive and generate cash flow. Examples of capital assets include equities, bonds, loans and real estate.
  • Consumable Assets are assets that you can consume, burn, or transform into another asset. Examples of consumable assets include gold, oil, and commodities like wheat.
  • Store of Value (SoV) Assets cannot be consumed, have some degree of scarcity and its value persists over time. Examples of SoV assets include gold, currencies, real estate, and bitcoin.

While some assets might be categorized within two of these superassets, no asset in existence has the properties of all three. However, assuming the successful launch of ETH 2.0 and EIP 1559, Ether would be the first asset to hold all three properties of Robert Greer’s superassets. 

Summarizing how Ether fits into all three asset classes:

  • Ether is a capital asset given the ability to earn a passive income by holding the asset (i.e. staking in ETH 2.0).
  • Ether is a consumable asset as it is needed for all transactions on the network to produce economic yield (i.e. sending Dai as a payment).
  • Ether is a store-of-value asset as it’s the primary reserve asset for permissionless finance (i.e. used as collateral for minting Dai and other stablecoins).

While Ether will have to wait until the successful launch of ETH 2.0 to become the world’s first triple-point asset, it is nothing short of exciting. All of these concepts create an entirely new model for money that the world has yet to explore. Ultimately, assuming it realizes the potential it currently holds, the future of Ether is extremely bright. However, there’s a long road ahead for Ethereum, especially in the coming years.

The Ethereum Investment Case
Ethereum's Drawbacks

Having launched the genesis block in July 2015, Ethereum as a technology is yet to be considered mature and faces plenty of shortcomings in both the near-term and in the long-term.

Two of the biggest criticisms surrounding Ethereum today are in its governance over the protocol and its ability to scale to the dizzying heights that many advocates might pontificate.


Governance is and will always be a contentious issue within decentralized blockchain network.

The anonymous nature of Satoshi Nakomoto gave Bitcoin the ability to forego governance and and opted towards biblical approach where the concepts outlined in Satoshi’s whitepaper are rigid and base layer improvements are rare to the point of stagnant.

As such, Ethereum receives a fair amount of criticism from the Bitcoin community given its fluidity over governance and the up-keep of what is effectively a “social contract” with the broader community.

This social contract was put under enormous stress during The DAO fork in 2016. The DAO, for those unfamiliar, was a decentralized investment group which saw millions of Ether contributed to its smart contract. The contract, which amassed enormous value in a very short period of time, was swiftly exploited and those who had invested saw their ETH stolen.

While decentralized blockchains emphasize immutability as one of their core value propositions, the Ethereum community agreed that the network should rewrite the ledger and return the lost capital back to those who lost funds in The DAO.

While the hard fork was successful, it did create a rift in the community resulting in two networks: Ethereum Classic and Ethereum.

This decision arguably damaged Ethereum’s reputation, as blockchains had – up to that point – been deemed immutable regardless of circumstance.

Ethereum has also received some criticism surrounding its consistent delays of the “Ice Age”, also known as the “Difficulty Bomb”. The Ice Age is a mechanism that was implemented in the protocol creating near-impossible block difficulties to disincentivize hardware mining and smoothen the transition towards Proof of Stake in the future.

Ethereum has delayed the Ice Age multiple times in order to give developers additional time to properly code and implement ETH 2.0.

While the delays are generally considered to be for the greater good of the network, it does shed some light on how easy it is for the network to come to a social consensus and change protocol level mechanisms.

This ease at which a group of individuals (Ethereum developers) can interfere with the low-level running of the network has created some concerns among investors.

That said, blockchain governance is very much a human process and is reliant on these general and vague “social contracts”. The belief that humans can be removed from these systems is arguably fantastical and applies equally – albeit with opposing results (much change versus minimal change) – to Bitcoin.


Ethereum’s scaling solution, ETH 2.0, has been delayed more times than most care to count. These delays and the ambiguity of how ETH 2.0 will unfold has drawn much criticism and concern for the network.

Despite these network upgrades being outlined in the original whitepaper back in 2014, we’ve yet to solidify when the transition will officially begin.

However, given the current state of the development, it can be expected that the transition will begin sometime in the year 2020, as multiple ETH 2.0 clients are in live testing environments.

With a successful launch of Serenity (the final stage in Ethereum’s development), the total addressable market for global financial assets could begin to be captured in a meaningful way.

Should ETH 2.0 still struggle to achieve the scale required for such a feat, other solutions to transaction throughput can be found in rapidly-developing new technologies from the likes of Zero Knowledge Roll-ups, Optimistic Roll-ups and state channels.

Black Swan Events

Given the rapid pace of innovation within Ethereum, it’s possible that the network will face a black swan event in the future.

Crypto assets, smart contracts, and decentralized blockchain networks are highly experimental and have not yet been truly “battle-hardened”.

With the proliferation of permissionless finance, there’s an increasing amount of value being stored in smart contracts. Similar to the DAO in 2016, as the amount of value stored in the contracts increases, so does the incentive to steal it.

While these are short-term drawbacks, black swan events contribute to the network’s long-term antifragility. If the network survives and continues to progress, these events can become increasingly valuable as they demonstrate the blockchain’s resistance to even the most complex of attacks.

For more reading on the importance of antifragility and its importance for Ethereum, feel free to reference this post.

The Ethereum Investment Case
Ethereum Killers (EKs)

In 2017 and 2018, hundreds of millions of dollars were raised from crypto-focused venture firms to develop and launch the next “Ethereum Killer”.

Over the coming years, we’ll begin to see these networks hit public markets and find fair valuations for their native assets.

All of these networks purport to having superior technology; featuring higher throughput, more intuitive programming languages, more secure consensus algorithms, and other claims. Unfortunately for these EKs and their venture fund backers, the best technology – even if it is objectively better – doesn’t always win.

One of the most valuable aspects of Ethereum is its growing network effects through its composable money protocols. While all of these networks are being developed behind closed-doors with absurdly high valuations, Ethereum has the advantage of being live, open source and the daily contributions of a global pool of developers.

Even better, Ethereum already has a network of miners securing the network. As such, EKs will not only have to win over the share of existing blockchain developers but also bootstrap the security of the network with high issuance rates and economic ingenuity to attract the interest of miners.

Every day that Ethereum maintains its growing user, developer and mining community, the harder it will be for other networks to overcome Ethereum’s established network effects.

The Ethereum Investment Case
Closing Thoughts

Assuming none of the issues outlined above come to fruition and Ethereum successfully transitions towards Ethereum 2.0, the potential for the technology and its native asset become unimaginable.

There are hundreds of trillions of dollars potentially able to be tokenized and secured on Ethereum. All of these assets will require Ether to some capacity to either transact or collateralize the assets in a trustless, permissionless fashion.

Outside of permissionless finance, Ethereum also establishes the infrastructure for permissionless identities, in-game assets, supply chain verification and even new sectors and applications that innovators have yet to discover.

While day-to-day price swings can seem daunting, the future is nothing but exciting for Ethereum. To give some confidence on the trend of Ether as an investment case, here are the annual lows for ETH in USD and BTC.

Year Price (USD) Price (BTC)
2015 $0.41 0.0015
2016 $0.84 0.0020
2017 $8.02 0.0079
2018 $80.29 0.0246
2019 $100.06 0.0161

Year-after-year, Ether as an asset has continuously made higher lows against the US dollar. If investors are able to maintain a low-time preference on their investments, Ether could hold a significant upside over the long-term.

This technology will play out over the course of decades, not weeks or months. Those that have the patience to remain emotionless and truly take the time to understand the core, fundamental value of this technology will be the ones who benefit the most in the long-term.

If you’re looking to become a serious, long-term investor in Ethereum, it is recommended to take a dollar-cost averaging approach and purchase small allotments periodically over time. This ensures that you receive the best price without incurring high-risks or over-allocating towards the asset.

It is important to note that crypto assets in general are highly speculative and should not be considered viable for as “get rich quick” scheme.

All in all, the future potential for Ethereum as the infrastructure for the internet of value is endless. In the coming decades, the applications that will emerge on decentralized blockchain networks (Ethereum or not) will genuinely be unimaginable to those in the industry today.

That said, all signs are pointing for the next leg of technological and financial innovation to occur on Ethereum.

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