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Ethereum Flips Itself – Signalling a Trend That Will Replace Bitcoin as a Store of Value

Nick
Author Nick
Published

Ethereum Price: $181.65
Ethereum Price (BTC): 0.021618BTC
Market Cap: $19.73B
ETH Network Dominance*: 69.12%
7 Day Candle**: $186.35 / $189.96 / $177.25 / $181.65

The latest Coin Metrics State of the Network issue raised a fascinating insight into the Ethereum ecosystem: Ether, the blockchain’s native token, now accounts for less than half of the total daily transactions across the network.

The remaining transactions are largely accounted for by ERC-20 tokens like BAT, DAI and (increasingly) USDT. The numbers are relatively even – roughly 303,000 daily ERC-20 transactions compared to about 290,000 ETH transactions, however the trend is certain to continue as thousands more ERC-20s come online.

Credit: CoinMetrics.io

This observation is the first of its kind and unique to the Ethereum blockchain in that it is the only chain with a vibrant and active token economy. The result is that ETH has “flipped” itself; Ethereum’s native token has passed on the torch to assets with greater transaction utility than its own.

Ether’s Great Transition

This news could be worrisome for investors. A relatively dwindling utility may have holders scratching their heads – if ETH isn’t being used for transactions, what hope is there of price appreciation in the future?

ETH is transitioning to a new role in the ecosystem. Similar to how Bitcoin has moved from “peer to peer electronic cash” towards digital gold, ETH is becoming more akin to a store of value token than a utility or currency token.

Ether is increasingly being used as the asset to back a soon-to-be billion dollar financial market. Using ETH, investors can now borrow against it, lend it to others or take part in next year’s Proof of Stake consensus to earn the blockchain-world’s risk-free interest rate.

This shifting use-case for Ether is not unfamiliar in the space. The move from currency to store of value (gold) was an accidental but profound one for Bitcoin. As block size approached the 1 megabyte limit over the course of 2014-2018, it became very apparent that this limitation would stop the network far short of the “peer to peer electronic cash” its founder had envisioned. Instead, Bitcoin developers and users began to adopt the digital gold meme. Rather than spending Bitcoin, it became much more effective to hold it. Micropayments were done away with and the 21 million coin limit drove widespread hysteria for this new scarce and digital gold.

Like Bitcoin, Ethereum has struggled with similar limitations to its transaction capacity. However, unlike Bitcoin, Ether does not have a supply limit and nor does it have the same digital gold narrative to Bitcoin. Mainstream media’s best interpretation of Ether is that it is digital oil – fuel for a global computer and with it, sharing none of the store of value characteristics of gold.

Triple-Point Asset

It is possible to argue that Ether is digital gold. It is also possible to argue that Ether is digital oil. In fact, Ether is all this and more. Ether’s problem (and it’s a good problem to have) is that there is no real-world analogy to describe the vast value with which it possesses as an asset. Bitcoin’s extreme appreciation was, in-part, a result of its simplicity. Bitcoin is digital gold. There will only ever be a maximum of 21 million Bitcoins. Every 4 years the total number of new Bitcoin’s mined gets halved.

Put another way, Bitcoin was a FOMO-meme and the perfect retail asset for the first round of blockchain hysteria.

Ethereum on the other hand, was never easily explained. A programmable blockchain with smart contracts, gas fees and an “unlimited” supply. The value of the blockchain might be useful, but why would Ether be valuable? Ethereum brought with it an entirely new paradigm which created (and is yet to create) new concepts that were hard to reconcile with existing financial structures. Investors can calculate the price of a Bitcoin on the basis that it replaces gold’s trillion dollar market. With Ethereum, there’s no equivalent target because the target could be anything (everything).

The complexity of what David Hoffman describes as a “Triple-Point asset“, has made it hard to price and understandably less appealing to retail investors. However, with the re-positioning of ETH as an income-generating store of value, that may soon change.

The supply curve of ETH – like BTC – is a ski slope. Annual % issuance of ETH is roughly 4.4% compared to Bitcoin’s 3.6%. Once Ethereum has transitioned to ETH 2, issuance is likely to be under 1% and possibly nearing 0%. Contrary to common belief, ETH is a scarce asset and one whose supply issuance is set to fall below Bitcoin’s for decades to come.

New native token issuance (%) – BTC (red) vs Ethereum (purple)

Unlike Bitcoin, Ethereum is a store of value that can also be leveraged. Anyone holding ETH could choose, if they wish, to leverage this asset by locking it into a protocol like MakerDAO and drawing out dollar-pegged DAI. This DAI can then be invested in other cryptoassets or Ethereum derivatives. Buyers of DAI can also opt to lock their tokens in the DAI Savings Rate contract – earning an interest of a few percent per year. Alternatively, ETH could remain uncollateralized and locked in the Proof of Stake consensus contract, again, earning the holder a low-risk yield each year. In each scenario, the holder is still the owner of the ETH being locked and thus benefits from any upside in the price of ETH as well as the interest earned.

Bitcoin’s masterful (if unintended) transition to “digital gold” is certain to make way for Ethereum in due course.

As a store of value, BTC is a dud. In the long-term, Bitcoin has a questionable security model; as mining rewards drop to zero, the incentive for miners to continue securing the network drops with it.

And as an asset, BTC is not income-generating. Without a programmable blockchain, the likelihood of being able to earn interest on BTC holdings in a decentralized and non-custodial way is negligible. The best chance Bitcoin has here is in “wrapped Bitcoin” – BTC that has been ported over to the Ethereum network.

In May next year the Bitcoin block reward will half, bringing the blockchain another step closer to irrelevance. Yet bizarrely, this news of increasing scarcity will likely attract headlines that trigger another buying frenzy. For those hardened Bitcoin bag holders (myself included) it will be prudent to dollar cost average their way to the exit – selling on the way up, migrating to Ethereum and putting your digital assets to work on the only blockchain where they can.

– Nick, Owner EthereumPrice.org

* calculated as: (ETH Market Cap / Ethereum Network Market Cap)
** open / high / low / close