Ethereum’s recent decision to drop the block reward from 3 Ether to 2 Ether and Cboe’s announcement of an Ethereum futures market have done nothing to sway investor sentiment. Ethereum is looking like it will break its 12 month low next week and today’s $250 price tag may still be wildly overvalued.
The two key drivers for buying Ethereum — a) to interact with dApps/crypto ecosystem and b) to untether from fiat — have fallen short, and the speculative froth sitting atop this reality is rapidly dissipating. The ecosystem of a) is underdeveloped and awkward to interact with, while b) is little understood or hard to access for those who would most benefit. When the price of Ethereum was mooning, it was on the expectation that there would be enormous buy pressure from these two sides, and of course those buyers never came. This realisation and the general market unease was recently compounded by an article published to TechCrunch titled “The collapse of ETH is inevitable“. The article goes into detail about plans to abstract Ether away from transaction fees and block rewards; raising the question that, if I can interact with Ethereum using Bitcoin, why would I buy and use Ether? This post is a response to that article with a longer-term perspective.
“Disintermediation” of Ethereum
The article starts by predicting that “Ethereum ends up succeeding wildly but ETH becomes worthless“. The claim is bold, but it’s also not without some basis in reality; Ethereum is on a path to having ETH “disintermediated” from paying gas (transaction fees). Instead of paying gas with Ether, I could pay for it with another token of my choosing (this is also referred to as “interoperability” between chains). If no one needs to buy Ether to pay for gas, then who’s buying Ether? This is a question that I brought up at Consensus earlier this year but the tl;dr answer was simply… “no one”. As blockchains move towards interoperability, how will tokens hold value if they are not needed and fees could be paid with – for instance – Bitcoin?
For many tokens there is a “workaround” to this problem. Do not allow any other tokens to interact with the software; close the blockchain and block interoperability. This may seem like an obvious solution to the demand problem, but the reality is that users will want flexibility as to which tokens to use. In the scenario of two blockchains, one that allows the user to choose which currency to use for gas fees and another that doesn’t, the former will win. This does mean that disintermediation of ETH is inevitable, but this will not reduce its price to zero.
Enshrining ETH at the protocol level
Co-founder of Ethereum, Vitalik Buterin, felt obliged to respond to the TechCrunch article on Reddit. While Vitalik accepted that most of the author’s criticisms were correct for Ethereum today, he also noted that proposed protocol changes would ultimately render many of the points irrelevant.
Gas will be payable in any ERC20 token however a proposed “min fee” may be implemented that can only be payable in ETH. The min fee is then burned or redistributed.
Rent fees are likely to be implemented as a means to deter users from storing data on the blockchain. Rent is payable to keep data in storage, with the fee being burned.
While these both fit into the “workaround” issue described above, the bulk of any transaction fee will still be payable in any ERC20 token.
Ethereum block rewards are paid in Ether and these block rewards are essential to the network’s liveness; if Ether were to reach $0.00 then there would be no miners and no transactions. Ether has to have a value or the entire ecosystem collapses. This in itself is not a reason for Ether to stay above zero, but it does raise questions about the structure of the system – if Ethereum were to host world-changing dApps that transferred billions of dollars in value, then could it all come crashing down by disintermediating ETH?
This is a tough question to reconcile, but dApps aside, Ethereum – with all its current mining power – is more secure than any fiat currency (and all cryptocurrencies bar Bitcoin) and for that reason it must have a non-zero value. Users in Venezuela would be able to attest to that.
Staking in Proof of Stake
The “inevitable collapse of ETH” also seems to skip over the upcoming move to Proof of Stake (PoS) as a consensus mechanism. In PoS, users will have to stake Ether in order to participate in consensus and earn dividends. While this has no long-term benefit (buying a disintermediated token to earn the same disintermediated token is futile), the buying pressure will ensure a non-zero value of Ether. At the very least, there will be plenty of users staking Ether to secure the network out of charity rather than capital gain; in the same way that users run full nodes with no compensation today.
Is Bitcoin any different?
The focus of the TechCrunch article targets Ethereum, but similar issues face other cryptocurrencies including Bitcoin.
It seems inevitable that users will not want to spend Ether on gas fees. Why cover gas fees with an asset that could be worth many times more in the future? In fact, why spend any asset that could be worth many times more in the future? Stablecoins (many of which are built on Ethereum) solve this issue as users look to spend crypto using a stable dollar denominated value. These stablecoins are likely to become the main source of liquidity for the entire ecosystem; replacing the need to transact in anything else – including Bitcoin.
What then for Bitcoin?
If Bitcoin’s payment network is replaced by something with stability, speed and security, then Bitcoin is left with the sole purpose of being a store of value (SoV) with relatively few transactions. Ethereum on the other hand, is likely to have millions of daily transactions as users interact with a plethora of dApps on the blockchain. As the supply growth of Ether grinds to a relative halt (low ETH rewards under PoS and burned fees), deflationary pressure begins to take hold and Ethereum’s Ether may too become a SoV, with the stablecoins built on top of the platform being used for day-to-day transactions.
The outcome for Ethereum is nuanced, unknown and impossible to accurately predict. This entire asset class is still very young and hard to value. There are inherent qualities of secure cryptocurrencies like Ether and Bitcoin that trump the traditional fiat system and warrant some level of buying pressure, but only the future will decide the extent of that buying pressure. The story published on TechCrunch has certainly sparked a discussion, however the question as to whether Ether goes to zero can be answered with a simple and emphatic no.