Bitcoin’s value proposition, according to many of its investors, is cut and dried: as they say, it’s a scarce, decentralized, borderless, and digital form of money for the world. The value propositions of other cryptocurrencies, however, is a bit more muddied.
A case in point of this conundrum is as follows: some say that while Ethereum has immense value as a technology for decentralization, but Ether/ETH as a token is worthless.
Jeremy Rubin, the co-founder of the MIT Bitcoin Project and a prominent crypto entrepreneur, summed up this sentiment well in an op-ed for TechCrunch titled “The collapse of ETH is inevitable.” In it, he wrote that while Ethereum will “succeed beyond anyone’s wildest dreams,” the cryptocurrency will eventually become “worthless.”
Although the explanation for this shocking sentiment is a bit long-winded, the core of it is as follows: if Ethereum transactions can run without ETH paid as “gas” because of certain platforms and contracts, “there’s no reason [for it] to be valuable.”
According to two prominent industry executives and investors, this sentiment is absurd.
Ethereum is “going to appreciate”: Analyst
In a recent episode of Bankless, a combo podcast and newsletter focused on Ethereum, David Hoffman of tokenized real estate platform RealT and Ryan Sean Adams of crypto fund Mythos Capital discussed what gives ETH value.
According to the duo, there are three distinct mechanisms (some of which are incoming, not activated yet) that will ensure that the second-largest cryptocurrency by market capitalization will appreciate over time:
- ETH locked in DeFi: As the decentralized finance ecosystem grows, more and more of the tokens will need to get locked into smart contracts as a form of collateral, like how ETH needs to be securely deposited into MakerDAO’s CDPs to mint the DAI stablecoin. There are other ways in which DeFi systems can and will leverage ETH as collateral in the future.
- ETH staked: In the near future, meaning within the coming year or two, Ethereum will migrate to a consensus system of Proof of Stake, meaning the traditional and tried-and-true strategy of mining (using computers to process transactions, which earn coins as a result) will be ditched. The system of staking will entice willing participants to stake their Ether, making these coins unusable in return for dividends. The duo suggested that Ethereum staking could involve 10-30 percent of all coins in circulation.
- ETH burnt: Although there isn’t a proper mechanism in place for Ether burning at the moment, the duo explained that there’s a proposal that will burn ETH for every Ethereum transaction that is sent. That’s to say, should this proposal be agreed on and implemented, the amount of ETH in circulation will decrease with rising adoption.
Ether’s price is going to appreciate.
This is a forward looking statement about the value of an asset. Why am I able to say this with confidence?
Because Ether has its own native scarcity mechanisms
– ETH in DeFi
– ETH staked
– ETH burnt
Meanwhile, money printer go brrr https://t.co/dMxkASYzAp
— DavidHoffman.eth (@TrustlessState) April 13, 2020
The long and short of it is: due to the scarcity of ETH enforced by these mechanisms working in tandem, supply-demand dynamics dictate that the cryptocurrency’s value will rise should the growing demand for ETH outweigh the minted supply. Notably, this is a long-term trend as opposed to a short-term one.
So, what’s the result of a higher ETH price?
According to Vitalik Buterin, the Russian-Canadien founder of the leading blockchain, the higher the cryptocurrency goes, the more valuable it becomes.
In a live iteration of Unchained, Laura Shin’s crypto-focused podcast, Buterin explained that he thinks an increased Ethereum price is even productive, despite many bashing the crypto industry’s focus on price and wealth:
“I can tell you what things are clearly important about why the price being higher rather than lower is good. One of them is obviously security. If the price is zero, then the network can’t be secure. That’s true in proof-of-work and proof-of-stake.”
He added that with higher prices, innovators are more incentivized, both monetarily and psychologically, to continue using Ethereum.
A vicious cycle of appreciation
If we assume Buterin’s statements and the sentiment of the Bankless podcasters to be entirely true, that means the crypto industry has a vicious positive feedback loop on its hands where higher ETH prices beget more usage, which begets higher prices, which begets more adoption, and so on.
It isn’t clear if there’s a limit on this trend; as long as there is a growing level of demand for Ethereum, a shrinking supply of the cryptocurrency, whether it be through DeFi or being burnt, should boost prices higher.
But to what extent, no one is all too sure.