Why is Ethereum Valuable?

by Gobie Desert Canoe Pro for the Carl Kruse Blog

Editorial Note: Ethereum is a relatively new technology, on the frontier of knowledge and practice.  Ethereum is volatile, risky, experimental.  The Carl Kruse Blog includes this article by Gobi in the interest of furthering discussion on the Ethereum, not to shill it or encourage anyone to invest in it.  Anyone investing in Ethereum could lose their entire investment.  Please exercise care, do extensive due diligence and consult with a financial advisor before contemplating parting with your money in any investment, Ethereum or otherwise.

On May 1, 2022, about $150 million was spent in two hours in fees on the Ethereum blockchain during the Yuga Labs minting event of their “Otherside” virtual landsale. Said in another way, people spent $150 million to transact on the Ethereum network to purchase virtual land —property that does not exist in the physical world (See: https://cryptopotato.com/baycs-otherside-nearly-200m-gas-burnt-in-hours-apecoin-crashes-30/ ). One single user spent $44,000 in ETH fees alone to purchase a plot of virtual land (https://cryptoslate.com/ethereum-user-spends-44000-in-gas-fees-to-mint-bored-ape-otherside-nfts/). That’s like someone spending a large sum of money to send an email or photo over the Internet, which normally can be done at no marginal cost.

Which leads to the question many normies have asked me –  why would anyone pay to transact on the Ethereum blockchain? Why don’t people just send each other virutal land by email or Fetch or on a thumb drive and save themselves the cost?

And the reasons people do pay are the reasons why Ethereum is valuable. Let’s enumerate 10 of them.

Reason #1 why Ethereum is valuable: it enables trustless transactions between people. 

You can transact and exchange value with someone in Timbuktu not knowing anything about them, and they not knowing a lick about you. This is powerful. If Mr. Timbuktu wanted to sell you digital land, or let’s use a different example, say digital tickets to the Madonna concert in Miami in the traditional way, say by E-bay, you wouldn’t know if you sent him money whether he would send the tickets, and he couldn’t be sure if he sent you the tickets first whether he would get his money. An age-old problem solved (partially) with a trusted third party, in this case E-bay, getting in between the transacting parties. Smart contracts on Ethereum eliminate this problem. As Timbuktu gets his money you get your tickets in an unalterable, secure, provable, irreversible transaction on the blockchain.

Reason #2 is alluded to in Reason #1. Elimination of trusted third parties. 

To exchange value between people we no longer need E-bays, banks, Western Unions, brokers, and escrow agents to solve the issue of trust between us. Smart contracts on the blockchain take care of this and eliminate most middle men. And partly solving the issue of trust is powerful.  How powerful? Varying estimates put the cost of trust at about 30% of global GDP. Institutions such as the police, prisons, the military, all sorts of security measures (safes, locks, alarms, security cameras, gates, walls, anti-virus software), KYC/AML procedures, compliance, financial intermediaries, et al. have all arisen to solve issues of trust. Much value is spent because we cannot trust people and would like to ensure our safety. Solving part of the trust issue and eliminating middle men who partially do this for us is clearly valuable.

Reason #3 Ethereum is censorship resistant. 

So, if the government in Timbuktu doesn’t want Mr. Timbuktu to sell you his tickets, too bad, it cannot stop it. Neither can anyone else. The decentralized nature of Ethereum enables two consenting parties to interact freely anywhere in the world. Ukraine has received tens of millions of dollars worth of blockchain assets to help defend itself from Russia ( https://www.washingtonpost.com/technology/2022/03/03/ukraine-cryptocurrency-donations/ ). Freedom, autonomy, independence reign supreme on the blockchain. This raises a separate set of issues on who or what we want transacting on the blockchain, which I will cover in a separate article. But that no one can interfere in the exchange of value between two consenting parties has some value in a world in which such interference is rife.

Reason #4 is similar – Property is immune to seizure, confiscation or interception — by any force.

My property is my property. Yours is yours. This ensures digital rights. Value can only be unlocked by a specific private key. Without it, impossible. You have money in the bank? It’s not yours. It belongs to the bank. And they can freeze, stop, or embargo it. So can your government. Or an angry ex business partner. Not so on a blockchain in any jurisdiction. Ethereum, and similar blockchains such as Bitcoin, are the only assets in which no outside force can seize them without the consent of the owner.

Reason #5 — Blockchain guarantees authenticity of property. 

Real world, physical Madonna tickets, even cash, are frequently forged and faked. This is difficult, if not impossible on the blockchain. The unique cryptography of blockchain assets assures that your property is unique and unalterable. This has widespread implications from everything from money to art to stocks to bonds to Madonna tickets.

Reasons #6 Assets on Ethereum can be sent anywhere quickly. 

In minutes, quantities large and small can be sent anywhere, anytime, any place via Ethereum. A dramatic departure compared to bank wire transfers and an even more radical difference compared to shipping something like gold.


Reason #7 Ethereum assets are easily stored and wildly portable.

A string of numbers and letters is all it takes to store and unlock any assets held on Ethereum. Such assets are often managed through the use of a “hardware wallet,” whose access can be replicated through the use of a mnemonic phrase. Memorize the phrase and walk anywhere, anytime, anyplace with unlimited value in your head with no technology required. Fleeing Ukraine? Just memorize your private keys and race to the border with just the shirt on your back and your wealth in your head (as this man did —  https://bitcoinmagazine.com/culture/bitcoin-enables-ukrainian-refugee-escape).   Billions of dollars in value are stored easily and carried with no fuss.  This is unique among any other asset class.  Try carrying a large amount of gold or artwork or antique cars or even cash with you. And try sending any of that to someone else.

Reason #8 ETH, the asset of the Ethereum network is about to become deflationary.

Some time towards the end of September 2022, the daily issuance of ETH tokens to miners who secure the blockchain will end as Ethereum transitions from a Proof of Work consensus mechanism to Proof of Stake.  This will lower the daily inflation rate by close to 90% in what has been called the “triple-halvening,” as it has a similar effect to three Bitcoin halvings in supply reduction.  When combined with the so-called EIP-1599 protocol, which burns forever part of the ETH fees of each transaction made on the blockchain, Ethereum should become deflationary, meaning every day there will be less Ethereum than the day before.  Eventually this could/should create a supply shock in the token.  Scarcity combined with use and demand should increase the value of ETH.

Reason #9 ETH is composable

The ETH token is used as collateral, money, and interacts with a wide variety of so-called decentralized fiance (DeFI) applications on the Ethereum blockchain.  Many of these applications are composable and can link together like lego blocks.  Stablecoins, borrowing, lending, transferring funds, staking and a host of other uses that interact with each other stand a chance of replacing the way these same transactions take place in the traditional world.  Just better, faster, and more transparent.

Reason #9 Ethereum provides a yield

Staking ETH tokens currently yields a touch less than 4% APR.  After the Merge to Proof of Stake this yield should increase to the 6-8% range, depending on the amount of total ETH staked and on the number of transactions on the network.  Yield should give more value to ETH and possibly attract non-blockchain users living in a financial world devoid of yield.

 

The $150 million in Ethereum transaction fees I referenced in my original comment, while true, are a smaller part of a big picture. The reality is hundreds of millions of dollars are spent every year to use the Ethereum network. This does not include money spent on accumulating ETH, the native token of the Ethereum network, which runs into the billions.

When Ethereum launched back in August 2015, Ether (ETH) was valued at $1.25. Although as I write it trades in the $1,600 range, it has gone as high as $4,700 — significant appreciation in seven years.

How is this? Are people delusional? Is it a cult? Nope. It’s because Ethereum solves real world problems for many people. This is why it is valuable. And likely to increase in value as more people discover its benefits.

But it’s just a digital thing, no? I can’t touch it or kick its tires. Yet anyone thinking this might not realize that their money at the local bank is digital, just 0’s and 1’s on the bank’s database. It’s not like the bank has your cash lying around. Surprisingly, due to fractional banking, the bank has almost no cash lying around and certainly nowhere close to enough cash to give to all its depositors if they came asking for it. Does that make your money fake, because it is digital? What about your stocks at E-trade? Are your emails, websites and instant messages you interact with fake? Is this blog, where you are reading this non-existent? It’s all in the ether, so to speak. We are right now, at this moment, in cyberspace, interacting in a digital world — 0’s and 1’s floating in space, which through the magic of digital networking we come together across an expanse of space and time. Is what is happening now between us fake? Does it exist? I would say it is not fake and it does exist. And, crazily, much of our reality, our culture, even our own selves, are becoming a series of bits and bytes on a server, so that often we speak of our “real” selves” and our “digital” selves, and I would argue that distinction is increasingly becoming blurred. Regarding digital assets specifically — people have long been paying many billions for digital assets from in-game purchases (body skins, magic potions, dragon-resistant armor) to concert tickets that exist only on your smartphone to stablecoins to cryptocurrency, which you can actually use to transact in the “real” world from everything from buying physical or virtual property to real or virtual weapons (ask Ukraine). It’s a new reality.

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This Carl Kruse Blog homepage is at http://carlkruse.at
Contact:  carl AT carlkruse DOT com
The last blog post talked about Ethereum as an interesting play.  And in this Medium article Carl Kruse tries to predict when the actual Merge to Proof of Stake takes place.
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