What makes Ether valuable? Did we spend our money on magical internet numbers, or is Ether more than just a digital tulip? The value proposition for Ether is not easy to grasp, especially for a layman. Not only does one need to understand how Ethereum’s blockchain and smart contracts system works, you would also need to understand how Ether is valuable in such a system. At a $30 billion market cap, which is roughly $300 per Ether, I’ve put a lot of thought into whether this hefty price tag makes sense.
Here’s why I think Ether is valuable, and why it continues to have tremendous upside.
Ether is a fuel, not a currency
I’m going to elaborate this in a future blog post, but I highly doubt any public, limited supply, cryptocurrency will ever be a successful currency. Such a cryptocurrency will be inherently volatile and deflationary. This makes it highly inconvenient as a medium of exchange.
- Assume an Xbox is worth 1 Ether
- Why would a merchant accept your 1 Ether for his/her Xbox, if that 1 Ether could depreciate and be worth half an Xbox the moment the goods exchange hands?
- Conversely, why would you give your 1 Ether to the merchant for his/her Xbox, if that 1 Ether could appreciate and be worth 2 Xbox’s the moment the goods exchange hands?
In both cases, the volatility of Ether caused one party to lose out. This uncertainty discourages either party from committing to a transaction. Given that a healthy and growing economy needs a high money velocity, this is terrible.
So if cryptocurrencies cannot serve as successful currencies, what are they useful for? The first thing that comes to mind is an alternative to gold. However, we have to keep in mind that gold took milleniums to be ingrained in the human mind as a fundamental store of value. For people to start valuing an ephermeral digital currency the some way we already value gold takes a huge paradigm shift that would need to occur over years if not decades.
Ether will be valued not as a currency and not as gold. It will be valued as a fuel that powers a highly useful public utility, the Ethereum blockchain. You need Ether to send transactions and power smart contracts. In the ideal case, many decentralized applications (either built by the public or by large corporations) will be running on Ethereum. There will be a high demand to use these smart contracts, creating a significant buying force on the Ether markets. This is where Ether will derive most of its fundamental value from.
Proof of stake
With Ethereum’s Casper upgrade, which is set to be released next year, Ether will not only be useful as a fuel, it will be useful as a means to mine the blockchain.
The current arrangement (proof-of-work) has graphics cards and ASICs solve complex math problems to mint Ethereum transactions. The reward for the hardware doing all this work is a fee paid in Ether. With Casper, Ethereum will be almost fully reliant on Ether to function. Ether will be needed to mint Ethereum transactions and Ether will be needed to pay for the minting.
This wouldn’t be a talking point if not for how dysfunctional Bitcoin’s leadership has become. Instead of arguing over trivial things such as whether to introduce SegWit or whether to add 1MB to the maximum blocksize, Ethereum’s leadership actually has a well defined roadmap and are actively working towards it.
Not only is there a plan to improve Ethereum, its leaders are actively venturing out to promote Ethereum through driving grassroots support with local meetups and hackathons, as well as fostering corporate connections through giving talks at large technology conferences and even meeting government officials.
Finally, how can I discuss Ethereum’s leadership without mentioning Vitalik Buterin, the creator and primary figurehead for Ethereum? Vitalik cannot be a more fitting leader. Vitalik published Ethereum’s whitepaper at only age 18. He was a skinny and socially awkward teen with a whitepaper then. Now he’s equally skinny, equally socially awkward, but also the creator of a $30 billion blockchain.
Even with his skinny physique and a few nervous ticks, I have to give credit to his public speaking skills. Vitalik has given a large number of talks promoting Ethereum. His most recent apperance is on TechCrunch’s Disrupt SF 2017. He speaks clearly, loudly, and at an authoritative pace. Not something you’d expect of a skinny, 23 year old blockchain geek.
Vitalik recently announced that he would be dedicating all of his OmiseGo and Kyber Network advisor shares, either to charity, or to funding for Ethereum second-layer infrastructure.
Upcoming technology - Plasma and Raiden
Ethereum has two substantial upgrades coming up: Plasma and Raiden.
Plasma will significantly increase the efficiency of running smart contracts on Ethereum. It will enable smart contracts (and the decentralized applications relying on them) to have potentially billions of state updates per second. Although Ethereum is currently a single-threaded computer, Plasma will ultimately allow Ethereum to efficiently host a large number of decentralized applications. OmiseGo is currently building on top of Plasma. You can read more about Plasma here.
Raiden is another proposed upgrade for Ethereum. Its closest parallel is the Lightning network for the Bitcoin blockchain. Raiden is a second-layer infrastructure that will enable potentially over a million transactions per second on Ethereum, including ERC20 token transactions. Raiden announced this month that they will be conducting an ICO to fund further development of the project. You can read more about Raiden here.
Ethereum as a highly useful public utility
As mentioned above, a large part of Ether’s fundamental value will derive from Ethereum’s success at being a highly useful public utility. People will want to buy Ether to use Ethereum’s decentralized applications. These applications will either be deployed by the public or by large corporations.
Here’s an overview of Ethereum’s nascent ecosystem of decentralized applications.
Budding corporate adoption
If you haven’t already heard of the Ethereum Enterprise Alliance (EEA), you should check it out. I wrote about the alliance here. It’s essentially an Ethereum research group comprised of companies that are interested in Ethereum’s smart contract blockchain technology and want to learn more about it, improve it, and adapt it for their own use cases. One of the core value propositions for the EEA is that it connects all these large institutions with Ethereum experts.
Do the names Microsft, J.P. Morgan, and Deloitte perk your ears? They are only a few of the numerous big name companies and universities that are involved with the EEA.
EEA is nice as a fancy research group, but what’s most important for Ethereum is real corporate adoption of the public blockchain… and we’re seeing signs of it right now. Russia’s airline, S7, announced in July that they would be selling tickets using Ethereum’s public blockchain, aiming to simplify payments and decrease setlement times between airlines and agents. In September, a French multinational insurance firm worth €68.5 billion (AXA) released Fizzy, an insurance product built on Ethereum’s public blockchain.
Powerful decentralized applications
The transparency, integrity, and security of the blockchain makes it very conducive for financial and gambling applications. Ethereum, with its smart contracts system, is at the forefront of making them a reality.
Two of Ethereum’s most well-used applications right now are ICOs and decentralized exchanges. ICOs are like IPOs but conducted over the blockchain using smart contracts. ICOs are huge right now. They are a key reason to why the cryptocurrency markets exploded this year. However, many have questioned whether they are healthy for cryptocurrencies as a whole due to the rampant amount of speculation and scams. Nonetheless, the ICOs together represent a massive, active use case for Ethereum.
The other well-used application of Ethereum is decentralized exchanges. EtherDelta is one of the largest Ethereum-based decentralized exchanges out there and it has orderbooks for almost every ERC20 token. EtherDelta has a 24-hour volume of $3.6 million, a far-cry from the hundreds of millions of dollars traded on premiere cryptocurrency exchanges but still significant for one powered by smart contracts.
There are decentralized applications for other compelling use cases of Ethereum such as casinoes, lotteries, and prediction markets but adoption hasn’t been strong. I would argue that poor user interfaces are hindering their growth. Projects to look out for in this space include: Augur (prediction markets), Gnosis (prediction markets), FunFair (casinoes), and Edgeless (casinoes).