5 reasons why I’m going all in on Ethereum

The Ethereum merger will likely make Ethereum the first economically viable blockchain in the long term.

Key points:

- Currently no major blockchain protocol is economically viable in the long term, i.e. the revenue exceeds the operating costs of the blockchain.

-The real power of cryptocurrency technology is decentralization. If you want to decentralize a network, you can’t just flip a “blockchain switch.” For it to work, a strong social force is needed — legitimacy.

-In a blockchain ecosystem, legitimacy grows and is maintained within the community, which maintains legitimacy and assigns responsibility.

-A blockchain cannot be decentralized if ordinary community members cannot run nodes.

-The Ethereum merger is a historic upgrade that will likely make Ethereum the first economically viable blockchain in the long term.

ETH is the native currency of Ethereum. It has multiple functions - it is valuable (can be used to pay for transactions) and drives the world's largest decentralized computer; it is a "bond" (used in the POS consensus mechanism) and can generate profits; it can store value (as currency in Defi) - these functions complement each other.

The cryptocurrency ecosystem contains assets that have been the best performing assets in the world over the past decade and have the best risk/reward ratio. (e.g. BTC and DOGE). For many of us, this is the main reason why we became interested in cryptocurrencies in the first place. However, from an investor's perspective, I believe ETH is the asset with the best risk/reward ratio right now.

Top five reasons why I am bullish on ETH:

1. Solve the scalability problem

2. Network Effect

3. “The most important scarce resource is legitimacy”

4. Friendship with Moloch

5. The world's computers go green

6. Solving the scalability trilemma

The trilemma is that if you use “simple” technology, you can only achieve two of the three main features that blockchain is trying to achieve (scalability, decentralization, and security). There are currently three “simple solutions” that can achieve two of these features:

Without proper decentralization, the "pure mathematics" in blockchain technology will not work, but Satoshi Nakamoto showed us how to do it. Before Satoshi Nakamoto, we already knew how to communicate in a secure and scalable way, which is not difficult (advocates of high TPS chains need to understand this); what we didn't know was how to do it in a decentralized way. This is similar to how Michael Faraday showed us how to get electricity with the world's first generator, which created a domino effect - thanks to this, we have other innovations that have completely changed the way humans live.

Have we solved the scalability problem?

Currently, no blockchain has solved the scalability problem, which is akin to hoping to download a movie in a minute in the 1990s; the technology and adoption were simply not ready.

People invest time or money in Internet projects in order to gain benefits. However, it is shocking that no mainstream blockchain protocol is economically viable, that is, the fee income should be greater than the cost of blockchain operation.

Bitcoin fully performs its primary function: store of value; but it needs to "print" BTC to pay for security. It "prints" about $31 million worth of BTC every day, generating only about $300,000 in BTC transaction fees (July 2022). Will Bitcoin be economically viable after a few halvings, or when all 21 million BTC are mined (estimated to be in 2140)? No one knows. I think most people would agree that as more halvings occur, its economic viability will inevitably decrease (if everything else remains the same).

After Ethereum upgrades to proof-of-stake, it will likely become the first blockchain to be economically viable in the long term, as the cost of maintaining the network is expected to be lower than the fee rate generated by creating blocks. In fact, Ethereum has already produced some deflationary blocks after EIP 1559 (BASEFEE burning).

Ethereum is the blockchain that has come closest to solving the scalability trilemma, and has the best scalability strategy by building a unified settlement and data availability layer. Ethereum’s community is (with the right R&D, public goods, and grants) able to make it happen, and it is the only ecosystem that can do this.

Network Effects

On the Ethereum network, roles such as the core team, investors, validators, developers, and users interact using the same currency, creating a beautiful positive feedback flywheel that builds a stronger community.

Why did the “crypto use case explosion” happen on Ethereum? DAOs, NFTs, and DeFi didn’t magically appear in 2016-2018; these use cases have been incubating since the Ethereum whitepaper, created by the most innovative people in the industry, who have been tirelessly building, updating the network, and developing dApps for years. dApps attract users (and money), which in turn attract more developers, who build more dApps, attract more users, and so on - creating a positive feedback loop called the “two-sided platform network effect.”

“…the truly distinguishing feature of a two-sided network is that it has two distinct classes of users: supply-side users and demand-side users. They each come to the network for different reasons and generate complementary value for the other.” - James Currier, The Handbook of Network Effects.

Is it too late to invest in Ethereum now?

Hayes wrote in an article that although ETH's market cap is much larger than its competitors, it is still cheap based on the valuation of network fundamentals. Hayes compared the valuation, number of developers, number of addresses, and TVL value of ETH with its main competitors. Considering that ETH is cheaper in fundamental valuation compared to its alternatives, ETH offers the most attractive risk/reward ratio from an investment perspective.

“The most important scarce resource is legitimacy”

Blockchain technology is different from many other technologies. If you want to decentralize a network, you can't just turn on the "blockchain switch." In order for it to work properly, a strong social force is required - legitimacy.

Legitimacy is defined in Vitalik’s post as:

“Legitimacy is a higher-order pattern of acceptance. If a social environment is one in which people widely accept and play their part in achieving a certain outcome, and everyone does so because they expect others to do the same, then the outcome in that social environment is legitimate.”

To understand this idea of ​​legitimacy, ask yourself:

-Why is Ethereum able to pay for more security than any other smart contract blockchain?

-Why can blockchains recover from 51% attacks?

-Why are some hard forks more valuable than technically identical forked blockchains (e.g., Ethereum vs Ethereum Classic, Hive vs Steem)?

-Why are some NFTs more valuable than others, despite using the exact same image to represent them?

The answer to all of these questions is legality.

Why is community so important?

In a blockchain ecosystem, legitimacy is developed and maintained within the community. Not only does the community carry legitimacy, but here the power and responsibility to maintain the blockchain is also distributed among the members, making the network more distributed and decentralized.

The stronger the community, the more legitimacy it has. I believe Ethereum has the strongest community among smart contract blockchains, given that it has a mature and strong network effect to support users, developers, investors, and validators.

Friendship with Moloch

Early in my cryptocurrency career, I realized that understanding how blockchain technology could help us solve big problems was the key to understanding its value. I spent a lot of time understanding the failure of coordination, which is known as the Moloch problem.

Moloch has many definitions, but mine is this: it explains why we can’t have nice things. I think the essence of Moloch is best illustrated in this failed fish farming collaboration.

As a thought experiment, let's consider fish farming in a lake. Imagine a lake with a thousand identical fish farms, owned by a thousand competing companies. Each fish farm makes $1,000 a month in profit. For a while, all is well. But each fish farm produces waste, which pollutes the lake. Suppose that each fish farm produces enough pollution to reduce productivity in the lake by $1 a month.

A thousand fish farms produce enough waste to reduce productivity by $1,000/month, meaning that no fish farm is profitable. This is where capitalism comes in: Someone invents a sophisticated filtration system that removes the waste. It costs $300/month to run. All the fish farms voluntarily install the system, the pollution ends, and the fish farms are now making a profit of $700/month - still a respectable sum.

But there is one farmer (we'll call him Steve) who doesn't want to spend the money to operate the filter. Now, waste from a fish farm is polluting the lake, reducing productivity by $1. Steve's profit is $999, and everyone else's profit is $699.

Others saw that Steve wasn't spending money on filtration maintenance, so they disconnected their filters, too.

Once four hundred people disconnected their filters, Steve's monthly income dropped to $600 - less than it would have been if everyone had kept using filters, and the poor, ethical filter users only made $300. Steve said to everyone, "Wait! We all have to voluntarily agree to use filters! Otherwise, everyone's productivity will drop."

Everybody agrees with him, they all sign the Filter Pact, except one guy who is a bit of an asshole, let's call him Mike. Now everybody starts using filters again, except Mike. Mike is making $999/month, while everyone else is making $699/month. Slowly, people start thinking they should also get the big bucks like Mike, and disconnect their filters for an extra $300 in profit….

A self-interested person would have no incentive to use a filter, but would have some incentive to sign an agreement that everyone uses a filter, but in many cases he would have a greater incentive to wait for others to sign the agreement without participating himself. This could lead to an equilibrium where no one would sign such an agreement. "

Why is this a big problem?

One way to measure human progress is to see if we can develop better ways to collaborate with each other. Language, religion, government, nation-states, constitutions, monetary systems, the scientific method, and the Internet are all fruits of the tree of human collaboration. Each of these inventions was a small battle won against Moloch (although they all came with their own sacrifices). But there are many more battles we have yet to win: corruption, censorship, privacy, fair trade, economic justice, and so on.

“The search for, discovery, and construction of a system that enables unstoppable human collaboration is so compelling to humanity that even the grandest science fiction writers cannot imagine the future we can build with this technology.” David Hoffman, Ethereum: Slayer of Moloch.

What does Ethereum have to do with all this?

David explains it this way: “Unstoppable code, immutable transactions, and unprintable money are the ultimate collaborative toolkit humanity has never had… Ethereum is a platform for producing coordination mechanisms… which means the world is about to become a much more collaborative place.”

The world's computers go green

The merger is the most anticipated cryptocurrency event of the year and a historic upgrade for Ethereum. According to the latest estimates, the merger is expected to take place between September 14-15, 2022. In short, the merger means that the engine of block production switches from Proof of Work (POW) to Proof of Stake (POS).

I want to focus on why the value of ETH will appreciate in the coming months, and it all has to do with the concept of Ultrasound Money.

Super sound money can be understood as a culture that believes that the combination of EIP 1559 (BASEFEE burning) and this merger may lead to a reduction in ETH supply. After the merger, the issuance of ETH will be reduced by about 60-90% (depending on the participation of staking), which is equivalent to at least two Bitcoin halvings.

Hal Press, a cryptocurrency analyst at North Capital, wrote in an article that “from a price movement perspective, the current environment of ~$5 million of new money entering the asset every day to maintain its current price would shift to ~$30 million of existing holders selling their tokens every day to maintain the price.”

This creates a huge perpetual buying pressure on ETH.

After the merger, ETH will meet ESG standards (ESG stands for environment, society and governance; here it means that ETH will no longer have high-energy-consuming miners), enabling new institutional investors to invest in ETH. And we have already seen Swiss bank SEBA make this move.

Many people have described staked ETH as the internet of bonds because, through proof of stake, you can stake ETH to generate yield in perpetuity.

risk

Based on its performance over the last cycle, I do not consider ETH to be significantly riskier than BTC (the “less risky” cryptocurrency right now). It is true that ETH is more volatile right now and it generally does not perform as well as BTC in bear markets (although ETH/BTC is currently making new local highs). However, many of the risks involved with BTC are likely to impact the entire cryptocurrency market as well, including ETH.

What are some of the additional risks involved with ETH?

What if more stablecoins collapse? What if regulators crack down on Ethereum for being unstoppable (as in the Tornado Cash case, where the U.S. Treasury Department sanctioned Tornado Cash), or suddenly decide to label it a security? What if the merger doesn’t go as planned? What if Ethereum’s complexity causes more problems than progress? What if DeFi isn’t as resilient as we thought?

challenge

Is it environmentally friendly? It doesn’t have a finite supply, so is it sound money? Is it costly to secure, is it efficient enough? All of these challenges have simple responses – and they will likely be solved after the merger.

Is it too expensive for retail users? Is it suitable for mass use? What if retail users don’t care much about decentralization? These are challenging questions, and solving the scalability trilemma is not easy. But the path forward is clear, and if there is a team/community best suited to address these challenges, in my opinion, it is the developers of Ethereum, because most of the innovation in the blockchain ecosystem comes from them.

Positive closing remarks

ETH offers one of the best risk/reward ratios currently available. It is arguably the best candidate to solve the scalability trilemma; it is the smart contract chain with the greatest network effect and the greatest legitimacy; its coordination mechanism can help solve some of the world’s biggest problems; and it is likely to become a deflationary asset. All of these characteristics give ETH a stable advantage, supporting its protocol. Let’s not forget that the blockchain ecosystem has the potential to undo the failures of human collaboration and create tremendous value — most of which is still on the way, waiting for our exploration.

Original text: "Betting It All On Ethereum" by Alphadegen.eth