Six Reasons Why Ethereum Has Intrinsic Value

Six Reasons Why Ethereum Has Intrinsic Value

Ethereum is now six years old. But in that short time frame since its launch on July 30, 2015, a lot has happened. Ethereum has established itself as the most actively used blockchain network, while its native token, ether, is now the second-largest cryptocurrency by both market capitalization and daily volume.

To mark its sixth birthday, we examine six reasons why ethereum has intrinsic value.

1. Smart Contract Capability

Ethereum was built as a platform to run programmatic smart contracts and applications via its own currency – ether.

Real-world use cases are already beginning to emerge and sustain value, as the Ethereum blockchain can execute smart contracts that power decentralized applications (DApps) like decentralized finance (DeFi) or nonfungible tokens (NFTs).

DApps are smart contracts programmed for a specific and recurring use. There are over 3,000 DApps deployed on Ethereum as of June 2021. This is more than the total numbers of DApps deployed on any other general-purpose blockchain platform in the world combined. According to the industry tracker DappRadar, the top 10 DApps in 2020 were responsible for close to 90% of transaction volumes on the blockchain.

DeFi is an extremely bullish catalyst for Ethereum. In fact, Ethereum is practically synonymous with DeFi because it powers many cryptocurrencies in the decentralized finance sector. Ethereum hosts more than 200,000 ERC tokens, some of which are part of the top 100 largest cryptocurrencies. DeFi allows users to trade assets and borrow and lend directly to one another without involving banks, and also acts as a means to creatively unlock value – for payments, loans, insurance, and more.

Together, with the accessibility of DeFi and the draw of better interest rates, more and more retail consumers will likely turn to the DeFi space. Even now, there are more than $65 billion worth of assets locked up in DeFi.

DeFi value is growing

2. A New Type of Connectivity

We can think of Ethereum as an infrastructure, one with the potential to revolutionize both finance and technology.

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DeFi is potentially recreating the entire financial system. Ethereum-based applications are likely to impact markets, governance, public services, and perhaps even how identity is managed. In the future, we may use the Ethereum platform to change the way mortgage transfers, securities trading and many other fields work.

What’s more, this will happen on a network that can reach anyone, anywhere, who can connect to a public network.

As these ideas come to fruition, Ethereum is a bet on a whole new type of connectivity and innovation layer, another driver in the value of the network.

Ethereum already has an active developer community and user base. It is one of the most popular digital currency networks across all metrics for Github activity, including number of commits, total contributors, total project watchers, and total stars. All of this points to an expanding and diversifying Ethereum ecosystem. For a blockchain, that’s the best story you can tell: a growing network, and key for the value of ether.

3. Proof-of-Stake Model

Both bitcoin and Ethereum currently operate using the proof-of-work consensus. The verification and confirmation of transactions requires a network-wide consensus by miners, who are rewarded for processing transactions and executing smart contracts.

Ethereum is currently working towards changing to a proof-of-stake model, also tagged as Ethereum 2.0, which dramatically changes the rewards system. The current proof-of-work model does not encourage collaboration, nor does it provide any consequence for malicious behavior. In contrast, under the proof-of-stake model, transaction validators will replace miners. There will no longer be cryptographic challenges to solve. Validators will be required to own ether, and in order to validate a block, they will be required to put their ether stake on the line to certify that a block is valid. This way, if there is malicious behavior, their stake is at risk.

If Ethereum 2.0 succeeds, the blockchain will have significantly more transaction-processing capability. That scalability is needed if Ethereum is to play a meaningful role in the global financial system and to be more environmentally friendly than proof-of-work alternatives such as bitcoin.

4. Speed and Scalability

Ethereum is different from bitcoin, as measured by two key metrics. Ethereum block times currently stand at between 10 to 15 seconds, compared to bitcoin’s 10 minutes; as well, an ether transaction will show in about five minutes, while it takes bitcoin about 40 minutes to complete a transaction.

This is because bitcoin’s first priority is security. Its coding language and restricted commands make it more difficult to hack the blockchain but adds more time to complete a transaction.

Among other things, the upcoming Ethereum 2.0 upgrade will provide for faster transactions. Part of that upgrade, called the Beacon chain, employs shardchains, which are smaller groups of nodes that process their own portions of transactions in parallel, without needing to achieve a consensus across the entire network. This is meant to improve Ethereum’s scalability and vastly increase its throughput rate. It is expected that the Ethereum 2.0 throughput rate will be able to reach 15,000 transactions per second, allowing Ethereum to match any centralized payment system in transaction processing speed.

5. Disinflationary Supply

Bitcoin has a finite supply of 21 million coins, which is why it is often regarded as a store of value and an investment against inflation. Contrary to bitcoin, Ethereum offers an unlimited number of ether but does cap the amount released each year via the mining process. This removes the perceived scarcity that may be a factor in bitcoin’s higher valuation. Ether’s supply increases according to a disinflationary mechanism that will continue to be adjusted as the network matures.

With Ethereum’s new model, there is a fundamental change in how blocks are created. Instead of rewarding miners for creating blocks, validators will earn a transaction fee for each transaction and smart contract they validate. The more ether that is staked the higher the value because there is fewer ether in circulation. In addition, proof of stake removes the costs associated with mining such as electricity and hardware costs, meaning that fewer ether will be sold by miners and potentially be staked, so the deflationary aspect might come into play in ways it hasn’t previously.

6. Correlation to Bitcoin

The bitcoin price is a major point in defining the entire cryptocurrency market picture, as well as for ether. The two are positively correlated – when bitcoin rises or falls, the same happens to ether. During the explosive DeFi boom that hit the market during summer 2020, ether’s price rallied to its highest level in more than two years because most DeFi projects are built on the Ethereum blockchain. At the time, bitcoin was struggling to break a similar two-year record. Over the tail end of 2020, with the bitcoin price rally, there was a BTC-to-ETH price rotation, with investors seeing Ethereum, and more specifically the DeFi applications built on it, as a constructive complement to bitcoin, whereas bitcoin became too “expensive.”

Ether is no longer following bitcoin’s price fluctuations as closely as it once did, as it is starting to be driven by its own catalysts. Ether’s correlation with bitcoin was 0.95 in July 2020. A year later, it is at 0.71, according to data from Cryptowatch.

Ether Futures

As a leading cryptocurrency futures exchange, CME Group added Ether futures to its suite of cryptocurrency products in February 2021.

Ether futures interest has grown since launching earlier in 2021

Nearly 320,000 Ether futures contracts (~600k equivalent ether) have traded since launch. Strong institutional adoption and increased trading relative to Bitcoin futures has occurred as market participants use the contract to gain exposure to the token and hedge ether’s price risk.

It’s the kind of market activity worth watching as participants better understand all the use cases and applications of this breakthrough digital currency.

Image by Peter Patel from Pixabay

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Ethereum Burn Rate Could Destroy $5 Billion Per Year

It has now been almost a week since the Ethereum London upgrade launched and over 20,000 ETH have been destroyed, giving analysts an estimation of a yearly burn rate.

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Ethereum’s highly anticipated London hard fork was deployed last week on Aug 5. It introduced a new fee-burning mechanism as part of a restructure of the gas auction system for transaction payments.

Anywhere between 25% and 75% of the base fee is now being destroyed in an ongoing process that may turn the Ethereum ecosystem into a deflationary form of “ultrasound money” once proof-of-stake is rolled out.

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More than 20,000 Ethereum burned

According to the ultrasound.money tracker, the amount of ETH already burned over the past five days is 20,600 at the time of writing. At today’s prices that is worth around $64 million burnt in less than a week.

The top Ethereum-based platform for burning fees at the moment is the OpenSea NFT marketplace, which has burned 735 ETH, or $2.3 million. Uniswap v2 is next with 348 ETH burnt and another NFT platform, Axie Infinity, has removed 318 ETH or almost $1 million in transaction fees.

Etherchain is reporting a burn rate of 3 ETH per minute, taken as an average over the past 24 hours. Extrapolating this equates to around 4,320 ETH per day, approximately 30,240 per week, and 131,000 per month. On a yearly basis, this could result in 1.57 million ETH being burned — approximately $4.9 billion at current prices.

Naturally, all of these figures are hypothetical as the fees will change with demand on the network and prices are not static. What it does show is a snapshot of current conditions. These figures could be much higher if Ethereum demand and prices increase over the next couple of years, which most analysts agree is highly likely.

$21B staked on ETH 2.0

Aside from using ETH for trading, decentralized finance (DeFi), or non-fungible token (NFT) minting, a large chunk has already be staked on the Beacon Chain. These tokens are locked away and immovable until “the merge” joins ETH 1.0 with the proof-of-stake blockchain sometime in late 2022.

At the time of press, there were 6.8 million ETH staked on the Beacon Chain according to the ETH 2.0 Launchpad. At current prices this is worth around $21 billion — higher than the entire Ethereum market cap was in April 2020.

This “ultrasound money” narrative has been reflected in ETH prices which have way outperformed bitcoin this year. At the time of press, the asset was trading up 5% on the day at $3,115.

Bitcoin and Ethereum Prices Rebounded Once Again, Because of Course They Did

There’s a moment in Wreck It Ralph when Fix-It Felix, Jr. strikes the bars on his cell window in hope of escaping confinement only for his magic hammer to strengthen the bars instead. Sometimes it seems like Bitcoin and Ethereum have a similarly enchanted tool lying around, because despite all odds, their prices are rising again.

The price of Bitcoin declined for a few months after China introduced new restrictions that effectively halved the network’s hashrate and prevented financial services from supporting the cryptocurrency. It struggled to remain above $30,000 for weeks, but according to the latest CoinDesk data, BTC is now worth approximately $45,500.

Ethereum weathered similar price drops as well. The value of its primary coin, ETH, dropped by half over the course of the summer, from its previous high of over $4,100. CoinDesk data put its lowest price over the last month at roughly $1,740, but it’s priced right around $3,155 at time of writing. Chumbawamba would probably be proud of the cryptocurrency’s resilience.

Both of these rebounds highlight the difference between the crypto market and the profitability of cryptocurrency mining. The former is enjoying a boom even as U.S. lawmakers consider stricter rules for digital asset. While prices haven’t reached the same peaks they did earlier this year, they are on the upswing, which could spell bad news for the continuing GPU shortages. Our GPU price index continues to track the data off eBay, and prices could trend back up if cryptocurrencies continue to rebound.

But things still aren’t looking good for miners. Chinese mining operations still have to find a new home following their government’s crackdown on everything but the digital yuan. Ethereum miners don’t have long until the cryptocurrency’s transition to a proof-of-stake model obviates them and already have to accept reduced profits.

This separation of the crypto market’s rising prices and the mining industry’s declining profitability could be a good thing for enthusiasts. What’s good for the goose (the crypto market) is no longer good for the gander (miners), and that hopefully means the goslings (PC builders) can enjoy improved GPU technologies in peace.

But we’re not out of the woods yet. While direct Bitcoin mining requires dedicated ASIC equipment to turn a profit, places like NiceHash allow the use of GPUs to run alternative algorithms and still get paid in Bitcoin. Ethereum’s reduced value was accompanied by lower graphics card prices in the secondary market as well as declining spot prices of graphics memory, but these things can change quickly.

The institutional investors, tech bros, and crypto enthusiasts may continue to swing their golden hammer that magically fixes the value of their digital assets whenever the occasion arises. Hopefully Ralph will be around to keep breaking the mining industry—or at least crack it enough to give PC builders some respite.