Opinion | ETH is a reserve asset with a final value of several tens of trillion dollars

Foreword summary: I have written an article before, expounding the characteristics of ETH's assets from three aspects – it is a reserve currency for non-sovereign economic networks. It's a good idea to read my tweet first and get it to my point faster.


-Link: https://twitter.com/RyanSAdams/status/1129114658923843584?s=20 –

ETH is a reserve asset

Reserve assets refer to assets held by banks. It provides value endorsements for other assets and can be used for cross-bank transaction settlement. The transfer of reserve assets is difficult and liquid. Sovereign bonds, money and gold are the reserve assets of the central bank.

ETH is also a reserve asset, but it is not a central bank but a currency agreement.

The nature of ETH as a reserve asset has brought utility to the Ethereum economy.

In this regard, Vitalik said this last week:

As a reserve asset of the Ethereum ecosystem, ETH has many intrinsic effects . It is the only fully trusted asset that can act as a collateral in many decentralized financial applications. This asset is naturally suitable for use as a margin . ETH is also the most convenient asset for implementing payments between Ethereum applications.

ETH can act as a pledge, margin, and for settlement of transactions.

The intrinsic utility of ETH for the Ethereum economy is not limited to being a fuel or improving network security, but also its own value as a reserve asset.

All this is a matter of course.

Although this sounds like a sly, I still have to say that the value of reserve assets stems from itself. The higher the liquidity of the reserve assets and the stronger the ability to aggregate value, the better the role of reserve assets.

(By the way, ETH is an asset with reflexive (self-reinforcing ability). The higher the value of ETH, the better it can act as a good reserve asset, which in turn can raise the value of ETH. Make it a better reserve asset, and so on.)

For ETH, value is its utility.

This means that the price of ETH is the bandwidth of the economy.

The price of ETH is economic bandwidth

Think about DAI.

DAI is a synthetic asset that anchors the dollar and endorses it with ETH as a reserve asset – an ETH bond issued by the Maker currency agreement. This is largely analogous to gold-issued bonds issued by banks or dollars that can be converted into gold.

Currently (September 20, 2019), a $316 million ETH lock is in the CDP, which casts $86 million in DAI.

This means that 1.3% of ETH's current total issuance is used as a reserve asset to endorse DAI.

But the value of the ETH network is assumed to be 1/50 of today's, or $446 million (2016 level), not $22 billion. If you want to get DAI worth $86 million at the same pledge rate, you need to pledge 70% of the total ETH circulation; in this case, the value of DAI is unlikely to exceed $100 million, it can only be a good currency, but There will be no world influence.

What if ETH's network value is 50 times that of today? In other words, the value of the ETH network reached $1.1 trillion, and the price of each ETH exceeded $10,000. In this case, if 30% of ETH's current total issuance is pledged at the same pledge rate, the total value of DAI will exceed $100 billion – the threshold for becoming a world currency.

Do you understand what I mean?

The value of DAI is limited by the economic bandwidth of ETH.

If the price of ETH rises, then the economic bandwidth that the currency agreement can enjoy will also increase. Just like the difference between a dial-up network and a fiber-optic network – it's just about currency.

Value brings utility.

ETH is the only choice

You will definitely vomit that this is too stupid. Why not use other tokenized sources of value as collateral, such as DAI? The dollar, real estate, sovereign bonds, and even BTC seem to be more reliable.

Take a closer look at what Vitalik said, ETH is “the only fully trusted asset that can act as a collateral ”. He is right. ETH is the only reserve asset on the Ethereum that does not depend on another trusted asset. It is also the only reserve asset that is fully settled on the chain – a digital bearer note.

Let's take a look at some other types of reserve assets:

  • USDC: Legal settlement / need to trust Coinbase
  • Tokenized real estate: legal settlement / confiscation of the real thing / need to trust the issuer
  • Tokenized sovereign bonds: legal settlement / trust issuer
  • wBTC: Chain settlement / trust BitGo
  • tBTC: chain settlement / trust oracle / still need ETH as pledge

Current version of ETH:

ETH: On-line settlement / trust-free type

See the difference?

That's right, there is no doubt that there is a need in the market for assets that are less trustworthy. However, if you want a pure, trust-free reserve asset built on Ethereum—more like a native BTC than a tokenized collateral—the ETH is irreplaceable.

ETH is your only choice and the best choice.

Trust-free reserve assets at the basic level

Perhaps you suspect that if you need to sacrifice convenience, will ordinary people still prefer trust-free assets? It doesn't matter, I will have this doubt. However, one thing to keep in mind is that trust-free assets can become trusted assets, and vice versa. You can convert ETH into a Coinbase and convert it into an IIO that is endorsed by Coinbase, turning it into a trusted asset, but the borrowing of the Coinbase endorsement can never be trusted like pure ETH. That is why I believe that trust-free neutral assets may lay the foundation for a parallel monetary system based on other trusted assets in the future. The reason why the Internet can get such a wide range of applications is precisely because of the neutrality of TCP/IP. If the ownership of the TCP/IP protocol is in the hands of Microsoft, there will be no Internet today.

What is special about the value of the Internet?

Value internet

Let's talk about DAI. ETH can't just act as a reserve asset. Almost all currency agreements use ETH as their reserve asset in some way. Uniswap uses ETH as a highly liquid trading pair. Compound uses ETH as a reliable source of pledge.

As an economic bandwidth, ETH's most exciting use case today is in the area of ​​trust-free synthetic assets – currently in rapid rise. After I tried the UMA protocol last week, I sent a series of tweets:


– Link: https://twitter.com/RyanSAdams/status/1172163128379002882 (Editor's Note: Chinese translations see "Ethereum as a synthetic asset platform" ) –

The combination of trust-free reserve assets and UMA currency agreements is very powerful. Anyone in the world can issue, trade, borrow, and lend any asset – you can buy Tesla in an internet cafe in a small city in Central America, or sell it in San Francisco.

Global, license-free, open.

There are no boundaries.

Do you think this idea is incredible?

Then do you remember the idea of ​​letting people all over the world open and broadcast their own TV channels? Did you feel incredible at the beginning?

This is the power of the value Internet.

Money Lego with value storage capacity

My friend David Hoffman coined a term called money legos to describe the composability of ETH-based currency protocols. That is to say, the currency function is combined with the code to create some currency terms to complete some currency operations. Just like Lego.

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-Link: https://twitter.com/RyanSAdams/status/1164225926269427717?s=20 –

The most important piece of money, Lego, is the one at the bottom. By combining programmable LEGO with value storage capabilities, you can create trust-free stable currencies, exchanges, money markets and synthetic assets.

Without a native cryptographic asset with value storage capabilities, these monetary agreements simply do not be trust-free and require the introduction of value sources from traditional financial fields.

ETH – the reserve assets of the Ethereum economy.

ETH – the currency Lego with value storage capacity.

The road ahead is long…

I must point out that ETH has a long way to go as a reserve asset. The above-mentioned examples of synthetic assets have the problem of low efficiency of use of funds, and can be alleviated to some extent by identity systems and new mechanism design.

ETH also has strong volatility. Although this was expected at the beginning of the rise of commodity currencies, it was challenging for systems built on top of ETH. Systems such as Maker help maintain the stability of ETH, and I look forward to seeing more and more DAI forms of ETH (after all, DAI is just a stable ETH) as a reserve asset.

Put the problem aside first, and if you pay attention, you will notice. It has already shown signs of using ETH as a reserve asset for ICO financing. Now, you can clearly see this from the use of ETH in the DeFi protocol: ETH has gradually become a reserve asset before our eyes.

Road to money

Vitalik mentioned this at the end:

The road where ETH becomes [currency] is different from BTC, but this road is still…

When I say it, it will come to an abrupt end, but I think what he wants to say is "still going."

This sounds a lot like the story of the two monetary systems released last week. I think so. The road to ETH becoming a global reserve asset is almost like this:

  • Phase 1: ETH becomes the reserve asset of the Ethereum economy
  • Phase 2: ETH becomes a reserve asset for cryptographic economies
  • Stage 3: ETH becomes a reserve asset of the world economy

We are currently in phase one to two. By the time the large financial institutions and the central bank began buying large quantities of ETH and ETH bonds, it was said that we had entered phase three.

ETH is likely to never enter Phase 3, but it does have a chance to do so. If there is such a day, it is because of ETH's primary advantage – as a reserve asset for the booming Ethereum economy.

The value of ETH as a phase 1 reserve asset is trillions of dollars.

The value of ETH as a phase III reserve asset is several tens of trillion dollars.

That's it.

(This article is from the EthFans of Ethereum fans, and it is strictly forbidden to reprint without the permission of the author.