Author: David Schwartz is a software engineer, graduated from the University of California at Berkeley School, currently resides in Los Angeles. David assists in organizing Ethereum gatherings in Los Angeles and co-manages @EthereumLA Twitter accounts.
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Ethereum's change to finance is like the Internet's change to data. Therefore, Ethereum will become the best investment with risk-adjusted returns in the past decade.
Ethereum is the first permission-less global economy. For those new to this ecosystem, Ethereum is simply an economy. Ethereum (ETH) is the currency of this economy. Ethereum is essentially a “digital state” without borders, where the code is governance, and everyone in the world is a “citizen” of this country. Anyone anywhere in the world can write code for Ethereum to provide logic-based automation services such as digital bank accounts, financial exchanges, lending platforms, etc. and deploy them on Ethereum.
The code on Ethereum is auditable and will always run according to coding rules; anyone with an Internet connection in the world can access Ethereum services without the need for a third-party permission. The creation of Ethereum has had a significant impact on global finance. Current fiat currencies, such as the US dollar and the euro, have systemic problems due to their permit-based nature. By increasing trust and efficiency in global trade and settlement, Ethereum has become the best economy in the world.
Many investors are concerned about the crypto market, and they still remember the original ICO boom. Although the scam was popular in that boom, they have a high valuation for projects that have no pure speculative foundation. A few years later, it became clear that Ethereum could grow in the next cycle with fundamentals rather than speculation. In this article, we will draw our conclusions by exploring the mechanism behind the price of ETH and why ETH may surge in price in the next ten years.
The current global "license-based" economy
The economy is a series of transactions built on trust. The global economy is the sum of all transactions within and between countries. Within each country, such as the United States, the set of transactions adds up to form the gross domestic product (GDP). Without trust between the two parties, there will be very few transactions, thereby stalling the economic machine.
Governments issue fiat currencies to facilitate trade, and use complex legal systems to enforce rules and arbitrate differences between two or more parties. The government's main responsibility is to manage citizens' welfare by keeping unemployment rates low, setting minimum wages, and ensuring currency stability so that citizens can use their income to buy (foreign or domestic) goods and services needed for their lives.
To achieve these goals, the government uses complex technological infrastructure and human capital systems to support its fiat currencies. Today, these government-deployed systems typically enable online transactions, credit card payments, and physical cash, while those who commit financial fraud or attempt to counterfeit money can face threats of imprisonment and violence.
The government not only manages the technology behind these currencies, but also issues the currency. They can and do print the money they want. However, they need to be careful not to print too much, otherwise it will lead to inflation or loss of trust in global financial markets, which will lead to rapid rise in prices of goods and services. Countries that keep inflation low while maintaining low unemployment and high-quality jobs will thrive.
The government manages its financial infrastructure through a license-based system. The government grants permission to the bank, then allows the bank to access technology companies (Visa, PayPal, Venmo, Plaid), and then authorizes other businesses or users to access their applications or APIs, and so on. At each level, this permission is used to control the economy, prevent money laundering, and enforce KYC rules. The government looks at and executes everything from the top.
Lack of financial innovation in existing permissive systems
Licensing-based systems are essential for national governments to ensure the trust that exists in the economy. However, it does have a negative effect because the government has the ability to review any application that does not comply with its rules.
For payment networks like Visa, many fiat currencies are supported at exchange rates determined by larger financial markets. This makes it easier for citizens of all countries to travel and achieves a healthy global economy. To provide these services, however, Visa requires permission from every government / country in its network.
In addition, in order to create financial products, companies must pay expensive legal fees to ensure that they meet regulatory requirements and can operate. Businesses must pay these fees in the countries in which they operate and ensure they comply with the latest laws and requirements. These high costs protect citizens from fraud, but at the cost of innovation and enable rent-seekers to access financing. Rent seekers reduce economic efficiency by increasing their share of existing wealth without creating new wealth.
Without substantial capital investment, it is almost impossible to create new innovative startups to compete with existing companies such as Visa. The cost of funding for and interacting with multiple permit-based governments is too high for anyone who can't get a lot of capital.
Due to high barriers to entry, it is difficult to compete with them, so large financial companies are allowed to collect monopoly protection fees and make a fortune from them. Despite these advantages / profits, companies such as Wells Fargo are still engaged in illegal activities and have only recently been fined $ 3 billion. Wells Fargo Bank unwittingly created millions of new accounts for existing customers, which caused them unexpected costs.
Consumer trust in these "trusted" institutions is not always guaranteed. These companies have no problems with the status quo, but users who have been charged high fees and developers who can develop better products should not be complacent.
Unfortunately, due to the nature of permits and high barriers to entry, only a small percentage of the population can innovate in the financial industry. You may have a team of talented developers, but if you do n’t have a track record, or live in a country with a strong network of venture capitalists, or have not attended a prestigious university, you are unlikely to be in Innovate financially, as the odds of success are slim compared to companies that don't have a lot of capital.
Unlike the retail and newspaper industries, the financial industry has never experienced the disruption caused by the Internet. What we need is a platform that anyone can trust. You don't need a lot of money to find rent seekers and an overly complex legal system. Here's a viable, license-free alternative built by a large number of developers and researchers: Join Ethereum.
Ethereum: innovation platform
The Ethereum economy is a network country economy that is not controlled by any third party. Users can rest assured that any code placed in their system will always be executed according to the code. Ethereum is a tool used by developers to provide innovative and innovative self-sovereign products to people around the world, including but not limited to bank accounts, exchanges, exchange-traded funds, derivatives markets, lottery systems, gambling websites, virtual reality , Game items and digital collectibles.
Ethereum has two main advantages in fighting the nation-state economy and its products. First, Ethereum does not require a license, and second, it has more efficient technology than traditional banking systems. Unlike having people participate in the settlement process, everything in Ethereum is automated. Having said that, most governments and banks are currently transitioning to using Ethereum-like blockchain technology, such as JP Morgan's Quorum, a license-based, slightly modified version of Ethereum. Therefore, with the convergence of technologies used between countries to improve efficiency, it is the license-free aspect that has made the Ethereum economy truly innovative.
Ethereum is an open financial system. This is a powerful driver of innovation. Anyone with an internet connection can develop services or access these services on Ethereum, and no one can block or censor. A group of savvy developers are working to build better financial services. Just as the Internet changed the way data flows, Ethereum will change the way money works.
Now, with Ethereum, you can have a stable currency that can track the value of the U.S. dollar, spend or trade that currency, and earn about 8% interest (which is unheard of in today's economy), and you can take advantage of that Participate in a novel product, such as a non-destructive lottery or donate to a charity, and your principal balance remains unaffected. From stocks to sports to political results, you'll soon have investment opportunities in almost everything at a very low cost. This list of possibilities is constantly increasing.
We are now 2020 and Ethereum is still in its infancy. Developers are exploring network effects, and user interfaces that interact with Ethereum products are constantly innovating.
One of the main issues facing Ethereum adoption is the self-sovereignty and private key management of the ecosystem. The private key is a long password that can access the user's funds and requires expertise to be stored and used properly. However, advanced encryption technologies such as multi-party computing (MPC) are being used to create new wallets that greatly increase the availability of everyday users and the simplicity of account recovery.
In addition to improvements to the current Ethereum 1.x technology, Ethereum 2.0 is about to be released and will revolutionize the field, providing enough throughput for Ethereum to make it the de facto global settlement layer of the world economy. As governments and banks migrate to Quorum and other blockchain technologies, Ethereum will be at the center.
Ethereum has huge network effects. Any innovation made by a single developer on Ethereum can be used by all other developers. If developers create agreements (such as interest-generating bank accounts), all other developers can use the agreements in their applications, and no one can block them. They don't have to ask for their permission. Therefore, whenever a new innovation occurs on Ethereum, it will multiply the ecosystem.
No other platform other than Ethereum has these network effects and developers' interest. Many venture capital firms invest money into their opponents who are trying to defeat Ethereum, and these similar platforms are almost never needed. It will take some time for these projects to disappear because they have a lot of money, but they are just blank blockchains. Ethereum is by far the only truly attractive platform.
Bullish on Ethereum
We have explored the reasons why developers can choose to develop on Ethereum, and how the platform prepares for a large wave of innovation, but how will this be reflected in the price?
In the next ten years, there are five main drivers for the rise in ETH prices. Each factor can be attributed to a reduction in supply or an increase in demand, which drives prices up.
Staking (Token Stake) is the process of protecting the Ethereum network by locking tokens and using them as collateral to provide users with good security. If a mortgagee acts in good faith, they will be rewarded. Otherwise, they will be punished through a mechanism called reduction.
It is estimated that as a result of the collateral, up to 3 million tokens in the current total circulation of about 110 million ETH will be locked and removed from the circulation supply. Currently Ethereum Staking is expected to start on July 30, 2020, but if security testing indicates that other changes are necessary, Staking may be delayed.
Other blockchains that also offer staking have more locked shares. For example, as of now, Tezos's pledged tokens account for 77.65% of the total supply, but it is higher because Tezos tokens are rarely used except for hype. As we will soon see, Ethereum is a strong ecosystem with a large number of applications competing for ETH as collateral, thereby reducing the funds available for collateral.
2. End mining
The permanent withdrawal of miners from the system for Staking will reduce the new supply of ETH and will occur within the next year or two after the initial implementation of Staking. For a short time after Ethereum 2.0 goes online, mining and staking will coexist. The blockchain network can be protected through mining technology, but new ETH can be generated as a reward to miners.
The amount of mining issuance is much higher than that of Staking. Abandoning mining will greatly reduce the new supply. It is expected that when mining stops, there will be a mechanism to burn transaction fees to offset Staking rewards and make the total circulation of Ethereum negative, thereby increasing scarcity.
3. Apply collateral
Many innovative applications on Ethereum need to lock ETH as collateral in order to function properly. For example, MakerDAO is a project to create a stable coin DAI, which currently tracks the price of the U.S. dollar. There are multiple complex mechanisms, but ETH is the collateral for DAI. DAI is essentially stable synthetic ETH. Another form of ETH can be used as a reliable payment for goods and services. Even if the price of ETH used as collateral fell from $ 1428 to $ 83, DAI remained stable, which is a powerful system.
By simply developing business and having more users purchase and lock ETH to create more stable tokens, MakerDAO will reduce the supply of available ether. There are many applications that rely on ETH / DAI and compete for this scarce resource. As more projects are launched, the demand for Ethereum is expected to increase dramatically, and more and more supplies will be locked into these services.
defipulse.com: The value of ETH locked in the app over time
ETH is used to pay for gas on the network. In 2019, the average daily gas cost for Ethereum is $ 95,000. With the release of Ethereum 2.0 and increased throughput, and more developers developing on Ethereum, the total amount of gas paid is expected to increase significantly, thus forcing users and / or companies to purchase ETH for services.
Finally, we will see pure speculation, which is common in all financial markets, especially in high-growth high-tech industries. As we saw before 2017, the bull market of cryptocurrencies can lead to amazing price growth. What happens next when the user has a real product and agreement to use. Instead of investing in false promises, they can experience the power of an open financial system.
For more information on Ethereum economics, here are some good articles that include more details on the subject: ETH Reserve Assets , ETH: A New Model of Currency , and Trillion Dollar Use Cases for ETH ".
In the 10 years from now, millions of developers will work rigorously in the 1920s to create a new open financial system on Ethereum, replacing existing financial markets and exchanges, And create new products that we can't imagine, like Facebook. At the beginning of the Internet, Amazon and Google were also difficult to understand. Ethereum will also have use cases outside the financial realm, such as creating better voting systems, decentralized social networks, decentralized cloud computing, and this list of applications is constantly increasing. stay tuned. Exciting moment.
This article does not represent any financial or tax advice. This article is strictly educational and is not an investment recommendation to buy or sell any assets or make any financial decisions. This article is not tax advice. Talk to your accountant if necessary. Do your own research.