– ETH price trend from August 8, 2015 to January 8, 2019 –
“Even if each Ethereum is worth only $10, the entire Ethereum network will still function.”
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I have seen this view often discussed in the cryptocurrency community. There is no factual basis for this sentence. It assumes that the only meaning of Ethereum is to pay for online transaction costs (Gas); and, for a variety of reasons, it can be misleading.
In this article, I will explain why Ethereum is much more than a payment method for transaction fees, and shows how Ethereum becomes a currency in the Ethereum digital economy .
Let's start by exploring the value of Ethereum.
What is the value of Ethereum based on?
Ethereum is the original currency of the Ethereum network, which is endowed with value due to various factors. It is used to run a range of functions in the Ethereum network, including:
- Used to pay for Ethereum transaction fees (in the form of "Gas")
- Used as a pledge for various open financial products (MakerDAO, Compound)
- Can be borrowed or borrowed (Dharma)
- Used as a payment method for certain retailers and service providers
- Used as a medium of exchange to purchase tokens based on Ethereum (via ICO or exchanges), digital collectibles, in-game props, and other non-homologous tokens (NFTs)
- As a reward for completing tasks (Gitcoin, Bounties Network)
In addition, in the Ethereum 2.0 era (Serenity), as long as providing computing resources and locking 32 Ethereum, a user can become a verifier and help protect the network. Therefore, there is reason to predict that Prosperity Proof (PoS) will reduce the amount of Ethanol circulation. There is also a “destruction fee” model (although it is still in dispute, it is not determined to be deployed), in which a fixed percentage of the Ethane transaction costs will be “burned”, so the Ethanol currency will fall further.
In addition to utility value, Ethereum also has speculative value. This value stems from speculative activities (such as trading and investment) (these speculations are currently the main source of value for all blockchain assets). As in 2017, blockchain assets can set off a speculative boom, with the value of some assets turning 1000 times in just a few months. This speculative gain usually introduces new capital and reinvests in vertical markets, but it also has the potential to affect short-term market sentiment in all blockchain assets.
Can other tokens in the Ethereum network replace Ethereum?
The theory is that the reality is no. The concept of using another asset to protect the Ethereum network is called “economic abstraction” (proofing note: it can also be called “cost generalization”) (click here for more information). But this also requires miners and verifiers to accept tokens other than Ethereum as a fee when packing the transaction.
The possibility of economic abstraction based on the Ethereum protocol is minimal, as it may depreciate the Ethereum and thus reduce the security of the blockchain.
How does the value of Ethereum help protect the entire network?
In a work-based (PoW)-based system, miners compete with each other when they come out, and successful entrants get work rewards (in the form of the agreement's native currency). As asset prices rise, more mining unions naturally join the mining industry and make it harder to work across the network. The higher the difficulty of the network, the harder it is for miners; this has led to large-scale mining operations centers (also commonly referred to as “mines”) that have become the only lucrative form of mining in PoW networks ( Once the PoW network is formed to a certain size, it is doomed so). Miners can also join the “mine pool” to increase their chances of finding a block and thus get more rewards.
Now, individuals or groups need to spend a lot of money to successfully attack or control the Bitcoin or Ethereum PoW blockchain.
When Ethereum 2.0 transformed Ethereum into a proof of equity system, it is expected that a user will receive a verifier status for each pledge of 32 ETH and receive an additional Ethercoin as a reward based on their work (the rate of increase will be dynamically adjusted, as will be Description).
In the context of proof of equity, the cost of attacking Ethereum will be directly linked to the price of Ethereum. Unlike in PoW systems where people use energy-intensive mining to get out and get rewards, users under PoS will “pled” Ethereum into certifiers, block out and protect network security, and once they don’t follow the agreement, they’ll Loss of some or all of the assets in custody. The more certifiers that pledge the Ethereum and protect the network, the more Ethereum it will need to attack the network. Such an attack is likely to quickly increase the price of the Ethereum and make the cost of the attacker unacceptably high.
What is protected by the Ethereum network?
The Ethereum network is currently worth billions of dollars, including: utility tokens, work tokens, digital collectibles (and other NFTs), DAI (generated via CDP mortgages), and asset support. Securities and so on.
If we expect a decentralized financial system to sustain growth and replace existing systems in the future, we must ensure that the Ethereum network is able to fully protect its multi-billion dollar value and be able to maintain this capability tenaciously.
Serenity 2.0 (on the consensus algorithm) prefers Liveness rather than Safety. This means that even if most of the verifiers go offline (for example, a disaster like World War III), the protocol will remain up and running. This level of activity can be achieved as long as the Ethereum maintains a high enough value (to motivate people to continue to run the verifier node).
What is currency?
Historically, many items have been used as currency circulation—shells, coins, banknotes, and so on. People regard them as money because of their high imitation difficulty, scarcity and the fact that they were used as currency. In modern times, commodities such as gold are not considered to be currencies, although they are very valuable and people do not see them as a medium of exchange.
The main attribute of money is a social contract. The legal currency, the form of currency used in most parts of the world, is guaranteed by the government of a particular country. Government regulations stipulate that a particular currency (US dollar, Australian dollar, Japanese yen) is the legal currency of the country (the currency that should be accepted) and, most importantly, the method of payment as a tax. Generally speaking, the government controls the money supply and can increase the amount of money as it wishes.
The currency itself is very subtle – once it is mismanaged, it can have terrible effects on the country (such as events in Venezuela). Although some governments have strong power and influence, it is not enough to simply deny an item as a legal currency—nationals must collectively believe that this currency has real value and will not lose its effectiveness due to strong inflation.
Is Ethereum a currency?
If the same item is to act as a currency in the economy, it needs to have three functions: exchange medium (MoE), accounting unit (UoA), and value storage (SoV). Ethereum is used by many APPs as an exchange medium in the Ethereum economy, and many dAPP providers accept tokens for the exchange of homogeneous or non-homogeneous tokens or other services. It is also used by the parties (including companies that raise Ethereum through ICO) as a unit of account. Finally, given its relative scarcity, the predictability of supply growth and endogenous functions, Ethereum has a history of being used for value storage—investors and speculators buy Ethereum to meet their investment needs.
An item (whether real or virtual) usually has five specific attributes to be a reliable currency: portability, durability, severability, interchangeability, and long history (Lindy effect). Ethereum has high portability (because it is virtual), durability (still because it is virtual), separability (up to 18 decimal places), limited interchangeability (because ETH tokens) Can be exchanged, but accounts and addresses are easily blacklisted). A privacy agreement such as zk-SNAKEs will eventually improve this property of Ethereum.
Ethereum was launched in 2015 and will continue to write a powerful stroke in history. In 99.99% of the time, the Ethereum network (and Ether) worked as expected. The remaining 0.01% includes the DAO incident, massive hacking of multiple smart contracts, multiple protocol-level attacks, Shanghai DoS attacks, uninterrupted negative comments from a wide blockchain community, and multiple bear markets (including recent prices) Falling 94% of this event).
In addition, Ethereum has other attributes such as anti-censorship, no threshold, quasi-anonymity, and interoperability with other blockchain networks.
The issuance of cryptographic assets is especially hot for all parties (especially the Bitcoin community), and there are currently two main modes: limiting supply (like bitcoin) or limiting a low, predictable and hard-to-change distribution. Rate (as planned by Ethereum 2.0).
In Ethereum 2.0 (sharding and proof of equity will be deployed), although low inflation will always guarantee that certifiers are rewarded for their protection of the network, it may depreciate the Ethereum in the hands of non-verifiers. However, the following items may allow some ETHs to withdraw from the circulation area, thereby hedging this depreciation effect: equity pledge, open financial applications, fee destruction, and private key loss.
Support data (as of January 7, 2019)
The class currency properties of Ethereum can be explored by the following parameters:
- Ethereum's 24-hour average circulation reached $2 billion.
- There are currently more than 1.8 million Ethereum coins used to protect MakerDAO's CDP
- In addition, up to 40,000 Ethereum coins are locked in various financial applications.
- The Ethereum network processes an average of 600,000 transactions per day.
- An average of 250,000 active addresses per day
- Gas usage has reached the upper limit (indicating that Ethereum is not only used for simple transfer transactions) ( proofreading note: this is actually not logical, because the number of simple transfer transactions can also run out of Gas)
- Thousands of companies have raised ICO through Ethereum and raised billions of dollars
Ethereum's expected issuance rate
As of this writing, the annual rate of ETC is about 7%. In January 2019, Ethereum will be upgraded to Constantinople, reducing the reward for each block from 3 Ethereum to 2 Ethereum (the block reward will fall further). This will reduce the overall annual rate of increase to around 4.5%.
In the initial phase of Ethereum 2.0, the issue rate will pick up slightly (possibly from 4.5% to 5%) as the beacon chain runs in parallel with the Eth1.0 chain. In the third phase, the Eth1.0 chain will be deprecated, so the network issuance rate will drop significantly to the planned target, below 1%.
– Image source: https://docs.ethhub.io/ethereum-basics/monetary-policy –
There will be a slip ratio between the total equity of the Ethereum and the annualized rate of return of the holder. The existing Ethereum 2.0 specification will provide the following annual inflation rate and verifier annualized rate of return based on the total number of shares in the network:
– Image source: https://medium.com/ethhub/the-basics-of-ethereum-2-0-economics-3bd2ffc7fd0e –
It is worth noting that the increase rate of Ethereum is much lower than the annualized income of the verifier.
Editor's Note: On April 23, 2019, Vitalik proposed to increase the annualized rate of return of the verifier in the code base of the Eth 2.0 protocol specification (and naturally adjusts the rate of increase in Ethereum accordingly). This proposal received a lot of support and was therefore likely to be implemented or further modified on this basis. For the maximum number of ETHs, see the hyperlink at the end of the article.
to sum up
As I have shown in the article, the function of Ethereum is far more than the payment method of the e-Taiwan network transaction fee. As a result, Ethereum has accumulated tremendous value in its short life cycle and has begun to produce currency-like attributes.
I expect that Ethereum will continue to be used as the original digital currency for Ethereum's open economy, and that this economy will continue to grow and demand for Ethereum will continue to grow.
Special thanks to DCInvestor , Eric Conner , Chaz Schmidt , Ryan Sean Adams, and Cyrus Younessi for their suggestions and feedback.
Nothing in this article should be considered investment advice.
Author: Anthony Sassano
Translation & Proofreading: Zhou Wei & A Jian
This article is authored by the author to translate and republish EthFans.
(This article is from the EthFans of Ethereum fans, and it is strictly forbidden to reprint without the permission of the author.