With these upcoming improvements, ETH’s voice for UltraSound Money is getting louder and louder.
For the presale of 30 cents in 2014 till now more than $3000 dollars, more professional in the crypto world believe that the bullish of Ethereum are still not coming, one day the ETH will up to $10K. And one more interesting thing in the crypto world is that more and more investors are shifting allocation to ETH over BTC. Following a drop of over 50% in price, Ethereum long-term holders remain unfazed. The number of hodlers — addresses that have been holding for over one year — continues to grow in spite of the volatility.
As of July 8, 2021 using IntoTheBlock’s Ethereum Ownership by Time Held Indicators
To begin, to understand the importance and necessity of ETH, we need to know what Ethereum is and how it works.
Ethereum is an open-source public blockchain platform with smart contract functions, a resonance network composed of thousands of computers around the world. ETH is a digital token of Ethereum, which is regarded as the "Bitcoin 2.0 version". Ethereum provides a decentralized virtual machine (called "Ethereum Virtual Machine") through ETH to process peer-to-peer contracts. Developers need to pay Ether (ETH) to support the operation of the application. Like other digital currencies, Ether can be bought and sold on the trading platform.
Ethereum is the most widely used public blockchain system that supports complete application development. Compared with Bitcoin, Ethereum belongs to the category of Blockchain 2.0. It is a blockchain system redesigned to solve some problems of the Bitcoin network. The design of Bitcoin is only suitable for encrypted digital currency scenarios. It does not have Turing completeness, and lacks the concept of an account to save real-time status, and there are problems of efficiency and waste of resources brought about by the PoW mechanism.
Simply put, the previous blockchain (such as Bitcoin) was just a single tool or at most a multi-functional tool combination, while Ethereum is a blockchain smartphone, users can use their smartphones to build any "application" that they need.
The “Ultrasound Money” meme has been running in Ethereum based circles for some time, gaining momentum as the asset rises and rises in value during this bull market. But this meme is suspected by many people. According to Vitalik Buterin, the founder of Ethereum, the three eye-catching changes of Ethereum, the London upgrade, Ethereum 2.0, and Layer 2, are estimated to be completed in the second half of 2021. With these upcoming improvements, ETH’s voice for UltraSound Money is getting louder and louder. Next, I will analyze from three aspects the potential of ETH to be ultrasound money.
On August 5, when the block height of the Ethereum network reached 1,2965,000, the Ethereum London hard fork was upgraded, and the game rules of Ethereum ushered in a major change. The Ethereum London hard fork has brought many impacts, especially the impact of EIP-1559, over 10,000 ETH have been destroyed.
EIP-1559——Reform of Gas Price
EIP-1559 changes the Ethereum mainnet price high priority gas fee mechanism. Using the gas fee structure of "Basic fee" + "miner tip" can effectively achieve the stability and predictability of network gas fees. At the same time, the block size will have a flexible upper limit, and the basic fee will be automatically adjusted according to the utilization rate of the block space.
Normally, transaction fees are set by users and accepted in full by miners. Under EIP 1559, the base fee is set by the Ethereum protocol automatically and is removed or “burnt” by the network instead of being awarded to miners. The burning mechanism of EIP 1559 is one of the most controversial aspects of the London upgrade because of its potential to reduce miner revenue.
EIP-1559 can make Ethereum Gas fees more predictable and stable. At the same time, in the future, nearly half of the network fees in the Ethereum network may be directly destroyed. Although the current market is relatively sluggish, ETH destruction will affect the long-term future of ETH. Value support has a profound impact, especially after the transition of Ethereum to PoS in the future, under the premise of the prosperity of the Ethereum ecosystem, the ETH handling fee for network destruction can even offset the newly issued ETH tokens on the network, pushing ETH into a deflationary era.
2. Environmentally Friendly
May this year, Tesla CEO Musk suddenly announced on social media that Tesla has called to stop buying cars with Bitcoin. Attacked the massive energy consumption caused by Bitcoin, and claimed to look for cryptocurrencies that are more environmentally friendly.
PoW to PoS
In the Ethereum 2.0 version to be upgraded, the most important change should be the change of the consensus mechanism, which will be converted from PoW to PoS. “Proof-of-stake is a solution to the [environmental issues] of Bitcoin—which needs far less resources to maintain,” Vitalik Buterin said at the StartmeupHK virtual festival.
A POW model—which both Bitcoin and Ethereum currently use—employs a consensus mechanism that requires massive amounts of computational power. To verify electronic transactions on the blockchain, miners compete to solve complex math problems using computer components, such as Bitcoin mining’s use of ASICs (application specific integrated circuits) and Ethereum’s use of graphics cards.
Miners are incentivized to stack up hardware and solve as many hash computations as possible to reap rewards in the form of coins. Because it demands massive amounts of computational power, cryptocurrency mining is most popular in countries where energy is cheap and accessible.
Ethereum’s POS model secures the blockchain through verifying transactions according to Ether holders' stake in the token. It requires less computing power because it doesn't reach consensus by having miners race to complete the same puzzle.
Ethereum’s energy consumption and hardware needs could be reduced by a factor of 100, or even 10,000, with the POS model, according to Buterin.
3. Capital Efficiency
The improvement of Ethereum, especially the reduction of Gas fee, will attract more user transactions, and will welcome more applications on Ethereum. Higher transaction willingness plus more network activities will bring more ETH consumption. Because of the ETH scarcity, the ETH value also will get higher.
DeFi Project Empowerment
Currently, almost all DeFi projects are carried out on the Ethereum blockchain. DeFi relies heavily on the Ethereum network-DeFi is a global competition to make ETH the most useful asset in the world.
1) DeFi isn’t De without ETH
Because it’s Ethereum’s native asset, ETH has a privileged position inside Ethereum’s economy.
- It is the only asset on Ethereum that wasn’t issued by a smart-contract, and therefore has no smart-contract risk.
- It’s native to the Ethereum protocol, so it has no counter-party risk.
- It has assurances towards its scarcity, because any monetary policy failure is a risk to the Ethereum network, not just the DeFi apps on top of it
The privileged position of ETH as the original collateral in DeFi applications will increase the scarcity of ETH supply; this is an additional energy source that provides energy for the currency energy behind ETH.
2) All DeFi roads lead to ETH
DeFi tokens like UNI, AAVE, and MKR capture value from the surrounding Ethereum ecosystem. Each protocol captures fees using different mechanisms, but they all generally capture value by taking a fee on the economic activity that passes through their platform.
There are three main types of tokens that apps denominate their value-capture in:
- Other DeFi tokens (Compound captures UNI borrowing fees, for example)
- Stablecoins (USDC, USDT, DAI)
But really, it boils down to capturing value in either centralized stablecoins or ETH. Without ETH, DeFi apps would be forced to capture value in tokens that have centralization risk dependencies.
3) All roads on Ethereum lead to ETH
DeFi protocols need a trustless asset that is a fundamental part of the protocol, or else it’s reintroducing the centralization risks that we’ve been trying to avoid in the first place.
ETH is unencumbered from centralization risk and therefore is a favorable asset to capture value in.
Each asset comes with its own risk parameters (volatility, liquidity, centralization risks, bugs, etc), and each DeFi app that runs on collateral (spoiler; they all run on collateral) sets different parameters for each asset, according to what the protocol feels is safe.
No asset is perfectly optimized for all risk parameters; all assets have risk. But Ether, as the native asset to Ethereum, fills a privileged position in DeFi as the only asset with all counter-party and contract-risk eliminated. It is the single asset on Ethereum with the strongest settlement assurances, and therefore the least settlement risk. As the DeFi structure grows larger, ETH will be the asset that holds it together.
Source: David Hoffman:ETH: The World's Most Capital Efficient Asset
4) More projects flooding into Ethereum
DeFi makes the ecology of Ethereum more prosperous, but the increase in Gas fees also makes some users have to switch to other networks. Recently, public chain ecosystems such as BSC, Heco, Solana, and Avalanche have developed rapidly. Because Ethereum is still one of the most secure public chains, usage scenarios can always be found, and the innovation of DeFi is concentrated on Ethereum. Because of the different application scenarios, the current development of other public chains has not affected Ethereum.
The Ethereum upgrade mentioned above, especially the launch of EIP 1559, which has limited control over the high gas fees of Ethereum. Together with the upcoming Layer 2 upgrade, this will undoubtedly open the door for other applications to enter Ethereum.
5) DeFi is on a relentless march towards Capital Efficiency.
Every new protocol that finds success, because it was more capital efficient than its competition. Every protocol upgrade that any DeFi application has gone through has been in an effort to become more capital efficient. In DeFi, capital efficiency is the name of the game.
Ether, as the native asset to Ethereum, and therefore DeFi, is the asset that receives all of the tailwinds of this competition. When DeFi becomes more capital efficient, Ether becomes a more efficient asset.
DeFi is on a march towards capital efficiency, and ETH will receive all of it.
The definition of an asset class was addressed in Robert Greer’s seminal 1997 paper, “What is an Asset Class, Anyway?” In his paper, Greer lays out three superclasses of assets, which include
- Capital assets：capital assets are productive and generate value or cash flow. Examples include stocks, bonds, or rentable real estate.
- Consumable/ transformable assets：consumable/ transformable assets can be consumed once and transferred into another asset, and their consumption generates economic benefits. Like energy or commodities.
- Store of value assets：the value-preserved assets are scarce and cannot be consumed but can only be transferred. Their value lasts with time and space. Examples include gold, currency, art, or Bitcoin.
Ethereum will meet the following three characteristics after the Ethereum update is completed:
- Store of value. ETH is locked as collateral for DeFi transactions. For example, you can use ETH to obtain loans or provide liquidity for DEX. Currently, nearly 10 million ETH are locked in DeFi;
- Consumable assets. After EIP 1559 is processed, the gas fee will be like gasoline in a car. Any time something happens in Ethereum, gas fees need to be burned, thereby reducing the overall supply;
- Capital assets. ETH acts as a capital asset in a variety of ways. Owning ETH represents a share of the Ethereum network, just like owning a company's equity. Once pledged, ETH will give its owner the right to work for the network through the right to become a validator and collect fees generated by the network.
Source: David Hoffman:ETH: The World's Most Capital Efficient Asset
The above three major changes - the London upgrade, Ethereum 2.0, and Layer 2 will run through the second half of 2021, and each of them may have a significant impact on the ecology and price of Ethereum. Where will Ethereum go? Regardless of how Ethereum develops, according to the current trend, ETH has unlimited potential to become Ultrasound Money.
- David Hoffman: ETH: The World's Most Capital Efficient Asset
- David Hoffman: Ether: A New Model for Money
- Sergio Goschenko: The Future of Ethereum in a Meme: Ultra Sound Money
- IntoTheBlock: Ethereum On-Chain Activity Heats Up Ahead of Major Upgrade
- This article was organized and edited by Mexo, please indicate the source for reprint.