Five reasons to tell you: why do I make a full bet on Ethereum
The merger of Ethereum is likely to make Ethereum the first economically viable blockchain in the long run.
- At present, no mainstream blockchain protocol is economically feasible in the long run, that is, the revenue exceeds the operating cost of the blockchain.
- The real power of cryptocurrency technology is decentralization. If you want to decentralize a network, you can't just turn on the "blockchain switch". In order to make it work, we need a strong social force - legitimacy.
- In the blockchain ecosystem, legitimacy grows and is maintained within the community, and the community maintains legitimacy and allocates responsibilities.
- If ordinary community members cannot run nodes, the blockchain cannot achieve decentralization.
- The merger of Ethereum is a historic upgrade, which is likely to make Ethereum the first economically viable blockchain in the long run.
ETH is the native currency of Ethereum, which has multiple functions - valuable (can be used to pay for transactions), driving the world's largest decentralized computer; It is a "bond" (used for POS consensus mechanism) that can generate profits; Can store value (as currency in Defi) - these functions complement each other.
The assets contained in the cryptocurrency ecosystem are the best performing assets in the world and have the best risk/return rate in the past decade. (e.g. BTC and DOGE). For many of us, this is the main reason why we became interested in cryptocurrencies. However, from the perspective of investors, I think ETH is now the asset with the best risk/return rate.
There are five main reasons why I am bullish on ETH:
1. Solve scalability challenges
2. Network effect
3. "The most important scarce resource is legitimacy"
4. Make friends with Molo
5. World Computers Go Green
6. Solve the scalability dilemma
The three difficulties are that if you use the "simple" technology, you can only achieve two of the three main features (scalability, decentralization, and security) that the blockchain is trying to achieve. There are three "simple solutions" that can achieve two of these features:
Without proper decentralization, the "pure mathematics" in blockchain technology will not play its role, but Nakamoto showed us how to do this. Before Nakamoto Cong, we already knew how to communicate in a secure and scalable way, which is not difficult (advocates of high TPS chain need to know this); What we do not know is how to proceed in a decentralized manner. This is similar to Michael Faraday's use of the world's first generator to show us how to obtain electricity, which then produces a domino effect - thanks to this, we have generated other innovations that have completely changed the way of human life.
Have we solved the scalability challenge?
At present, no blockchain has solved the scalability problem, which is similar to the hope to download a movie in one minute in the 1990s; The technology and its adoption were not yet ready.
People invest time or money in Internet projects to gain benefits. However, it is shocking that none of the mainstream blockchain protocols is economically feasible, that is, the rate revenue should be greater than the operating cost of the blockchain.
Bitcoin gives full play to its main functions: value storage; But it needs to "print" BTC to pay for security. It "prints" about $31 million worth of BTC every day and only generates about $300000 worth of BTC transaction fees (July 2022). After several times of halving, or when all 21 million BTCs are mined (estimated to be in the 2140th year), can Bitcoin be economically viable? Nobody knows. I think most people will agree that with more halving, its economic feasibility will inevitably be reduced (if everything else remains unchanged).
After Ethereum is upgraded to a proof of equity, it is likely to become the first economically viable blockchain in the long run, because the network maintenance cost is expected to be lower than the rate generated by creating blocks. In fact, after EIP 1559 (BASEFEE combustion), Ethereum has produced some deflationary blocks.
Ethereum is the blockchain closest to solving the scalability dilemma. It has the best scalability strategy by establishing a unified settlement and data availability layer. The community of Ethereum (appropriate R&D, public goods and grants) is the only ecosystem that can achieve this.
On the Ethereum network, the core team, investors, verifiers, developers and users use the same currency to interact, creating a beautiful and positive feedback flywheel and building a stronger community.
Why did the "encryption case explosion" take place in Ethereum? DAO, NFT and DeFi did not magically appear in 2016-2018; Since the Ethereum white paper, these use cases have been incubated and created by the most innovative people in the industry, who have tirelessly built, updated the network and developed dApps for many years. DApps attract users (and funds), thereby attracting more developers, establishing more dApps, attracting more users, and so on - creating a positive feedback loop called "two-sided platform network effect".
"... The truly distinctive feature of the bilateral network is that it has two different categories of users: suppliers and demanders, who each come to the network for different reasons and generate complementary value for the other."- James Currier, Handbook of Network Effects.
Is it too late to invest in Ethereum?
Hayes wrote in an article that although the market value of ETH is much larger than its competitors, it is still very cheap from the perspective of the valuation of network fundamentals. Hayes compared the valuation, number of developers, number of addresses and TVL value of ETH and its main competitors. Considering that ETH is cheaper in terms of fundamental valuation than its alternatives, ETH provides the most attractive risk/return rate from the perspective of investment.
"The most important scarce resource is legitimacy"
Blockchain technology is different from many other technologies. If you want to decentralize a network, you can't just turn on the "blockchain switch". In order to make it work normally, it needs a powerful social force - legitimacy.
Legitimacy is defined in Vitalik's post as:
"Legitimacy is a high-level mode of acceptance. If in a certain social environment, people widely accept and play their role to achieve a certain result, and everyone does so because they expect others to do the same, then the results in the social environment are legal."
To understand the idea of legitimacy, please ask yourself:
- Why can Ethereum pay more security fees than any other smart contract blockchain?
- Why can blockchain recover from 51% of attacks?
- Why are some hard forks more valuable than technically identical forked blockchains (for example, Ethereum vs Ethereum Classic, Hive vs Steem)?
- Why are some NFTs more valuable than others, even though they are represented by identical images?
The answer to all these questions is legitimacy.
Why is community so important?
In the blockchain ecosystem, legitimacy is developed and maintained in the community. The community not only bears the legitimacy, but also the rights and responsibilities of maintaining the blockchain here are assigned to members, thus making the network more decentralized and decentralized.
The stronger the community, the more legitimate it is. Considering that Ethereum has a mature and powerful network effect to support users, developers, investors and verifiers, I think Ethereum has the most powerful community in the smart contract blockchain.
Make friends with God Moro
Early in my cryptocurrency career, I realized that we should understand how blockchain technology can help us solve major problems, so as to understand its value. I spent a lot of time understanding the failure of cooperation, which is called the suffering of Moro God.
Molo has many definitions. My definition of Molo is - it explains why we can't have good things. I think the essence of Molo God is best explained in this failed fish farming cooperation.
As a thought experiment, let's consider raising fish in a lake. Imagine a lake with a thousand identical fish farms owned by a thousand competing companies. The profit of each fish farm is 1000 dollars/month. Everything was all right for a while. But every fish farm produces waste, which pollutes the lake. Assuming that the pollution generated by each fish farm reaches a certain limit, the productivity in the lake will be reduced by $1 per month.
The waste generated by 1000 fish farms is enough to reduce the productivity by 1000 dollars/month, which means that no fish farm is profitable. Capitalism is needed: someone invented a complex filtration system that can remove waste. Its operating cost is 300 dollars/month. All fish farms have voluntarily installed this system, so the pollution has ended. The profit of fish farms is 700 dollars/month - still a considerable figure.
But one farmer (we call him Steve) didn't want to spend money to operate the filter. Now, waste from a fish farm has polluted the lake, reducing productivity by $1. Steve's profit was $999 and others' profit was $699.
Others saw that Steve did not spend money on maintenance of the filters, so they also disconnected their filters.
Once 400 people disconnected their filters, Steve's monthly income fell to $600 - lower than if everyone kept using filters, while those poor, ethical filter users earned only $300. Steve said to everyone, "Wait! We should all agree to use filters voluntarily! Otherwise, everyone's productivity will decline."
Everyone agrees with him. They have signed the Filter Convention. Except for a little jerk, let's call him Mike. Now everyone is using filters again, except Mike. Mike's income is 999 dollars a month, while others' income is 699 dollars a month. Slowly, people began to think that they should also get a lot of money like Mike, and disconnect their filters for an additional profit of $300.
A self interested person will not have any motivation to use the filter, but has a certain motivation to sign an agreement that allows everyone to use the filter. However, in many cases, he has a greater motivation to wait for others to sign the agreement, but he does not participate. This may lead to an inability to balance that no one will sign such an agreement. "
Why is this a big problem?
One way to measure human progress is to see if we can develop better ways to work together. Language, religion, government, state, constitution, monetary system, scientific methods and the Internet are all fruits of human cooperation. Each of these inventions was a small battle won against the god Molo (although they were accompanied by their own sacrifice). But there are more battles that we have not yet succeeded in: corruption, censorship, privacy, fair trade, economic justice, and so on.
"It is so desirable for human beings to find, discover and build a system to enable them to achieve unstoppable human collaboration. Even the most ambitious science fiction writers can't imagine what kind of future we can build with this technology." David Hoffman, Ethereum: The Killer of Molo.
What does Ethereum have to do with all this?
David explained: "The unstoppable code, the unchangeable transaction and the unprintable currency are the ultimate collaboration toolkit that mankind has never had... Ethereum is a platform for production coordination mechanism... which means that the world is about to become more collaborative."
The world computer is going green
The merger is the most anticipated cryptocurrency event this year, and also a historic upgrade of Ethereum. According to the latest estimate, the merger is expected to occur between September 14-15, 2022. In short, consolidation means that the engine of block production is converted from proof of work (POW) to proof of equity (POS).
I want to focus on why the value of ETH will appreciate in the coming months, which is related to the concept of ultra sound money.
The super sound currency can be immediately understood as a culture, which believes that the combination of EIP 1559 (BASEFEE combustion) and this merger may lead to a decrease in ETH supply. After the merger, the circulation of ETH will be reduced by about 60-90% (depending on the participation of pledge), which is equivalent to halving Bitcoin at least twice.
Hal Press, cryptocurrency analyst at North Capital, wrote an article that "from the perspective of price change, about $5 million of new capital is needed every day to enter the asset environment to maintain its current price. This situation will be changed into that only about $30 million of existing holders sell their tokens every day, and the price can be maintained unchanged."
This is a huge permanent purchase pressure for ETH.
After the merger, ETH will meet ESG standards (ESG means environment, society and governance; here, ETH will no longer have miners with high energy consumption), enabling new institutional investors to invest in ETH. We have seen that SEBA, a Swiss bank, is making this move.
Many people describe the ETH bet as an Internet bond, because by betting, you can bet on ETH to generate income permanently.
Based on its performance in the previous cycle, I think ETH is not much more risky than BTC (cryptocurrency with "low risk" at present). Indeed, ETH is currently more volatile, and its performance in bear markets is generally not as good as BTC (although ETH/BTC is currently creating a new local high). However, many risks involved in BTC may also impact the whole cryptocurrency market, including ETH.
What are some additional risks involved in ETH?
What if more stable currencies collapse? If the regulators hit Ethereum because it was unstoppable (such as the tornado cash case, the US Treasury Department made relevant sanctions on Tornado Cash before), or suddenly decided to label it with securities? What if the consolidation does not proceed as planned? What if the complexity of Ethereum causes more problems than progress? What if DeFi is not as elastic as we think?
Is it environmentally friendly? It has no limited supply, so is it sound money? It has high security cost, is it efficient enough? All of these challenges can be answered simply - they are likely to be resolved after the merger.
Is it too expensive for retail users? Is it suitable for public use? What if retail users don't care about decentralization? These are challenging problems, and it is not easy to solve the scalability dilemma. But the road ahead is clear. If there is a team/community that is best suited to meet these challenges, in my opinion, it is the developers of Ethereum, because most of the innovations in the blockchain ecosystem come from them.
ETH can provide one of the best risk/return ratios at present. It can be said that it is the best candidate to solve the scalability dilemma; It is a smart contract chain with the greatest network effect and legitimacy; Its coordination mechanism can help solve some of the biggest problems in the world; And it is likely to become a deflationary asset. All these features bring stable advantages to ETH and support its protocol. Let's not forget that the blockchain ecosystem has the potential to resolve the failure of human cooperation, thus creating great value - and most of them are still on the way, waiting for our exploration.
Original text: Getting It All On Ethereum by Alphadegen.eth
Compiled by: Guo Qianwen, Chain Catcher
Source: Chain Catcher