The world’s most valuable smart contract platform is a great bet for the future
Firstly, I believe that balance is important so I’d like to take a moment to address a potential downside. For a bearish perspective on what could go wrong with Ethereum I think that this article from Bankless does an excellent job explaining why Ethereum is susceptible to censorship, and how big a problem that is. Bear case aside, I still believe in the network long term. Here’s why.
1) Ethereum is at the heart of the cryptocurrency ecosystem
In the analog world all roads lead to Rome. In the digital world all roads lead to Ethereum. Just check out this cool chart below.
By a nearly unstoppable margin, Ethereum is the world’s most popular smart contract platform. It has the most total value locked (TVL) in its DeFi ecosystem, the most users and more developers work on Ethereum than any other network.
There’s more than $3 billion worth of Bitcoin locked up in the Ethereum ecosystem, and $0 worth of ETH in the Bitcoin ecosystem. I’m betting that this trend only intensifies. I view Ethereum as the hub for all blockchains, and I don’t see another project that’s going to displace ETH.
2) Dollar payments are coming
I believe that dollar stablecoins are Ethereum’s killer app. All we need is regulatory legitimacy from the United States and I expect stablecoin use to go parabolic. For the past decade the Bitcoin community has been touting the benefits of BTC as a store of value. Denizens of the developing world can use the orange coin to protect against inflation and currency collapse.
Well… If you bought $100 worth of Bitcoin at the start of 2022, by the start of 2023 you’d have $35. If you bought $100 worth of USDC you’d have $100 now. At least so far, Bitcoin is a speculative investment* and not a store of value. Dollars are far more effective at protecting your wealth.
*I’ve speculated that BTC could get used as collateral in the Eurodollar system, if Bitcoin’s volatility decreases
While there is a regulatory crackdown coming, I think that stablecoins will come through relatively unscathed*. We have to acknowledge the simple truth that America’s number one export is dollars. Almost every other country in the world is a junkie fiending for their dollar fix (Japan provides a timely example), and the USA is only so happy to keep that system going. If stablecoins are the latest and greatest way to send dollars abroad, I don’t think that politicians and regulators are going to abruptly end that system.
*Admittedly Tether may blow up at any time. Very hard to predict though, as people have been calling for Tether’s death for years and years.
Here are three ways that I think a stablecoin empire built on Ethereum might flourish in the 2020s.
1 — Private banking solution
What with everyone focusing on the SBF story and implosion of FTX, a few other important developments haven’t been getting much attention. Notably a USDC integration with Apple Pay, and Google accepting cryptocurrency payments via Coinbase.
This is just the beginning. I can see USDC gaining mass adoption in the next few years if American regulators give it the green light. Even Doomberg, who is famously bearish on crypto, has admitted that USDC is likely fully backed and on the correct side of the law.
Alternatively, a major bank like JPM might develop their own consumer-facing stablecoin. They’d have their work cut out for them, catching up to USDC, but it’s not out of the question. If one of these banks does launch a dollar stablecoin, I expect it to run on Ethereum.
2 — Government nationalization
A few months ago I wrote: Why the US Government might nationalize Ethereum. I don’t think that this is particularly likely, or if it does happen it won’t be for a few years at least, but it’s not impossible. If Ethereum is the beating heart of the cryptocurrency sector, I can see the American government expressing an interest in domination.
An alternative to full-on nationalization would be a nationalization-lite plan, wherein the American government takes over USDC. This would be a backdoor into a CBDC, and a far simpler way to create a government backed digital dollar than launching their own Fed coin.
3 — CBDC
I’m strongly opposed to a CBDC as I can’t possibly see how it’s a good thing for our incompetent government to dictate to its citizens what they can and cannot buy. However, if our glorious leaders are hellbent on monetary domination, I think there’s a decent chance they might roll out their slave Fed coin on Ethereum. Although, that’s certainly not guaranteed.
The Ripple platform might also be a candidate to host a CBDC. Ripple is an American company, XRP is fully centralized and Brad Garlinghouse, the CEO of Ripple, is attending the upcoming WEF shindig in Davos. You do the math.
3) The competition has consistently failed to live up to its hype
Pick a metric… Number of developers, unique wallet addresses, market cap, yearly transaction volume, etc. Ethereum wins, it’s the most popular smart contract platform in the world and has been for years. Every time a new “Ethereum killer” blockchain comes out it inevitably fails to live up to the hype.
Solana was going to displace Ethereum, until the network started going down once a month and everyone found out that the developers could turn it on and off at will. I was bearish on Solana before the events of the past few months.
Now that FTX is gone, I think Solana is truly done for. Tezos is a joke, I know there are some Cardano fans hanging around but the project has some serious catching up to do. Cosmos and Polkadot are arguably the greatest threat to Ethereum, but they’ve got a lot of work to do.
At this moment in time, when I look around the crypto landscape I don’t see any blockchain that’s going to displace Ethereum. Here’s a CoinDesk article saying the same thing.
4) Deflationary monetary policy
Bitcoiners make a big deal out of their coin’s low 2% annual inflation rate, the same as gold! They say. That’s all fine and dandy, meanwhile Ethereum has quietly become deflationary. The supply of Ethereum has started to (very slowly) shrink! Granted that might change in the months to come*, but it’s a good proof of concept.
*Ethereum’s inflation is variable, depending on network usage. The more people use the network, the more deflationary ETH becomes. If we enter into a protracted bear market where few people are using Ethereum, the network will likely become inflationary again.
If the network is already deflationary right now, it’s going to be noticeably deflationary in the next bull market! And that’s going to be excellent for the price of ETH. You can track all things having to do with Ethereum, including its inflation rate, with this outstanding dashboard.
5) Ethereum pays you to own it
Unlike Bitcoin, I can get paid to hold Ethereum. Currently the staking yield is roughly 5 to 7% (the number frequently changes), but that yield will likely increase in a bull market. The way Ethereum staking works, a certain percentage of all transaction fees go directly to the stakers so the more people use the network, the more stakers can earn.
Raoul Pal has claimed that crypto needs a yield curve and I think he’s spot on. I expect the staking yield on ETH to act as the risk free rate in crypto. The same reasons that cause investors to buy a US Treasury yielding 2% rather than an Italian BTP yielding 4%, will also cause people to stake ETH even if the yields are lower than other protocols.
6) The Ethereum community is creative and open-minded
The Ethereum community is open to new ideas and they’re generally more tolerant of change. It makes sense why this is the case. When you have inflexible technology like Bitcoin, innovation can be perceived as threatening.
On the other hand, the Ethereum community benefits from new advancements in blockchain. Ethereum is like a gelatinous blob, it assimilates other inventions into its own ecosystem.
In terms of block rewards, many Bitcoiners levy heavy criticism against Ethereum for its flexible monetary policy, however, I take an opposite view. I admire the fact that the Ethereum community is open to change and I trust that the developers will be wise stewards of the protocol’s monetary policy. We’re in the beginning stages of a massive period of disruption, and I would rather hang my hat with a nimble rather than fixed system.
The last block
I believe that while it might take a year or more to shake out the leftover scams from the last bull run, crypto will survive and Ethereum will thrive. I haven’t even mentioned the growth of DeFi, which is an entire article in its own right.
That’s the world of tomorrow that I’m preparing for, so let’s finish with a quote from the legendary Druckenmiller.
So, you always have to sort of imagine the world the way it’s going to be in 18 to 24 months as opposed to now. If you buy it now, you’re buying into every single fad every single moment. Whereas if you envision the future, you’re trying to imagine how that might be reflected differently in security prices.
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