ETH and BTC are Orthogonal
Different scopes for different folks. ETH isn’t “money” in the BTC sense, but it doesn’t need nor want to be
I don’t agree with the the “ultrasound money” meme that has been making the rounds on twitter. For one, it pits BTC and ETH directly against each other. For another, I don’t think describing ETH as “money” is all that accurate. I’m an ETH fan. I’m currently working on things in the Etheruem eco-system. I hold much more ETH than I do BTC. However, I don’t think of ETH as “money” in the real world sense, and doesn’t think we need to nor necessarily want it to be that. Rather, I think of ETH as an investment in the success of the Ethereum network.
If you aren’t familiar with the concept of Ethereum as ultra-sound money, the concept is fairly straightforward:
- Bitcoin is referenced as “Sound Money” due to having a hard capped supply and no influence from central banks
- With EIP1559 Ethereum will begin burning a portion of transaction fees that could lend to Ethereum supply decreasing over time (if it is more than inflation)
- Thus ETH is “ultra-sound” money — it supply can shrink!
However, by using the term “money” for both, I don’t think it accurate captures the differences between the philosophy of the BTC and Ethereum communities. If you look at the problem from the idea of the audiences they serve — they do not really compete, and are more orthogonal.
Bitcoin as Money
The BTC network is simple — it supports the transfer of payments. Particularly payment of the central asset — Bitcoin. This is one reason why many are bored with it. Ethereum does all these cool things but Bitcoin really just transfers value.
When I hear this, I think that people are missing the point. Bitcoin is not really trying to do all of these things. It is trying to be the new money system — a replacement to the current financial system.
“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”
Bitcoin was born from the ashes of the global recession. It is a quasi religion — Fiat and Central Banks are the devil that has caused all of our problems and Bitcoin — born from the loins of the mysterious Satoshi — a capped, decentralized peer to peer currency — is the savior to all of our problems.
The tenants of Bitcoin is that it can’t be stopped (due to not needing third parties), and that it has a fixed monetary supply. It is a return to the gold standard.
The United States was on the Gold Standard for much of it’s history. It was removed by Nixon in 1971 and ever since then a lot of charts have gone up and to the right. A lot of people historically haven’t liked this — goldbugs have existed for some time. Bitcoin has given them new legs.
Internationally, one of the more interesting aspects of gold backed currencies is the price–specie flow mechanism, which describes that trade balances / imbalances naturally self correct under the gold standard. I’m not an economist, but I’m curious if this property would still hold under an asset with shrinking total supply, like ETH may have under EIP1559.
Most of the worlds countries were on the Bretton Woods system for some time which effectively made the US dollar the world currency by pegging every thing in relation to the dollar (while the US dollar would be backed by gold). The monetary policy of the United States thus affected the world very much. Solidifying this was the rise of the petrodollar. Only greenbacks are to be used to buy Oil, cementing the US dollar as the center of international finance. The US is able to wield this power as a weapon via sanctions — if you don’t have access to USD, you don’t have access to the monetary supply.
Bitcoin is an attractive option for those that are both sick of the US Government’s current policy of money printing and inflation, as well as to governments that may not want America to have as much control as it does.
Bitcoin as money is both a return to the gold standard, and a potential reduction of US power on the world stage.
It is a pretty powerful meme, and I would not be surprised if it gains in legitimacy with fanatics domestically, as well as internationally. It has a cult like group of followers that are pretty interested in it’s singular goals. To keep the network as secure as possible to function best as a hard asset, it is resistant to change, and limited. Most new development goes towards improving the system, rather than building radical changes.
ETH as an Investment in Ethereum
I don’t think Ethereum is trying to accomplish the same goal. Philosophically ETH is much different. It is a generalized blockchain that allows for building applications without the need for trusted third parties.
It doesn’t take itself nearly as serious as Bitcoin. It’s not an international revolution to return to the gold standard and mercantilism, and I don’t think it has ever sold itself as this.
Rather Ethereum is a system in which such a revolution could be built on (tokens are easy to spin up). And as the meme posits, due to it’s possibly deflationary nature, ETH (Ethereum’s native asset) could even take over as sound money instead of Bitcoin. It would have even more advantageous properties to those who want to protect wealth over time if it is always decreasing.
However I don’t think ETH fits this bill well. In an Ethereum future, it is not necessary to have a war against fiat. Rather, due to the programmable and general nature of Ethereum, Fiat thrives. Look at the huge success of stablecoins.
Not everything on Ethereum needs to be priced in ETH. It could be US dollars. It could be BTC (through wrapped solutions). But Ethereum isn’t particularly picky and it is more up to a given merchant / application. Ethereum is digital Switzerland — a neutral, un-censorable programmable financial system.
Bitcoin is aimed at subverting the existing international Fiat system to Bitcoin based system. Ethereum is subverting the existing financial system by removing trust third parties and middlemen. Ethereum is also creating a new world on the Blockchain — the Metaverse — where everyone can do whatever weird thing they want and no-one can really stop it. Fiat currencies and non fiat currencies alike can prosper in this environment — it doesn’t particularly matter. ETH could also function as a currency in this system.
However, I think the lack of a religious holy like war against Fiat will stop the world from attempting to migrate to the “Ethereum Standard”. Instead, I see ETH as an asset that can profit immensely from the success of the Metaverse and the Ethereum network. It has three huge revenue sources that are distributed to holders that should increase its value over time
1. EIP1559
EIP1559 will burn ETH the more the Ethereum network is used. It’s similar to a company announcing a stock buy back. Simple logic dictates that the more usage of Ethereum, the increase of ETH scarcity, and number go up. ETH will naturally profit from it’s own success.
2. Staking Rewards
Proof of stake will removes miners from the equation. It will replace them with staking lots of 32 ETH. The main effect of this is it will add base productivity to holding ETH. Those that hold ETH are able to get a cool low risk 6% interest in ETH. There is a time value to holding ETH as it provides cash flows
3. MEV
MEV (or Miner Extractable Value) is how much miners can make from front running / back running transactions. The more usage of Ethereum, the more MEV that can exist.In the switch to Proof of Stake, it will be VEV — Validator Extractable Value. That means the 6% risk free rate of return will actually increase to be more value with the amount of economic arbitrage that can be captured on the network. The more usage, likely the more value in arbitrage.
The Case for ETH as Money
While I think ETH is more compelling as an investment asset in the success of the Ethereum network, there is a case for it to be money: every transaction on Ethereum requires ETH to function.
Thus, regular users will need to hold ETH in order to participate, and if they hold ETH, why not use it for transactions? Many applications native to Ethereum already price their goods in ETH.
I can believe that ETH will serve as a currency, but only to the metaverse on top of Ethereum, and not to world at large like Bitcoin is attempting. I don’t necessarily see countries adopt the “Ethereum standard” as they can just as easily mint their own currency on top of the network. I can very much imagine a financial world on top of Ethereum that mirrors the current landscape of disparate different currencies that we have right now, with their own monetary policy.
Additionally, it is not true that users actually need ETH in order to participate in the network. Through “direct to miner” channels like Flashbots, users can have transactions that require no gas. Flashbots could even be updated to take ERC20s as payment rather than ETH itself. We could have a world where users can pay their local currency for transactions, and Validators act as “payment for orderflow” entities. Maybe in this world some countries even are using BTC as their local currency. Digital natives organizations like DAOs, would likely pay in ETH.
Overall, I see BTC and ETH targeting two different philosophies. BTC’s philosophy is a world of sound money, free from Fiat currencies and United States Control. ETH is a new financial system. It is not necessarily targeting BTC adoption in the real world, and supports BTC just as well as it supports itself, or any other currencies.
