ETH is Money (And Why it Matters) – Ryan Sean Adams
Ethereum culture shuns price talk. Build, don’t shill is the mantra. While this ethos has served the community in many ways, it’s also caused us to undervalue and misunderstand the asset that makes Ethereum possible.
ETH is under appreciated.
What is ETH?
ETH is a triple-point asset:
- ETH is a capital asset like a government bond. When staked ETH generates returns in exchange for securing the network — an ongoing stream of value.
- ETH is a transformable asset like oil. When used to pay for transactions, ETH is used or transformed into another asset. As a transformable asset, ETH is priced via supply and demand, but does not yield an ongoing value stream.
- ETH is money like gold or USD. As a money, ETH is priced via supply and demand for ETH as a money relative to alternative monies. This attribute gives ETH a monetary premium, which I define as any value above capital asset and transformable asset value.
- Now, this money property can be broken down into parts. A common definition of money is a store-of-value (SoV), medium of exchange (MoE), and unit of account (UoA). When used to collateralize loans or held to protect wealth ETH is a store-of-value (SoV) asset. When used to price and buy collectibles or ICOs, ETH is a UoA and MoE.
Objections to ETH is Money
There are three objections to ETH is money:
First, volatility. ETH isn’t stable enough to be a reliable MoE or UoA people say. And while ETH volatility will decrease as network value expands into the trillions, they’re still right — raw ETH is too volatile for many money use cases.
But ETH has an answer to this in the form of stable ETH-backed synthetics. DAI for instance, is backed by ETH in the same way the Dollar was backed by gold under the gold standard. DAI is pegged to USD for stability, but isn’t redeemable for USD, it’s only redeemable for ETH. DAI merely uses USD as a peg for convenience (and can switch to another UoA at will).
So the answer to volatility: in DAI-form, ETH becomes a low volatility MoE and UoA.
Second, monetary policy. People say ETH issuance will inflate like fiat. There are so many false narratives on issuance that countering each would require a separate post. A few facts:
- ETH issuance is now 4.6% and has only decreased over time
- A large part of the design goal of Ethereum’s proof-of-stake (PoS) is to increase security at reduced issuance cost — under PoS ETH issuance will drop to around 1%
- ETH stakeholders are incentivized to decrease issuance — this is completely contrary to the incentives of central bank fiat issuers
- ETH scarcity and BTC scarcity are both backed by the same thing — a social contract enforced by a community of nodes & developers who can hard fork a rebellion at anytime
The monetary policy of ETH is lowest possible issuance to secure the network. This structure ensures long-term sufficiency of security budget rather than say, an arbitrary policy of halving security and hoping for the best every four years. Under PoS, ETH will have lower annual issuance than existing SoV assets like gold.
Suffice it to say, ETH’s monetary policy is more than sufficient for a SoV money. I expect the market to realize this over time. And smart participants already do.
Third, some will admit ETH is money, but claim it’s only money within the Ethereum economy. But there’s no reason to believe ETH should be limited to its domestic economy. Indeed, if Ethereum became a neutral global settlement layer for open finance, secured by ETH bonds, and with trillions in currency and financial instruments backed by ETH as a SoV, I find it impossible to believe ETH wouldn’t be an entry on the balance sheets of all major institutional funds and central banks as a globally held non-sovereign asset.
So I guess this last objection depends on the limitations of your vision for Ethereum.
Who cares if ETH is money?
Lastly, why does this matter? From time to time I’ve had conversations with people that go a bit like this:
People: Who really cares if ETH is money?
Me: If ETH isn’t valued as a money it’s never going to be worth trillions of dollars.
People: So who cares. Doesn’t Ethereum work the same at $10 vs $10,000?
Me: No. It doesn’t. It works less well at a lower price.
At a lower ETH price, there’s less:
- Economic security for Ethereum’s network of assets¹
- Economic bandwidth to power Ethereum’s SoV-backed synthetics and currencies, like DAI²
- Economic resources to pay for Ethereum’s development
- Economic credibility to establish Ethereum as a global financial system
For all of the reasons above, I believe the winning open financial network will have a SoV reserve asset at its base money. If that network is not Ethereum, a less open, less permissionless, and more centralized network will take its place.
Libra delivers a closed money and a closed banking system.
Bitcoin delivers an open money but a closed banking system.³
Only Ethereum delivers an open money and an open banking system.
Ethereum is permissionless like the internet, censorship-resistant like BitTorrent, and a public good like TCP/IP.
A decentralized financial system for the world.
I want Ethereum to win because these outcomes are important.
And Ethereum only wins if ETH is money.
So let’s appreciate ETH.
: In both proof-of-work and proof-of-stake Ethereum security grows in proportional to the value of ETH. Bearers assets in particular, those that settle only on the Ethereum blockchain (like DAI and REP, not like USDT and GUSD which are revokable) require high base chain security for protection against double-spend attacks. While its difficult to reason about how much security is enough, it seems clear that a higher security public blockchain will be trusted with higher value bearer assets and that these network effects will compound.
: By economic bandwidth I mean the capacity of a SoV asset to support the assets it backs. Consider that at $10B in network value and with 10% of ETH supply locked at currents collatoralization rates ETH can support a max of $666M DAI. At $1T in network value under these same assumptions ETH can support $66B DAI. The higher the value of the base money, the greater the economic bandwidth of the system.
: Banking with Bitcoin requires the centralized crypto exchanges you’re familiar with: BitMex, Coinbase, Binance, and BlockFi. Ethereum uses these crypto banks, but does not require them. Instead, Ethereum allows for a decentralized network of banking protocols such as: Uniswap, Maker, Set, and Compound. The programmability of Ethereum as exposed in smart contract protocols enables an open banking layer vs a closed one.