Owning ETH is like owning shares in the internet. Demand for ETH will go up with increased web3 adoption, while upcoming changes will decrease the supply of ETH and let more value accrue to holders. It’s like a tech stock, a bond, a ticket to web3, and money, rolled into one. (View Highlight)
Ethereum is the Excel of blockchains.
That’s not exactly right. The analogy breaks down in places. But for our purposes, it’s good enough. Start by comparing it to Bitcoin. (View Highlight)
Bitcoin is like a database. That’s what a blockchain is — a distributed ledger of transactions. The Bitcoin blockchain lets people send each other bitcoin (BTC) and tracks who owns which bitcoin at any given time. It can also reward people for securing the database by giving them BTC for turning electricity into solutions to math problems (Proof of Work or PoW). It does one thing really well: track ownership of bitcoin. (View Highlight)
Ethereum is a Turing complete, programmable blockchain that lets anyone build full-blown applications using smart contracts. People can build all sorts of decentralized apps (dApps) on top of Ethereum, plugging into the blockchain and the surrounding ecosystem to provide everything from security to identity to payments (View Highlight)
Today, when you want to transact on Ethereum, you need to use ETH. There are currently around 116 million ETH, and the price is loosely governed by supply and demand. More transactions on Ethereum means more demand for ETH which means higher price, all else equal. (View Highlight)
When you transact, say if you send another person ETH, a few things happen:
You send 1 ETH and the other person receives 1 ETH
You pay gas fees, say .01 ETH
Your account balance on the chain goes down by 1.01 ETH, theirs goes up by 1 ETH (View Highlight)
To keep Ethereum running, it uses a Proof of Work consensus mechanism to trustlessly agree on the state of the blockchain. Bitcoin also uses Proof of Work, that’s where Ethereum got it from, although Bitcoin mining is able to be run on cheaper hardware and has 20x more miners than Ethereum, and is therefore more decentralized. (View Highlight)
Miners who successfully create a block are rewarded with 2 freshly-minted ETH (down from 5 in the beginning) and all the transaction fees within the block. (View Highlight)
So currently, the price of Ethereum is based on a combination of supply and demand, and the price it costs miners to secure the blockchain (View Highlight)
Challenges
There are a bunch of challenges with this system.
It’s Slow. The Ethereum blockchain currently does somewhere around 19 transactions per second. Visa, for comparison, does about 1,7000.
It’s Expensive. The simplest transaction costs about $5 in gas fees, and when I minted The Great Online Game as an NFT with Jack Butcher a couple weeks ago, it cost nearly $1k to mint and auction it.
It’s Volatile. Gas fees are based on auction, and change all of the time based on demand. That makes it hard to transact with confidence or predictability.
It’s Inflationary. Unlike Bitcoin, there’s no hard cap on the number of ETH that could theoretically be minted, and Proof of Work requires minting a bunch of new ETH, which means growth leads to dilution for existing ETH holders.
It’s Environmentally Unfriendly. Mining means using a lot of electricity.
It’s Inefficient. Most of the money spent on transaction fees leaves the system — miners are forced to sell the ETH they earn to pay for electricity, hardware, and taxes. (View Highlight)
Note: Current challenges with eth
Proof of Stake is a shift in how the network is secured, and who earns rewards. It means that instead of anyone in the world solving math problems to mine blocks, ETH holders can validate block transactions according to how many ETH they hold. Validators secure the network in exchange for yield in the form of tips and newly minted ETH. Ethereum claims that PoS will be more secure because validators will have ETH at stake, which can be destroyed if they try to cheat. Critics claim that staking puts more power into the hands of the people who hold the most ETH, making it less decentralized and therefore less secure. (View Highlight)
Note: Still unclear how proof of stake works
1997 Journal of Portfolio Management paper by Robert Greer, which says that there are three asset superclasses:
Capital Assets are productive and generate value or cash-flow. Examples include equities, bonds, or rentable real estate.
Transformable/Consumable Assets can be consumed one time, transformed into another asset, and their consumption produces economic yield. Think energy or commodities.
Store-of-Value Assets are scarce, cannot be consumed, just transferred, and their value persists over time and space. Examples include gold, currencies, art, or bitcoin. (View Highlight)
In the post, Vitalik highlights six ways that legitimacy can come about. Two are particularly relevant here:
Legitimacy by performance: if the outputs of a process lead to results that satisfy people, then that process can gain legitimacy (eg. successful dictatorships are sometimes described in this way).
Legitimacy by continuity: if something was legitimate at time T, it is by default legitimate at time T+1. (View Highlight)
Note: This is a great way to borrow from others work. ‘They laid out this many, and I found these fewer ones most valuable/relevant”
Performance and continuity create the Lindy Effect, which says that the longer something lasts, the longer it can be expected to last. Something that has been around for a year is expected to be around for another year, but something that has been around for 100 years is expected to be around for another 100 years.
This is an observable phenomenon. Amazon is more likely to be around in 30 years than a new startup, our kids are more likely to listen to the Beatles than to Olivia Rodrigo, and our grandkids’ grandkids’ grandkids’ are more likely to read Socrates than Dan Brown. (View Highlight)
Note: Strong supporting examples
Quality. Some things are just better than others, and the quality that allowed them to survive until now will allow them to continue to survive in the future.
Network Effects. As people recognize the quality of a thing and as it lasts longer, more people use it, so more people build on top of it. That creates a Two-Sided Platform Network Effect. More users attract more developers, more developers attract more users, and so on. (View Highlight)
Note: This is what I’m trying to do. High quality. Long lasting. More data feeds more users feeds more data
In Ether: A New Model for Money, Hoffman said that fees paid to Ethereum validators act as a wall that protects Ethereum: “The height of the wall is highly correlated with the total fees produced by the network. The height of the wall is the cost of attacking Ethereum.” (View Highlight)
In traditional software, the Bill Gates Line, coined by Ben Thompson, describes what makes something a platform according to Gates:
A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it. Then it’s a platform. (View Highlight)
