An Economic Analysis of Ethereum
Enjoyed the article. I think one can boil it down pretty simply: decisionmakers at Ethereum don't care about investors. They're going to make decisions that support and enable interesting decentralized applications, and "defi" is incidental to that, but in they end they wouldn't care if Eth gets massively devalued or something as long as the ecosystem is healthy and growing.
Disclaimer: this is just my own perspective and speculation based on a bit of reading and brief convos with Ethereum foundation people.
I feel like I disagree with the bottom-line a bit - a 100/0 split seems to ignore the possibility that a future stable state of the Ethereum network will be capable of supporting stablecoins or other coins with arbitrary monetary policy that are capable of matching or surpassing Bitcoin in all metrics of technical merit. I would not want to be a Bitcoin maximalist in that situation.
I hadn’t really sat down and thought how much more complicated ETH 2.0 is than Bitcoin so that was interesting. I don’t think that the Concord metaphor is very meaningful though. Isn’t supersonic flight hard and inconvenient for real world physics and engineering reasons while cryptocurrency relies on CS/ math developments but if those problems are solved there is no reason to think the solution will remain impractical. Crypto won’t burn excess fuel or make sonic booms.
Thankful for the in-depth analysis. I'm still bullish on ETH because the entire blockchain economy is very speculative. Trying to fault Ethereum because it's not as stable or secure as BTC doesn't seem very fair.
I'm wondering whether Bitcoin has a chance of being anything other than a store of value, or a means to settle accounts (if even that). Given the long list of problems with Lightning (e.g. [1]), and the many years it's been in development for, I'm growing increasingly skeptical. I'm wondering how that fits into people's economic analysis of Bitcoin.
P.S. I'm long Bitcoin, so I hope I'm wrong!
[1] - https://www.coindesk.com/bitcoin-lightning-network-vulnerabi...
Some good points, but for as many good points, there is a similar amount of misinformation, whether purposefully or due to lack of understanding.
- The claim that BTC chose a non-scalable solution for ease of running a node isn't true. The claim at the time was that Segwit and LN were sufficient to solve all the scaling issues, the hardforks were going to solve anyways with their block size increase. It also falsely states that the hard forks take up more hard disk space, when in fact BTC still takes more...
- The hashrate comparison, the way it is charted is completely nonsensical, between BTC & ETH... it is quite literally comparing apples to oranges, their POW algorithms are completely different from one another and cannot be compared in hash/s terms. They are each respectively at the top of their hash domains. I'm doubtful this is due to ignorance, but moreso malice. Would love to see BTC miners do a 50% attack on ETH, which the author is essentially trying to instill into the minds of readers.
I wonder if this is not part of a ramp up of subtle marketing toward ETH. The google trends is already growing up https://trends.google.com/trends/explore?date=all&geo=US&q=e...
Is it at the moment possible (or even advisable) to use stablecoins like DAI to buy things directly on the Dark Web? Because if not, then that forces you to use exchanges to convert the stablecoins to fiat, which themselves are still subject to KYC regulations. So in that case you haven't really got around KYC.
This is a fake quote from a parody website:
>>I happily played World of Warcraft during 2007-2010, but one day Blizzard removed the damage component from my beloved warlock’s Siphon Life spell. I cried myself to sleep, and on that day I realized what horrors centralized services can bring.
TL;DR from the Author Lyn Alden
> TLDR; Ethereum could indeed do very well over the next year in terms of price, but as long as it's transforming its base layer, it remains a speculation in alpha development, rather than a finished/stable product.
https://twitter.com/lynaldencontact/status/13508211296367370...
There is still a big question of whether a panic that breaks Tether's peg might cause enough chaos to discredit the entire market for a while. It's odd that Alden doesn't address that.
Some other cryptocurrencies could go up when that happens, but it seems like it would be bad for demand in the slightly longer run.
I was hoping for a real economic analysis. You know one written by someone who studied monetary theories and policies.
I think the same analysis applies to Bitcoin in fact.
Funny that this upvoted article says much of what I said yesterday in a comment that was originally heavily downvoted, then went back:
The Ethereum solution to serve this demand, however, ironically has semi-centralized clusters. While it’s more decentralized than purely-centralized systems, it’s not really the level of decentralization that some were hoping for, and Buterin has admitted as such. These clusters of centralization serve as potential attack surfaces for governments to crack down on these methods of going around regulated and fully centralized and KYC-regulated firms.
One could almost say it’s a veneer of decentralization over a system that is actually quite centralized. There’s a step here towards decentralization, but it’s not actual decentralization in its current form.
I went further. Let me reproduce it here: No, blockchains are not the future, they are really the reason why one transaction can happen at a time in the whole world. Even Ethereum 2.0 will have shards which will do away with this anomaly. The only reason flash loans even work with no collateral is because you can be sure nothing else is running on the “world computer” while your transaction runs, so you can roll it back with no risk except gas fees. Vitalik himself acknowledges this, the guy is quite honest and straightforward about its limitations:
Vitalik Buterin: Using Ethereum is expensive, and its blockchain is ‘almost full’ He also said blockchain's 'problem' is that every computer verifies every transaction
Actually blockchains are a first-generation technology that do global consensus for every block, which literally means all transactions in the world must go through one computer in the world (the miner) although it’s a different one each time. And the situation is actually worse, since you don’t know who would mine the next block in advance, every transaction must be sent to every potential miner! Imagine if BitTorrent had every computer store and seed every movie instead of using DHT.
The ability to send or loan arbitrarily large amounts for a fixed fee is a symptom of centralization. In a fully distributed network, transaction fees would have to be proportional to transaction size!
Almost every other protocol on the Internet does not have such bottlenecks in its design. No one asks how many emails or websites can be served per second. Blockchain is trying to secure every transaction using the entire network! That is why so much electricity is wasted just to do 7 transactions per second. The next generation of crypto will actually be able to power payments using embarrasingly parallel architecture. Until then, we have blockchain. Ethereum is nicknamed the “world computer” for a reason. Gas fees are super high for small transactions like paying for coffee or voting in a secure election. Just one app KryptoKitties can clog up the entire network.
As one example, we built Intercoin apps on top of Ethereum (https://intercoin.org/applications) but we are not going to wait around for Ethereum 2.0 - which is blockchain also. Kik Messenger and others have long gotten off. Ripple, MaidSAFE and Solana use different technologies.
ETH past 3k in 2021
The majority of the serious innovation and development in the crypto space currently happens on Ethereum, which keeps the money people interested and sniffing around. The existence of Ethereum IMO helps the price of bitcoin increase, especially as ever more bitcoin is "wrapped" and ported to the ETH network.[0]
I think this article is really solid, as are all of her articles. Part of what I love about Ethereum and altcoins is exactly because of the speculative, fast-money, insanely risky and exotic assets and protocols it creates. Where she sees that as a negative, I see it as a positive. ETH and its tokens have helped my crypto friends amass more wealth than we would have made working at FAANG companies, and without slogging through all of the bullshit and pain of working at huge corporations. Plus we get to work on super interesting tech rather than middleware that powers the middleware that powers the data mining pipeline that extracts money out privacy violations.
If you want the "safe" crypto play, I tell people to do 60/40 BTC/ETH on Coinbase so they can hold it safely and never look at it again. If you want to make the 10x fast money gains speculating like a crypto degen trader, then the only game in town is ETH and the alts running on its ecosystem.
Overall, a very good and thorough analysis with a completely comprehensible explanation why she's preferring a 100% BTC, 0% ETH strategy.
I have only some minor quibbles.
GPUs are very much not abundant. Gamers were complaining a lot during the last bull run that those crypto nuts were buying up all available high-end GPUs.
Also comparing the hashrates of Bitcoin and Ethereum doesn't make sense. Those are different algorithms that run on completely different hardware. Bitcoin ASICs can only be used for Bitcoin (or Bitcoin forks that haven't changed the POW algorithm) where GPUs as more general programmable devices can be repurposed for mining other cryptocoins which might be more profitably to mine at any given time. Together with the fact (as stated in the article) that Ethereum has reduced the block rewards over time, it's not surprising that the hashrate isn't bigger than during the previous bull run.
This leads to the criticised monetary policy of Ethereum. This wasn't explicitly mentioned in the article but Ethereum's monetary policy can best be summarized as "don't overpay the miners for securing the network".
Many see it as a necessary evil that Ethereum is still running on POW and they are eagerly awaiting the jump to POS. It is seen as a design flaw of Bitcoin that it has a rigid coin issuance that isn't dynamically adjusting to the actual demand.