Evaluating Ethereum as a Virtual Machine system.

Ethereum is a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third party interference.

By definition Ether is a commodity because developers could use Ether to make something. Just like jewelers use gold to make necklaces and rings, developers program digital agreements in Solidity (Ethereum’s programming language) and pay Gas, a unit of account used for paying miners fees for running operations-AKA smart contracts. Gas is converted to Ether which is deducted as the smart contract gets executed. Why is there Gas and Ether? Why can’t we just price operations in Ether directly? The reason for that is to decouple the price of an operation with the market price of Ether. If the price of Ether skyrockets on the market, the cost of running operations could be controlled with Gas/ETH conversion rate (set by miners). At this time, the most popular smart contracts are:

  1. Token Minting Smart Contracts— create your own crypto currency. You can modify things like the name your currency and choose how many tokens you want to mint and distribute, etc. So when you deploy your token minting smart contract to EVM, you are asking miners to run this operation for you and paying them Gas fees to do so.
  2. Crowd-sale Smart Contracts —after your create your own currency you can raise money for your project by selling your currency. These contracts basically let developers set parameters for the crowd-sale. For example: you just created a token minting smart contract which created 1,000,000 new XYZ tokens. Now you create another crowd-sale contract which says: if you send 1ETH to this XYZ crowd-sale smart contract, you will automatically get back 500 of XYZ tokens during the crowd-sale period. This is a very simple token sale model, developers rarely use this straight forward pricing anymore, today we have hybrid capped sales, reverse dutch auctions, Vickrey auctions, proportional refunds, and many other mechanisms-read more here)

Ethereum came into the market with a product everyone actually needed to get started: raise money with a couple lines of code. As you can see the first smart contract use-cases are designed to help projects get off the ground quickly. Instead of building a new network to execute smart contracts, developers use Ethereum’s already active miner network to create tokens and run a crowd-sale to fund their projects. In the future, these contracts will surely add functionality and use-cases as adoption spreads. Ethereum literally helps us program incentive structures and easily conduct experiments to see which are most appropriate for each use case/industry— the possibilities are limitless!

Crypto asset valuations evolve around applying the Exchange of Value formula to token economies (great work by Chris Burniske in this space) — big part of the calculation is measuring token velocity which is the number of times the same token needs to turn over in order to support the monetary base of that crypto economy. Most crypto assets are treated as store of value/medium of exchange since they record/transmit value on a decentralized ledger. General purpose blockchains such as Ethereum have an underlying currency called Ether which is not only used by consumers and businesses to record or transact value but also is required to execute operations programmed in smart contracts. Ethereum could be thought of as one big decentralized computer that you have to pay a little bit of Ether to every time you want to use it. This computer can be used as a payment transmitting system to record/move value and it can run programmed operations for applications the value of which can go far above the monetary base needed to support the day to day transactions between users who are using Ether as a medium of exchange.

Through continuous experimentation on the Ethereum platform, we’ll be able to gauge how valuable the underlying Ethereum network is. I am fairly confident that Ethereum will not be the only blockchain application platform and as more and more platforms come to market, I wanted to start defining some basic elements to measure the robustness of such platforms:


Provide services at a Gas cost that does not exceed customers’ willingness to pay. Network users need to pay Gas fees but if these fees are too high it discourages end-users from using the network. But how can we measure if Gas costs for performing a certain action is ‘too high’? One of the ways to measure affordability is by comparing Gas costs between similar utility focused networks. For example, lets pretend that an average transaction cost charged by miners to send Litecoins and Bitcoins adds up to around $5 while Ether is $2. Ignoring all other factors such as accessibility and security, if my goal as a user is to send currency to another person, I will choose Ether because the cost of using their network is cheaper. If I am able to achieve the same exact end result (transferring value to another person) for cheaper, I will almost always choose the cheaper option. If I am a developer trying to conduct a crowd-sale using smart contracts, I am now comparing gas costs between blockchain application platforms for executing my code (again keeping security and all other factors out of the equation, assuming they are all equal between networks). As more platforms join the market, investors will start measuring amount of code executed per Gas ratios between different platforms to see how efficiently their nodes are executing smart contracts.


Operational reliability=Average Transactions Per Second Index + Average Transaction Duration Index. We can compare average transaction duration between different networks with similar utilities.


Robustness and recoverability indicators measure the ability to maintain operations during an extreme external disruption and it’s ability to return to normal operation following a disruption. Example: DAO attack — how was the network performing during the attack and how quickly did operations return to normal?


Measures the ability to cost-effectively respond to future uncertainties, such as new technologies, demand shifts, and governmental regulations that may stress the platform in the short term and require the system to adapt over the long term. Indicators: extensibility-ability to add new functionality to smart contracts, scalability-ability to meet demand (e.g. increasing TPS) , interoperability-ability to interact with other blockchains and connect a wide variety of real world resources.


Measures the ability to provide services to customers with limited negative impacts on natural resources. Even though Proof of Work has proven itself to be one of the most secure consensus mechanisms, electricity consumption by miners is raising concerns of long term sustainability of such a system. Ethereum is planning to switch from Proof of Work to Proof of Stake mechanism where users ‘mint’ new tokens by staking their existing tokens to validate transactions and create new blocks. This will eliminate the ever-increasing need for more powerful processors and shift the incentive to saving more tokens (possibly creating other new problems in the long run).


Measures the ability to resist external disruptions. Each network needs to calculate and actively monitor Cryptoeconomic Security Margin which ensures that at any given time if an attacker wants to make a fraudulent change to the network, the amount of money spent making that change always results in economic loss for the attacker.

It is definitely hard to quantify most of these metrics but it is important to start tracking and comparing these metrics within similar crypto asset networks. As more data becomes available I will attempt to quantify the value of the Ethereum network by analyzing applications that are built on top of it.

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