Locked up ETH

Many financially minded people that I’ve run into who have an interest in the cryptocurrency space have tried to calculate the value of Ethereum’s ETH token by modeling demand for ETH based upon future gas usage in the Ethereum network. They look at the apps and products being built on Ethereum, and try to figure out how many users those apps will have, and whether people will buy ETH to pay the transaction fees associated with using them. Since the purpose of the ETH token is to pay fees for executing transactions (in the form of gas), this makes sense.

However there are also a class of protocols and applications being built on (and into) Ethereum that have very low costs in terms of transactions fees, but instead require you to lock up very large amounts of ETH for long periods of time. While people still need ETH to pay small transaction fees (on the order of cents) to use these applications, they may need to purchase hundreds, thousands, or millions of dollars worth of ETH, and then immediately take that ETH supply off the market for years, in order to get value out of these applications. Here are four examples.

Protocols that lock up ETH

Ethereum Name Service
The Ethereum Name Service (or ENS), allows users to register domain names that they can point at their wallet addresses or dapps. Users bid on the domains that they want, and if they win, their bid is locked up for at least a year. There is already about $50,000,000 worth of ETH locked up in ENS contracts and we’re only 8 weeks after launch.

Casper Proof-of-Stake
As Ethereum shifts from Proof-of-Work mining to the Casper Proof-of-Stake algorithm, miners will shift from spending cash to buy mining equipment and electricity to mine ETH, to instead just agreeing to lock up ETH in a bond in order to have the right to mine ETH when it’s their turn (simplified explanation). With millions of dollars/day being spent and earned on mining and transaction fees, it’s easy to see that it’s worth a lot of locked up ETH to have the right to participate in this process.

Swarm
Swarm is Ethereum’s decentralized file storage network. If you would like to insure that your file will be available at some future point, then you can pay the network to give you that guarantee. The nodes who are willing to make that promise lock up quite a bit of ETH as insurance that can be drawn on if they fail to live up to their claim. This again, leads to locked up ETH growing in proportion to the use of the network.

Crowd Token Distributions
Projects have been raising quite a bit of ETH through their crowd token distributions lately. And while some of this ETH is undoubtedly sold quickly to provide runway in the form of fiat currency, a large portion is locked up for a least a couple years. While less algorithmic and decentralized than the above examples, this is still a large source of locked up ETH.

As can be seen in many real world examples such as when useful housing gets taken off the market due to foreign investment, or diamond supply gets constrained via a cartel, it has a significant effect on price. While cartels inevitably get broken up due to market forces, the above examples are already decentralized and behaving according to the market.

While it’s hard to determine the right formula for modeling the effect of locked up ETH on the resulting demand and value of the token, it’s very likely that thousands of ETH that won’t be sold for a period of years has a greater impact on the market than the 5 cents in gas that it may cost to register that one ENS name.