Stop writing about Ethereum Failing.

The original version of this article appeared in my daily newsletter, CryptoAM.

Gas Ain’t Gold: Why Ether’s Price Could Tank Even If Ethereum Succeeds

Articles like these are rampant in crypto. Lot’s of words, lots of fluff, seemingly smart but have little actual content.

I normally write about articles that interest me, but in this case I’m going to link an article that I really dislike. The only reason I’m doing this article is because it was sent to me by 4 separate people asking me what I think.

Without further ado.

Ethereum failing has become a meme, and there seem to be a lot of people jumping on the bandwagon. There are good points to be made about the shortcomings of Ethereum, but more often than not the articles written about them are not well thought out.

In this mildly controversial article, Michael J Casey makes the case that Ether (the token) could fall to zero even if Ethereum becomes widely adopted as the standard for decentralized application development.

His two points:

  • Gresham’s Law states that “bad money drive out good”. This is because people are incentivized to hold good money, and therefore good money will eventually be hoarded, and not used. He speculates that Ethereum is “good money” and will therefore go unused.
  • ICO treasuries and fundraising pose a threat to Ethereum, as they are incentivized to depress price.

Now, before I explore the flaws, I want to get some definitions straight. Namely, what successful means in this context. I’m going to define “successful” for Ethereum as a future where Ethereum holds the majority of decentralized applications on it’s platform (>50%) and experiences high transactional volume daily.

Ok, so. A lot of people make the mistake of comparing Bitcoin and Ethereum. This is often a false comparison. Ethereum’s main use case is to be a platform for decentralized applications. Bitcoins main use case is to be money (whether transactional, or a SoV is an argument for another time).

What defines success for Ethereum does not define success for Bitcoin. Bitcoin can be judged “successful” if people treat it as a store of value. This means that Bitcoin can be successful even if no one even actually transacts on the Bitcoin blockchain.

This is not true for Ethereum. For Ethereum to be successful, people must actually use Ether. Applications are built on the Ethereum platform actually require Ether to be used, and burned. One cannot have a functioning Ethereum platform without Ether actually being used.

Gresham’s law doesn’t matter if people are actively forced to use the “good money” to participate in the system. Good money will be forced into circulation, as people are unable to hoard Ether if they want to access the Ethereum network and utilize the benefits.

With respect to ICOs, it is correct that they have markedly depressed the price of Ethereum through selling. While true, this does not mean that ICO selling will crash the price of Ether to zero. ICOs selling Moving forward though, I concede Ethereum will not be successful if it’s only use case is fundraising. If however, Ethereum “succeeds”, then ICOs selling their holdings will not be enough to crash the Ether price to zero.

Now before I get called a Ethereum shill, here are some possible failure points:

  • Proof of Stake is unproven, and theoretically could consolidate power in the hands of the wealthy.
  • It’s unclear how many good use cases there are for fully decentralized applications (Ethereum) vs meaningfully decentralized applications (EOS).
  • Decentralized applications are not user friendly, and have not garnered significant traction as a result. It’s unclear whether Ethereum is the best solution for building user friendly applications.
  • If Cardano, Zilliqa, RChain, Tezos or Dfinity solve “scaling” before or around the time Ethereum does, they would stand a solid chance at usurping ETH’s positioning. All of them are well funded and competitive projects.

Hopefully, this has been interesting. For further exploration on the bull case for Ether, let me suggest Spencer Noons take.

For the bear case, Tetras capital published a 42 page takedown of Ether, which can be viewed here.

The economics of Ethereum are relatively sound. The issues generally lie in the use cases and technology. I am going to advocate focusing our efforts on exploring those issues in the future.