On Jan 29, after Elon Musk’s addition of BTC to his online bio, BTC surged 20%. Yesterday, when Tesla bought $1.5B worth of BTC, its price surged about 10%.
Crypto speculators, and now even market analysts, have often forecasted that BTC could easily break $100K any day, because of its limited supply. This is because the world will never have more than 21M Bitcoins.
Earlier, Elon Musk sent Doge to the moon
When Elon Musk Tweeted about Ethereum:
What very few remember is that Elon is used to announce his crypto-obsession on Twitter. He tweeted about Ethereum some 22 months ago:
This was followed by a question:
And that was followed by Vitalik Buterin (the founder of Ethereum) inviting Elon to Ethereum Devcon in Oct 2019.
What is surprising, though, is that this exchange did not result in an ETH spike at that time. This, despite the fact that ETH has been #2 in market cap, just after BTC for most of the time.
That says much more about these two ecosystems: Not Tesla +Ether, but Tesla + Ethereum.
Ether isn’t the king of crypto-kingdom…
When Tesla bought $1.5B worth of BTC, the purpose was clear: Tesla wanted to inflate its future cash reserves using today’s most inflation-prone currency: Bitcoin.
It’s the king maker.
But Ether can exist in unlimited supply. This was intended so because it is designed to serve a much different purpose than Bitcoin. Unlike Bitcoin, it is designed to be free from volatility spikes of currency markets.
Despite this, Ether has the 2nd highest market capitalization after Bitcoin.
But we aren’t talking about Ether here. We are talking about Ethereum. And that will explain why Ether isn’t the king of crypto-kingdom. It’s much more powerful than the king.
It’s the kingmaker.
To understand this, we must go through some history and much of the basics.
What’s a blockchain?
The web is replete with blockchain definitions, so we will be limited to what matters to Ether & Ethereum.
Ethereum is a blockchain. Bitcoin network, where BTC is mined, is also a blockchain.
The word blockchain is also used to describe a decentralized application (DApp) nowadays — though historically blockchain was used to indicate distributed ledger (i.e. list of transactions spread across computer nodes)
Bitcoin network was limited to BTC mining & exchange only. BTC was a money token generated by the Bitcoin network, and the network didn’t do much beyond-
- Producing a BTC token
- Validating a BTC transaction between two parties
When a transaction takes place on a blockchain network, consider the fact that there is no central player calling the shots.
For example, if party A pays USD 5M to party B, the transaction + the storage of its record is made in a bank’s server, located in 1–10 locations max, worldwide.
Contrary to that: When party A pays 5 BTC to party B, the transaction happens on any of the thousands of servers running the bitcoin network, just like a movie getting downloaded+uploaded on BitTorrent. Any of them can get a copy of that transaction.
What’s more: If there is a rule change regarding any of this, every computer (node) owner gets to at least know about it, and many a time, he can vote about it, too. That’s decentralization for you, in a nutshell.
What is Ethereum?
Ethereum is a special kind of blockchain capable of running P2P decentralized applications (DApps) on top of itself. You know the word DApp has already been introduced to describe a blockchain (the transaction processor + ledger), but nowadays it is used to describe this later type: Any P2P decentralized application running on top of a blockchain can be called a DApp.
In 2017, an online game named Cryptokitties went viral. This was not just any game you play online — it was a DApp that ran on top of the Ethereum network i.e. its back-end code was executed on Ethereum nodes, instead of a privately owned server or a cloud such as AWS/Azure/GCP. People spent over $1M to exchange and show off their favorite cat combinations. As of today, it is still live.
How does any app run on thousands of interconnected nodes owned by different parties? There has got to be a payment mechanism for app developers to pay the node owners. Ethereum provides this mechanism via 2 steps:
1-End users pay app developers to use their DApp — this is done via buying a crypto-token issued by app developers. These crypto tokens come and go. There are thousands of them in numbers so far. They are usually bought using USD(or any fiat currency)/BTC/ETH. In the Ethereum blockchain, DApp creators can issue an ERC-20 (a protocol designed by Ethereum itself) compliant token that can be sold to users in exchange for BTC, ETH, or Fiat money (again, USD and its ilk). Users can redeem those tokens as flat/subscription pay, virtual coins, or in-game credits as they consume the DApps, many a time not even realizing they are using software running on a blockchain.
2-DApp developers pay blockchain network (Ethereum node owners in this case) to run requests on their end-users’ behalf. In Ethereum’s case, this transaction is done via Ether tokens. In Ethereum terminology, this transaction is based on a commercial term called Gas price.
What does this conceptually mean for Ether (ETH) token?
If Elon Musk decides to buy $5B worth of ETH, it could barely move the price of ETH.
In general, there are two distinct paths that affect ETH prices:
- One may buy ETH tokens from crypto-markets such as Coinbase. This may pump ETH price. One can dump it also, just like BTC. ETH tokens have an unlimited supply (though it will thin out past Ethereum 2.0) — so such transactions will not move ETH price as much as they do to BTC. If Elon Musk decides to buy $5B worth of ETH, it could only move the price of ETH by a few hundred USD. This is because ETH tokens are unlimited in supply. The hike will only last until the market frenzy dies out.
- Here is where the true movement happens: More DApps => More ETH required by app developers to pay to the Ethereum network => Demand for ETH will grow organically => ETH Price will grow. This is the kind of growth that doesn’t reverse easily, because everyone is invested, and the coin produces tangible value for end-users of DApps (e.g. Cryptokitties users who may even be unaware of ETH token but have indirectly paid for it), not just pump-and-dump stockmarket investors.
How Ethereum Transactions work:
This is a complex topic that qualifies for a book. This is because the Ethereum codebase exists since 2015, and Ethereum Github is pretty thick with 247 repos as of this writing. So I would try summarizing only a high-level understanding here.
If you feel that any claims are incorrect, feel free to add in comments.
The only unknown term in the diagram so far is ETH stakeholders. This demands a detailed explanation because it pertains more to Ether token than Ethereum as a network.
Historically, Bitcoin was considered “mined” (token created) every time a computer finds a solution to some complex mathematical problem. Besides, BTC mining happens extremely slowly today. This is because as the network grows, every transaction/computation must be replicated across all nodes, which makes it slower than a snail.
This criterion (of solving a complex puzzle to create a token) is known as Proof of work. Not quite unlike a masonry contract, wherein a mason gets paid by the number of bricks he hauls every day.
Bitcoin network takes an enormous amount of electricity. In a world already being destroyed by carbon, the bitcoin network could be the final nail in the coffin. As of today, one bitcoin transaction costs as much power as 667,551 VISA card transactions!
Makers of Ethereum first followed Bitcoin’s Proof of work strategy. But soon they realized this was a bad idea. Much worse because Ethereum’s primary aim was to support other DApps, not just staying as a Watt-guzzling blockchain eating token transaction fees.
So starting Ethereum 2.0 (Casper release), Ethereum is slated to run on an alternative concept called Proof of Stake. As part of it, mining will almost become an invisible operation. Not many ETH tokens will be mined, too. (this may affect the price dynamics, but not as much as what I am going to describe next).
What drives Proof of Stake is block validation: A software-based stamp that a transaction has been performed on the Ethereum network.
Proof of stake, in a nutshell:
- Who will perform validation for every transaction? All nodes belonging to Ethereum validators.
- Who are Ethereum validators? Those who have staked at least 32 ETH tokens to the Ethereum network. Smaller players combine their ETH to certain pools, and it is completely acceptable.
- What will they gain by doing so? Ethereum’s roadmap suggests that the maximum gain would be 1.56%-18.1% of the total transaction value.
I know what you are thinking: Hey, how many transactions are we talking about, for this one guy who staked his 32 ETH tokens?
Simplistically, if there are 10 transactions at a given hour on the network, and there are 10 stakeholders with 32 ETH each, all of them will end up validating 1 transaction. If our guy had staked 64 ETH instead, he would get 2, and other 8 transactions will be randomly (and as evenly as possible) divided among the other 9 stakeholders.
What, the amount? Ethereum has internal units that directly map to the computational complexity of the operation being run, and the smallest unit is called Gwei (nanoether), which is equivalent to 0.000000001 ETH.
A transaction value is calculated as certain number of Gwei (e.g 1B programmatic operations = 1 ETH) — that much ETH tokens must leave DApp developer’s account and 1.56%-18.1% of this will be paid to the validator.
A transaction with a higher gas price wins a miner quickly.
Gas prices are dynamic too. You may see such tweets from Vitalik.
For a more detailed explanation, read this.
What if validators play unfair?
As of today’s price, if one had to be an Ethereum validator, he would have to stake (=deposit) around USD 1700 x 32 = $54400. This is no small amount. This makes it hard for bad actors to validate a chunk of transactions unilaterally.
If a bad actor validates foul transactions to serve his personal interests, he not only fails to validate but is also slated to lose his deposit.
If you want to know more about becoming an Ethereum validator, here is an informative post.
So, will Tesla buy ETH?:
It could, to better invest its cash reserves, just like it did with Bitcoin. But Tesla isn’t a financial institution. And Ether isn’t as volatile as BTC. It’s not designed to be.
Why Tesla may need crypto?
Tesla will need a strong in-vehicle app ecosystem to multiply its revenue/user and sustained vehicle upgrades
Any tech megalith can’t survive on products and services alone. It needs a magic ingredient to stay on top of the game.
Despite being in business since almost 2 decades, it is only most recently that Tesla has arrived. And it needs this magic ingredient much more than any time in history.
It’s called an ecosystem.
All tech megaliths have built ecosystems on top of their thriving products. For example, app store is Apple’s ecosystem to boost its iPhone sales. Tesla will need a strong in-vehicle app ecosystem to multiply its revenue/user to stay dominant in a market starting to flood with EVs.
Two decades ago, no one thought an average consumer would shell out $500+ every year to have a newer smartphone. Tesla could do well by eying the same future for cars, or it would be reduced to just one-off innovation.
Smart contracts (=DApps) have vast opportunities for vehicle integration. The use cases are infinite. In-vehicle software could pay cities for parking, charging stations for electricity, shopping, ride-sharing, or even another vehicle just to yield a lane. Smart cities could reward drivers for taking less dense routes. In travel, all this will be much better served by P2P rather than a centralized network.
Ethereum’s Defi use case (decentralized finance) is where Tesla could fit in to create its ecosystem: Offering a Tesla ERC 20 based token that can be traded for all sorts of transactions surrounding the vehicle.
Why Tesla should choose Ethereum?
Elon Musk’s prior association with Paypal means that Tesla could even roll out its own (ETH independent) cryptocurrency. But there is one factor that makes Ethereum irresistible, especially past 2.0: Transaction scalability.
At <20 TPS, crypto cannot dream to run the world money.
According to this 2019 article, VISA network had the capability to process around 1700+ TPS (transactions per second). In comparison, cryptos (barring XRP, which is not truly decentralized due to it being owned by banks) lagged terribly:
Now, if a financial network is only able to process <20 transactions/second, it doesn’t exist beyond its creator’s hobby. It cannot run the world money. One of the major goals of Ethereum 2.0 was to scale to 100K+ TPS — well beyond VISA’s present transaction load.
Unlike Bitcoin which was created for hush-hush transactions in mind, Ethereum was designed with the goal of global reach. Ethereum 2.0 will achieve this with a superior technical solution known as sharding.
In an oversimplified explanation, sharding works like this: In current blockchains (including Bitcoin), every node verifies every transaction — like the US Presidential election’s popular vote. This was considered a necessity for them to be distributed.
Contrary to this: Ethereum 2.0 will distribute transaction blocks among smaller sub-chains called shards. A random notary validator (one of the 32 ETH stakeholders) within a shard would validate the blocks assigned to it. All such validated block-vote numbers will then be validated by the main Ethereum blockchain. Consider State elections sending elected representatives in Senate & parliaments.
The ingenious design of sharding will ensure that none of the 3 goals are sacrificed: Decentralization, Security, and Scalability. (For a detailed explanation, read this.)
Ethereum is too good to ignore for any business who wants p2p transaction power
In the ever-exploding world of crypto-enthusiasts, bitcoin is considered digital gold.
Its value is ever-rising, but it will surely face severe maintenance challenges. Just like gold has no transactional value, bitcoin will cease to be having one, due to its design limitations.
Given its inflationary value, huge institutions will stack BTC up to a point wherein there is no decentralization. Only volatility will keep it afloat.
With 68 dedicated members and 247 repos, Ethereum is quite mature in half a decade and has an enormous number of use cases. It is too good to ignore for anyone who wants to adopt p2p transaction power, along with a popular currency.
Tesla may or may not buy ETH tokens. But given its ecosystem roadmap, it must surely find Ethereum adoptable. If it doesn’t, Apple car isn’t far in 2024. Apple’s cash reserves (~$200 B) are enough to buy out almost an entire ETH market cap. In fact, 51% could suffice.
To anyone who needs informal, no-strings-attached investment advice: