Ep. 157 - The Future of Ethereum
The Bear Case & Bull Case for Ethereum ♢
In this episode, Mattimore explores the bear case and bull case for the world’s second largest cryptocurrency and blockchain.
Topics Discussed:
Origin story of Ethereum
Ethereum’s historic evolution
ICOs, Alt-Coins, Defi, NFTs
Problem of high gas fees
Recent EIP 1559 update
Comparing ETH to Bitcoin
Comparing ETH to Solana
Future Scenarios:
Bear case for Ethereum
Bull case for Ethereum
Most likely scenario
Thanks for tuning in ðŸ”
Episode 157 Transcript
Mattimore (00:13):
Welcome to Hence The Future podcast. I'm Mattimore Cronin. And today we're discussing the future of Ethereum. There have been a lot of questions lately surrounding Ethereum - which is the world's number two cryptocurrency by market cap and the number one blockchain by transaction volume - questions like: Will Ethereum eventually become more valuable than Bitcoin? Or, will another competing smart contract platform like Solana eventually displace Ethereum and take that number two slot? And, at a high level, what is the bear case and bull case for the future of Ethereum?
Mattimore (00:44):
We're going to get into all of these questions in today's episode. And let's first start with the basics of Ethereum, and how Ethereum compares to other cryptocurrencies and blockchain networks.
Mattimore (00:55):
Ethereum was invented in 2013 by a programmer Vitalik Buterin. And Vitalik was inspired by Bitcoin's creation in 2009. He wanted to create a complimentary cryptocurrency that would empower an entire ecosystem of decentralized apps called dApps that could be built on top of the Ethereum blockchain, much like how regular centralized apps today are found on either the Apple app store or the Google play store.
Mattimore (01:20):
The original release debuting Ethereum on ethereum.org even stated, "Ethereum would never be possible without Bitcoin. And we see ourselves not as a competing currency, but as complimentary within the digital ecosystem. Ether is to be treated as a crypto fuel, a token whose purpose is to pay for computation. And it's not intended to be used as or considered a currency."
Mattimore (01:43):
So you can see how, in the beginning of Ethereum, in the origin of Ethereum, Ether wasn't competing with Bitcoin as a store of value. Rather, it was competing purely on the utility of the network. ETH can be thought of as the gas or the electricity or the computing power that powers this whole ecosystem of decentralized applications.
Mattimore (02:05):
Alex Edelman describes this perfectly when he says, "When people compare Bitcoin and Ethereum, it's a bit like comparing gold with electricity. They are both valuable, but have very different uses. Ethereum is infrastructure. It is a blockchain that is still in the early days, and it has the potential to revolutionize finance and technology."
Mattimore (02:24):
So that's the origin story of Ethereum. And Ethereum really rose to prominence during the ICO craze in 2017. In 2017, the consensus wisdom at the time was that Bitcoin may not be the be-all, end-all of cryptocurrencies; but, blockchain technology is here to stay. So every developer, every investor rushed to debut their own coin and offer this to the public so they could potentially be the next blockchain, the next cryptocurrency to displace Bitcoin. All of these ICO, initial coin offerings, took place much an IPO, an initial public offering in a public stock market. And all of these alt coins were bought via Ethereum. I remember, for instance, the first ever alt coin I bought back in 2017 was KuCoin. And first I had to buy Ethereum in order to then use that Ethereum to buy KuCoin. This is a really advantageous place for Ethereum to be because it essentially sits at the bedrock of all the other alt coins.
Mattimore (03:24):
You have to own Ethereum in order to buy these other alt coins. That was the first major use case for Ethereum. And because there was so much demand for buying alt coins during the 2017 ICO craze, the gas prices for Ethereum skyrocketed. Gas fees are basically the transaction fees you have to pay in order to publicly record something on the Ethereum blockchain. And these fees skyrocketed because there was so much demand. However, much like in the.com bust of 1999, the ICO bubble eventually did pop, and that brought about the crypto winter from 2018 to 2020, where the price of Bitcoin and Ethereum dropped significantly, transaction volume dropped significantly, and therefore gas fees also dropped significantly.
Mattimore (04:09):
The next crypto bull market began in 2020 with the rise of NFTs. At that point, we first saw crypto punks, we saw crypto kitties, we had NBA TopShot. We had all of these major NFTs start to gain momentum. And all the NFTs are bought with Ethereum. So the most popular NFT platform is OpenSea, and you go there, you buy Ether, and you pay for NFTs with that Ether. However, gas fees have gotten even higher during this current crypto bull run in 2020 and 2021. It's not uncommon to see gas fees as high as a hundred dollars, $200, $250. So the gas fees are reaching a point where it's becoming difficult for regular people to buy NFTs that aren't crazy expensive. And this isn't such a big deal if you're buying a $1 million NFT, because it's worth it to pay the gas fees to have this recorded on the most used blockchain, which is Ethereum. But if you're a regular person who just wants to buy a $20 NFT or a $100 NFT, it doesn't make sense to pay these super high gas fees of $100 or $200.
Mattimore (05:19):
And that's where we come to today. Now there is an alternative that is starting to emerge in the market, which is Solana. Solana is another smart contract platform like Ethereum, though it has much lower transaction fees than Ethereum. Whereas on the Ethereum blockchain, it's not uncommon to pay a hundred dollars or $250 for a single transaction, on Solana the transaction fee is literally less than a penny. And Solana is able to accomplish this because their team is optimizing strictly for usability: How quickly, how easily, and how cheaply can people transmit information on the Solana blockchain while also benefiting from the security and censorship resistance of the decentralized "proof of history" protocol that they've implemented.
Mattimore (06:00):
And interestingly, by comparison, Ethereum has not prioritized lowering transaction fees and making the system as user-friendly as possible. In fact, Ethereum recently released an update called EIP 1559, which stands for Ethereum improvement proposal 1559, which would allow a certain amount of transaction fees to be "burned" each time a transaction takes place.
Mattimore (06:26):
So basically, when you transact on Ethereum, some amount of your transaction fee that you're paying will be burned. Some of that Ether you paid with will no longer exist. This is a way to deflate the supply of the currency.
Mattimore (06:39):
And this is great if you're an Ethereum holder, because when there's less Ethereum floating around in the ecosystem, the price for Ethereum goes up. But it might not be as good for someone who's just trying to buy an NFT on the platform. They're not investing in Ethereum long-term as an asset. They are just trying to transact in the blockchain.
Mattimore (06:58):
And this gets to the core question of today's episode: What does the future hold for Ethereum? Is it a good move for Ethereum to continue prioritizing both store of value and usability, whereas other competitors are only prioritizing the usability angle? Or is this multi-pronged approach opening Ethereum up to be displaced by Solana or by another newcomer that may come along?
Mattimore (07:25):
Let's start with the bear case for Ethereum.
Mattimore (07:27):
The bear case for Ethereum is as follows: What allowed Ethereum to rise to prominence from the very beginning was its utility. People use ETH to do things on the blockchain. They use ETH to buy altcoins. They use ETH to buy NFTs. They use ETH to enter into smart contracts where they can earn a return on the ETH that they stake, similar to the return you would get from buying a traditional treasury bill. So these are really useful functions that Ethereum offers. However, all of this utility might be at risk if the gas fees become too high.
Mattimore (08:07):
Vitalik Buterin, the founder of Ethereum, even said, "The internet of money should not cost 5 cents a transaction." And yet now, Ethereum transactions often cost over a hundred dollars in gas fees. So this seems to me to be the biggest weakness for Ethereum. It's hard for ETH to become the internet of money, the decentralized base layer of all the decentralized finance apps and other decentralized apps, if the gas fees are too much for what a regular person can pay. Most people can't pay more than a few cents per transaction if they're doing lots of transactions on the blockchain, as they would once blockchain reaches mass adoption.
Mattimore (08:46):
And Solana is already starting to displace Ethereum, because the gas fees are so much lower and it's so much more user-friendly from that perspective. OpenSea is the biggest NFT platform, and you can now buy NFTs using Solana rather than using Ethereum. This was a huge change, and a very bullish signal for Solana. And I'm already starting to see many of the NFT artists migrate to Solana. Many of the open source developers are migrating to Solana. And this is a really big factor that a lot of people don't consider, which is that where developer talent goes is a huge determining factor in which blockchain ends up dominating in the future. If all the developers think Solana's tech is cooler and better and more current and more optimal than the way Ethereum functions, Solana will displace Ethereum.
Mattimore (09:36):
Another bearish signal for Ethereum is that, whereas Bitcoin is only competing as a secure store of value, as the base layer of the new monetary system, Ethereum is competing with every other smart contract platform that could eventually be considered more useful than the Ethereum blockchain. So it's a much more competitive landscape for Ethereum. The only realistic competitor to Bitcoin is gold. That is the base layer of our legacy financial system. Ethereum is competing on all of these other factors and it just has much more of an uphill battle to climb relative to the simplicity of the Bitcoin network.
Mattimore (10:15):
And because Ethereum is optimizing for two different metrics at once - Store of value and utility of transactions - It's actually losing both battles.
Mattimore (10:25):
It's losing the store of value battle to Bitcoin. Bitcoin's simplicity gives it way more security than Ethereum. Fewer things can go wrong when you have a really simple system. And the proof of work that underlies Bitcoin makes it even more secure. So Ethereum will never win the battle as a store of value compared to Bitcoin. And it's also losing the battle of utility to Solana and other smart contract competitors because of its high gas fees.
Mattimore (10:48):
Another risk factor for Ethereum is that, because it is more agile and more nimble, it's also more subject to bugs and potential exploits that could put people's Ether at risk. Recently, there was a bug in the main node software that people use to run Ethereum nodes called Go Ethereum (Geth). And this bug essentially caused the chain to split. So you had two different sets of records for transactions on the blockchain.
Mattimore (11:16):
And fortunately, this bug was fixed and it's no longer a big deal. But it does point to the vulnerability of a blockchain that changes more rapidly than the Bitcoin blockchain. It's more open to potential bugs, potential exploits, and potential things that could go wrong with updates in the future.
Mattimore (11:31):
There is also a misconception that Bitcoin doesn't change at all. That is certainly not true. Bitcoin is currently updating its system with Taproot. So you can look that up if you're interested. But the difference is that Bitcoin changes much more slowly, much more gradually, and requires much greater consensus that Ethereum. And so it's safer in that regard. Ethereum has the strength of being able to change more quickly when things go wrong, but it also is riskier when you look at it from a long-term investment framework.
Mattimore (12:01):
If I intend to store my wealth for multiple generations, it's obviously more secure to store it in the blockchain that hardly ever changes than the one that changes much more frequently.
Mattimore (12:11):
Another bear case argument that's compelling to me is that, given that Bitcoin is the new base layer of the new decentralized financial system, wouldn't it make more sense to build on top of Bitcoin? We're already seeing the lightning network allow for instant peer-to-peer transactions that are virtually costless, and I've used this, it works great. You could build other dApps on top of Bitcoin. So there's no reason theoretically why we can't build the entire decentralized ecosystem on top of Bitcoin, rather than having all these other base layers like Ethereum.
Mattimore (12:45):
But assuming the end state does involve multiple cryptocurrencies, multiple blockchains, and there isn't a winner-take-all scenario, then it makes sense that one blockchain would have win out by being the best store of value, and that seems almost certainly to be Bitcoin. Another blockchain would win out by being the most useful one for actually making transactions that are fast, easy, secure, and virtually costless. That is still up in the air. That could be Ethereum. It could be Solana. It could be some new coin. And I would say Dogecoin is competing purely on the fun of the community and the irony and the joy that people get from being a part of that meme community. And so I think there is a place for some other coins to continue to persist into the future.
Mattimore (13:31):
To summarize the bear case for Ethereum, Ethereum is losing the store of value battle to Bitcoin, and it's losing the utility battle to Solana. And therefore, unless it makes some changes soon, it will lose its number two slot as the top crypto by market cap, and the price of Ether therefore may decline over time as people use the network less and less. That's the bare case.
Mattimore (13:53):
Now let's get into the bull case for Ethereum.
Mattimore (14:03):
The bull case for Ethereum goes like this. Ethereum is where Defi happens. It's where you go to actually do things on the blockchain. And, theories aside about the future, you cannot deny that right now, Ethereum is the world leader when it comes to buying NFTs, buying alt coins, and earning interest on your crypto via staking and other smart contracts. And if Ethereum can capture just 1% of the $3 trillion banking services sector, by replacing centralized finance with decentralized finance, one Ether would be worth $40,000. So the fact that one Ether currently costs around $3,000 means that it's a no brainer investment. You should have some ETH in your portfolio.
Mattimore (14:45):
And because ETH has proven itself as being the longest lasting, decentralized smart contract platform, it has staying power through the Lindy effect. The Lindy effect states that the longer something has been around, the more likely it is to keep being around. So for instance, if a book has been in print for a hundred years, it's probably going to be in print for another hundred years. If it's only been in print for a few months, it's probably going to go out of print after a few months.
Mattimore (15:12):
Another great point is that you can't really kill open source projects in the same way that you can kill centralized projects. As long as there are some developers willing to put in the hours to improve the protocol, it will persist into the future. So it's unlikely that Ethereum will totally die or Solana will totally die, or that any of these open source platforms will totally die so long as they have some small number of developer supporters that are still around and still willing to work on the project.
Mattimore (15:40):
Lastly, the Ethereum 2.0 update could be huge for the Ethereum network.
Mattimore (15:46):
Ethereum is currently switching from proof of work mechanism to proof of stake. And this will allow for much greater scale of the Ethereum network, many more transactions, greater speed of transactions, and if this all goes through successfully, lower gas fees / lower transaction costs. And remember, Ethereum doesn't have to be the dominant player in Defi to be incredibly valuable. It doesn't have to capture 51% of all financial services. All it has to capture is something like 1% of existing financial services and it would be worth $40,000 per ETH. Now, obviously if it captures 5% or more, it would be much more valuable. So there is a very strong bull case to be made that we are in the very early innings of Ethereum.
Mattimore (16:28):
Ethereum can adapt nimbly depending on what's needed. So even if it becomes unusable compared to Solana, it could then change its protocol and become much more competitive. Because of all of these factors, Ethereum is a good investment for the long haul. That's the bull case for Ethereum.
Mattimore (16:45):
Now let's bring it home with the most likely scenario.
Mattimore (16:58):
My most likely scenario is that Ethereum will never become more valuable than Bitcoin because Bitcoin has greater strengths when it comes to its simplicity, its proof of work based security, and the fact that it is the oldest, longest lasting coin that has the most credibility around it, especially given the fact that nobody controls Bitcoin, it's the most decentralized, and it's the least likely to be regulated by the SEC. However, that doesn't mean that the future is not bright for Ethereum. I think there is a strong argument to be made that Ethereum can continue to be the silver to Bitcoin's gold.
Mattimore (17:32):
Most investors want to invest in a number of cryptocurrencies. They don't just want to go all in on Bitcoin. And Ethereum is the no brainer second cryptocurrency to invest in if you're an investor, especially if you're an institutional investor who needs a certain level of market cap for the investment opportunity to feel compelling.
Mattimore (17:53):
And there is something to be said for the phrase, "a rising tide lifts all boats." Let's not forget that we are in the very early days of decentralized finance and blockchain technology. It seems quite clear that I would rather invest in any blockchain technology, any cryptocurrency, over the legacy financial system. So I would way rather invest in Ethereum or even Dogecoin than, let's say, Wells Fargo or Chase, because it's so clear where the macro trends are heading.
Mattimore (18:20):
I'll also say that I have much faith in the Ethereum team. Vitalik Buterin really is a pioneer in the cryptocurrency space. He's also a hero of mine. I think most of the people involved with Ethereum are noble actors. They are passionately trying to improve the system for everyone. And so I feel strongly that even if the Ethereum does lose out to Solana in the short term, they will make the necessary changes to make Ethereum more usable, more user-friendly, and still have that store of value quality in the long term.
Mattimore (18:51):
Another interesting scenario that I heard is that the NFT craze that we're experiencing right now, where people pay millions of dollars for a picture of a rock, this may be a bubble. And while we're in a bull market right now in the crypto space, once that NFT bubble pops, that could spark the next bear market.
Mattimore (19:10):
So a scenario that I think is somewhat likely is that we're going to continue to see this bull market in the cryptocurrency space shape up through the end of 2021. I think it's quite likely we'll see Bitcoin price hit $100K. We might see Ethereum hit $8K or $10K per ETH. And then in 2022, we might see that NFT bubble pop once people realize they have to spend money on real world things like food and shelter, which will likely have become expensive. And so they sell their NFTs, they sell their crypto assets, and therefore we enter a new mini crypto winter. And I bet after that mini crypto winter, the next bull run will bring about the full "flippening" where the world transitions from the Dollar standard to the Bitcoin standard.
Mattimore (19:59):
I hope you enjoyed today's episode, and I'll see you next time.