Bitcoin ranks first as the world’s first and largest cryptocurrency. The currency has value based on its position as a store of value capable of transacting value globally and comparatively easier than other similar assets, such as gold. Ethereum’s asset, Ether (ETH), has a different value proposition, possibly valuable for a number of reasons.
“Ethereum derives its value from a number of different factors, including gas rates, its use as collateral, its ability to borrow and borrow, its use as a medium of exchange for trading, and NFT. [tokens no fungibles], and the fact that it can be wagered on interest “, you He said Scott Melker, a cryptocurrency trader and the host of the podcast The Wolf Of All Streets, to Cointelegraph, adding: “It also has speculative value and is gaining more attention and interest from institutional investors.”
The story behind Ethereum
Ethereum is the network on which its tradable currency, ETH, runs. Ethereum was launched in 2015 based on a concept from a programmer named Vitalik Buterin about two years earlier. In short, Ethereum acts as a platform on which developers can build projects or solutions.
The Ethereum network became a staple in the cryptocurrency space over the years, with many projects based on it. A large number of initial coin offerings used Ethereum in 2017 as a financing vehicle. Crypto assets based on the Ethereum blockchain are called ERC-20 tokens, although ERC-721 tokens also exist as non-fungible tokens built on the network.
When a project is based on Ethereum, it can come with an asset to use within that ecosystem. That asset would likely be an ERC-20 token. However, it is not uncommon for projects to switch to their own mainnet blockchain after initially launching on Ethereum.
Much of the cryptocurrency decentralized finance (DeFi) sector also started on Ethereum, with decentralized exchanges (DEX) based on Ethereum blockchain hosting trading for numerous tokens associated with the niche. DeFi allows participants to borrow and lend crypto assets, among other capabilities. As Melker pointed out, ETH can play a role in this ecosystem.
Ethereum’s transaction costs are called gas fees
Part of the value of ETH is related to gas rates. Every time a person sends ETH, they have to pay a certain amount of the currency to pay for the transaction, a concept similar to the fees users pay when sending Bitcoin (BTC).
However, a big difference from ETH is that sending ERC-20 tokens carries gas fees. To send an ERC-20 token, the person making the transaction must also have ETH in the same wallet to pay for the transaction. Trading in DEX also comes with gas fees. Someone could buy and hold ETH for gas fees, which gives the coin a basic level of demand in the market.
During the DeFi boom of 2020, the Ethereum network experienced high traffic, driving gas rates to exorbitant levels. High transaction fees continued into 2021. According to YCharts data, an average ETH transaction cost $ 39.49 in February 2021, significantly higher than levels recorded in previous years. A fee of around USD 1 to USD 2 would be considered normal. “The average Ethereum transaction fee measures the average fee in US dollars when an Ethereum transaction is processed and confirmed by a miner”, YCharts notes on their site.
The possible speculative value of the asset
Speculation can have its share in the value of ETH as an asset. Investors can buy ETH coins as a bet on the possible future success of the Ethereum network and its adoption in the mainstream world. The price of ETH could also represent speculation about the success or failure of a part of the cryptocurrency industry, given the number of projects built on the network.
Tyler Winklevoss, co-founder and CEO of cryptocurrency exchange Gemini, expressed this thought process in an interview with Casey Adams, businessman and podcaster, in December 2020. Winklevoss compared the innovation of the cryptocurrency industry to that of the Internet, although investing in a small part of the Internet during its early years, if not through indirect methods, would have been difficult.
Buying ETH arguably offers that kind of fractional investment from a broader developing sector. Winklevoss explained this by comparing such a purchase to the hypothetical partial ownership of the racetrack, which would benefit more from the activity than from the results of individual races.
“Ether is the same for indexing a part of the Ethereum network, which is a […] decentralized global computer “, He said. “A lot of people equate Ether to digital oil,” he added. “If you want to get into the crypto game, my suggestion is to own some Bitcoin, digital gold, and own some Ether, digital oil, and with that, you have most of your bases covered.”
Value in Ethereum 2.0
Ethereum’s scalability has been a problem, as seen with the CryptoKitties craze in 2017, and with the DeFi craze that began in 2020. Ethereum 2.0 points towards a faster experience, but the update is a process and experiences delays.
Eth2 includes the network’s transition to proof-of-stake (PoS) consensus, which is dependent on ETH maintaining at least some level of price value, according to Aditya Asgaonkar, a researcher at the Ethereum Foundation.
“Proof of stake operates on the premise that if the validators do something wrong, if they are trying to attack the system or misbehave in some way, they will be penalized.” he said during a panel at the LA Blockchain Summit. “These penalties apply to your stake, which is in the ETH currency, so the ETH price has to be, like, greater than zero for the penalties to have any kind of effect in terms of incentive,” added.
Therefore, the validators need a share of 32 Ether to participate in the backup of the network. Validators that help run the blockchain in a PoS system are paid for the amount of contribution to the network provided by them. The demand generated by validators accumulating Ether in lots of 32 and the desire to earn returns from bets creates a market demand for the coin.
Competitors on the rise
In light of the competitive cryptocurrency market, the Binance Smart Chain (BSC) emerged as one of the alternatives. The network acts similar to Ethereum, except that the BSC uses Binance’s BNB currency for transaction costs instead of ETH, per Binance Academy’s explanation of the BSC.
Other competitors on the network include Cardano, Neo, and many others. Over the years, the prospect of usurping the Ethereum network was a hotly debated topic. Overtaking Ethereum in prevalence would be significant, given Ethereum’s extensive use.
Due to the large number of applications, products, and services built on Ethereum, it also benefits from something called the network effect. “The network effect is a phenomenon whereby a greater number of people or participants improves the value of a good or service”, explains Investopedia, He adds: “The Internet is an example of the network effect. At first, there were few users on the Internet, as it was not of much value to anyone other than the military and some research scientists.”
“However, as more users accessed the Internet, they produced more content, information and services. The development and improvement of websites attracted more users to connect and do business with each other. traffic, it offered more value, leading to a network effect. “
Essentially, the more something is used and built, the more prevalent it becomes, similar to a wave, gaining momentum as it goes. In the case of Ethereum, the network effect means increased trust as the platform is well known and prominent.
In the ever-changing world of cryptocurrencies, assets go up and down in popularity and price. Over the years, ETH has proven its price strength, as well as its dominance as a platform that developers can build on. Time will tell, however, if a faster and cheaper network will overtake Ethereum in the long run, or if Ethereum 2.0 will scale the blockchain to meet market demand.