Disclaimer: Your capital is at risk. This is not investment advice.
Token Takeaway: ETH Token
We will deep dive into Ethereum’s innovative blockchain and its utility token ETH over the next two weeks. This week will focus on qualitative analysis, including the team, the ecosystem, and finally, the ETH token.
Sector: Layer 1, Smart contracts, dApps
Ethereum is an open-source, public, permissionless blockchain that utilises smart contracts to house the most complex transactions in the digital asset universe. This is made possible via a “proof-of-work” consensus method. It is the hub for decentralised applications (“dApps”), which enable users to put their assets to work.
ETH is the native, or utility, token of the Ethereum Network. Typically, a utility token’s success heavily depends on the network effect of its native blockchain; in layman’s terms, the more people that use the native blockchain, the more people that must use the utility token. This generates immense value.
Overall, Ethereum houses all the best innovations in the digital economy, whether that is empowering digital ownership through non-fungible tokens and financial empowerment, through play-to-earn economies or decentralised finance (“DeFi”). ETH is essential for all of these mini-industries. Investors should closely monitor the network effect generated by the tokens and dApps built on Ethereum. They have a strong positive correlation.
The Team, Partnerships and Funding
The team behind Ethereum is unlike any other team I have covered in Token Takeaway. Being an open-source and distributed project, Ethereum is a product of expert entities and coders worldwide working together with a central aim: to dominate the dApp world by creating the Ethereum “World Computer”.
Ethereum’s virtual machine, EVM, and the “world computer” are the same thing. From a high level, the ideology behind these governs the vision of Ethereum. The EVM is a vast network that aims to create a universal computer accessible to anyone with an internet connection and does not discriminate depending on the user. An example of this is the Axie Infinity global wage, find my take on it here.
As far as founders go, Ethereum is unmatched. it is particularly hard to ignore its origins and its highly revered creator, Vitalik Buterin, who created Ethereum at the age of 17. Vitalik’s journey started by writing for the Bitcoin Magazine (which he co-founded) for two years before writing the Ethereum whitepaper. He is a genius.
We cannot do a disservice to the countless other parties involved in the creation and constant maintenance of Ethereum. Even Charles Hoskinson, of Cardano fame, is a co-founder of Ethereum. The crux of Ethereum’s backend success comes from the active network of Solidity programmers and scholars that together make Ethereum such a strong community.
The Enterprise Ethereum Alliance, EEA, has enabled Ethereum to garner some of the best partnerships in the space. The board of directors includes names from institutions such as Santander, Accenture, Microsoft, BNY Melon, Six Exchange and JP Morgan.
The partnership side is impressive and includes Nomura Research, Consensys, AMD, Fnality, FedEx, JP Morgan and Microsoft. The best partnerships since we started Token Takeaway.
The Ethereum network is well funded. Readers should understand that funding is essential to the success of a dApp-based blockchain because protocol developers need to be incentivised to choose a certain blockchain over another. This is partly why Ethereum has continued to grow and generate value for its community.
The Ethereum Foundation (EF) is key to the funding and development of the Ethereum ecosystem. EF is a non-profit organisation dedicated to supporting Ethereum and related technologies. Its role is to allocate resources to critical projects within the Ethereum ecosystem and advocate for Ethereum in the traditional world. For example, EF has the Ecosystem Support Program. According to its website:
“[it] is a large scale effort aimed at ensuring that the ecosystem has the support it needs to succeed”.
However, does the capital match the nice words? Very much so. According to Crunchbase, EF has raised nearly $19m. Although figures are hard to find for 2021 funding, up until September 2020, EF announcednearly $30m in grants and project-based funding.
The Ecosystem Within ETH: DeFi, NFTs
Ethereum is the second-largest digital asset, with a market cap of US$360bn and a 24hr trading volume of nearly US$30bn. These are gigantic numbers and should spark the interest of digital asset enthusiasts who have, up until now, focused solely on Bitcoin.
There is more to Ethereum than meets the eye. Ultimately it has cemented itself in the top 2 through its token standards, most notably ERC-20 and ERC-712, both of which are responsible for many of the Ethereum-based tokens in circulation. To put the scale in perspective, according to Etherscan, there are over 440,000 token contracts on Ethereum.
The partnership of Ethereum’s smart contracts, dApps and tokens, create several “in-house” sub-sectors, each offering market users a different way to put their money to work. Most significantly, DeFi is part of Ethereum’s financial stack. It enables global and unhindered access to entity-made financial products, which offer yield unattainable in the traditional financial world. Currently, the size of the DeFi market on Ethereum equals US$80bn, according to DeFiPulse.
Another interesting sub-sector in Ethereum is non-fungible tokens (NFTs). These are digitally unique and indivisible assets that grant their holders absolute ownership rights, which is unheard of in the traditional world. An early example of an NFT is CryptoKitties, which is a platform where users can mint, breed, and trade virtual kittens. These kittens are unique and cannot be duplicated. Investors have attributed a lot of value to NFTs in recent months. In March, Christie’s hosted a record sale for a series of art NFTs, which sold for $70m.
Looking at the scale of just two sectors within the Ethereum ecosystem demonstrates its growth potential. However, housing the space’s innovation has shown the constraints that Ethereum has. I am referring to the “gas” issues (the term for network fees) that the network has faced in times of market turbulence. This has led to the recent “London Hard Fork”, which implements a new feed mechanism to mitigate previous high gas costs happening again - an example of how the technology continues to evolve and improve.
Housing Real-World Applications
The Ethereum ecosystem also caters for real-world demand. Axie Infinity is the best example of this. It is a platform built on Ethereum that generates global utility for countries in unstable macro conditions, such as the Philippines. It fits with the EVM ideology and enables unhindered access to a gaming economy network that offers them a value that has a universal purchasing power.
The ETH Token
ETH is the native token for the Ethereum blockchain, meaning all transactions require ETH to be validated. All parties are required to use ETH; therefore, the growth of the Ethereum World Computer has a direct correlation to a growing utility for ETH. This will generate value for holders as demand increases.
The utility of the ETH token covers two main aspects as it settles gas fees and enables involvement in a variety of Ethereum dApps. Gas, as discussed earlier, is required for each transaction. On the other hand, ETH plays a larger role in the functioning of the ecosystem. For example, the crypto-backed stablecoin DAI is minted by collateralising the position with ETH.
The ongoing growth of the Ethereum ecosystem should bode well for the ETH token. But this will hinge on the broader development of the industry.