Redefining Ethereum: New Capitalism and Three Types of Assets

This article was published on Deep Tide TechFlow.

Can Ethereum surpass Bitcoin?

This question was once ridiculed just like "Can EOS surpass Ethereum?" Now, as the exchange rate of Ethereum against Bitcoin continues to soar and ETH 2.0 is gradually approaching, this question is no longer a joke.

For example, Ryan Watkins, a senior research analyst at Messari, believes that once Eth2.0 and PoS are completed, Ethereum may replace Bitcoin as the largest crypto asset.

Today, let's talk about the evolution of Ethereum, why we are optimistic about its future, and the potential to challenge Bitcoin.

New Capitalism

When it comes to capitalism, you might think of capitalist empires like the UK and the US, but one country must be mentioned: the Netherlands.

In 17th century Europe, the most powerful country was neither Spain nor Portugal, nor England, but the Netherlands, known as the "Sea Carriers."

The strength of the Netherlands came from its advanced shipbuilding industry. At its peak, Dutch merchant ships accounted for three-quarters of the total tonnage in Europe, and maritime trade was essentially monopolized by the Netherlands.

On the other hand, it stemmed from developed commercial trade. It can be said that the Netherlands invented capitalism, and capitalism shaped the Netherlands.

In 1602, the world's first joint-stock company, the Dutch East India Company, was established;

In 1606, the world's first securities exchange focused on financial stocks was established in Amsterdam, a century earlier than the London Stock Exchange;

In 1609, the world's first modern bank was born in Amsterdam, the Amsterdam Bank, which had the attributes of a central bank, reflecting the credit of the state, and unified management of the currency and credit system, becoming the bank for currency issuance.

When the Netherlands established the first well-functioning loan system, which made it easier to create debt, capitalism took root in the Netherlands and spread to the world. Therefore, the Netherlands is also known as the "first capitalist country."

Hundreds of years later, a new capitalist system began to be established, that is the new Netherlands in the digital world: Ethereum.

The transformation of Ethereum lies in its establishment of a new application layer and value layer on the internet.

Web 2.0 is a centralized database and centralized data internet, with Facebook, Google, Amazon, and their products representing the pinnacle of the Web 2.0 application layer.

Ethereum provides another option, allowing value to be transmitted directly over the internet. One major innovation is the integration of the "Ethereum Virtual Machine (EVM)" into its blockchain.

In other words, with EVM, Ethereum can run software that can handle digital assets on its blockchain, thus creating an application layer on Ethereum, a new debt ecosystem, a new stock trading system… a complete set of capitalist ecological mechanisms can be established and operated quickly and at low cost.

The old capitalist system can be described as "meatspace + digital," where in the "meatspace + digital" economy, each asset class has its own exchanges, custodians, and markets, so cross-market value transfers require financial and time costs.

All asset types on Ethereum (stocks, bonds, assets, real estate, virtual land, etc.) are developed using the same language, allowing for frictionless trading between each asset.

In the "meatspace + digital" system, individual users need to wait days or even weeks to transfer stocks from one custodian to another, but on Ethereum, it only takes a few minutes.

Therefore, the most imaginative aspect of Ethereum is to become the future global settlement layer, establishing a complete capitalist ecosystem on Ethereum.

Three Types of Assets

Ethereum 2.0 will be an evolution of Ethereum.

According to David Houman, COO of RealT, after Ethereum 2.0, ETH will become the first asset in history to possess all three asset class properties: capital asset, consumable asset, and value storage.

In 1997, American economist Robert J. Greer classified asset classes into three categories in his paper "What Are Asset Classes?"

Capital Assets

Capital assets refer to any assets that can generate future cash flows.

For example, stocks that generate cash flow in the form of dividends and bonds that generate cash flow in the form of coupons, as well as rental real estate, fundamentally have the characteristic of being able to discount future potential cash flows.

Consumable / Convertible Assets

These assets can be consumed or converted into another asset but cannot generate future cash flows themselves.

For example, oil, wheat, and coffee; in other words, these assets are physical commodities.

The difference between convertible assets and capital assets is that these assets cannot be valued by discounting future cash flows.

Value Storage Assets

These assets do not generate income and cannot be consumed, but they have economic value, and the value of these assets lies in the recognition of investors. Currency and collectibles are typical examples of value storage assets.

For example, gold, art, or Bitcoin.

In 2019, David Houman proposed the view that "when ETH gradually becomes a 'three-type asset' that plays a triple role economically, meeting all the demands of the new economy, it will be the best currency model in the world."

Ethereum as a Capital Asset

Shares in the Ethereum Network

Equivalent to "shares" in the Ethereum network, the PoS staking mechanism of ETH 2.0 makes ETH itself a productive asset, which can generate returns through staking, capturing the value of system growth.

Claim Rights of Ethereum

This refers to the claim rights to the fees of the Ethereum network. In this regard, it behaves similarly to bonds. Ethereum is a bond issuer, and Stakers are bondholders who receive corresponding returns.

The difference from traditional bonds is that Stakers can redeem Ether "on demand" (without maturity), similar to embedded options in bonds. Specifically, ETH has the characteristics of sovereign bonds because the platform is designed to be solvent, with no default risk.

Rights to Produce for Ethereum

Owning ETH means having the right to work for Ethereum and the right to collect fees.

ETH also serves as a mechanism to ensure incentive alignment between the Ethereum network and its workers; all workers must hold ETH to work for Ethereum. If you want to be an employee of the Ethereum network or pay for related services, you must hold ETH and align with the network.

ETH as a Consumable Asset

ETH can be understood as a consumable energy; with energy, our world can operate normally, and energy is the economic foundation that powers the world economy.

Every transaction on the Ethereum network (sending tokens or interacting with smart contracts) incurs Gas fees, priced in Gwei.

With the introduction of EIP - 1559 (scheduled for July 2021), these fees will be "burned." Just like traditional natural gas or oil, Ether will become a continuously consumed consumable / convertible asset (commodity).

ETH as Value Storage

If you follow DeFi, you should know that ETH acts as a value storage in the DeFi ecosystem. When ETH is locked, it often means that ETH will become the underlying collateral.

Bitcoin has a fixed supply of 21 million and a declining inflation rate, also known as "digital gold." In contrast, although Ethereum does not have a fixed supply, its future inflation rate will continue to decline.

After Ethereum 2.0 fully transitions to PoS, the total issuance of ETH will sharply decrease, reducing the inflation rate from the current 4.54% to 1.58%, which is not only lower than the expected global currency inflation rate for 2021 (3.29%) but also lower than Bitcoin's inflation rate (1.8%).

Moreover, the EIP-1559 proposal has been approved for implementation in this year's Ethereum London hard fork upgrade, officially linking the growth of the Ethereum economy with the scarcity of ETH assets.

Throughout, Ethereum's monetary policy has been "minimum necessary issuance," meaning that the amount of newly issued ETH under the Ethereum protocol is "small enough" to ensure the security of the Ethereum network.

EIP-1559 will destroy ETH used as transaction fees, meaning this portion of ETH will be removed from the total circulation. Destroying ETH increases the scarcity of ETH.

The POS mechanism of ETH2.0 and EIP-1559 will enhance Ethereum's value storage attributes.

Finally, returning to the initial question: Can Ethereum surpass Bitcoin?

My personal view is that Ethereum will gain more value recognition and appreciate in the future, but within this cycle, it still cannot shake Bitcoin's position, with theoretical possibilities in the next cycle.

From the source of funds, both Bitcoin and Dogecoin directly absorb the flood from the fiat currency world, while Ethereum's capital inflow is more from the overflow of Bitcoin's funds.

In terms of competition, Bitcoin has no rivals in its lane, while Ethereum faces more challenges.

Just as Ethereum seeks to challenge Bitcoin, other new and old public chains are also challenging Ethereum. Exchanges like BSC and HECO, as well as new public chains like Solana, Near, and Avalanche, are absorbing Ethereum's funds and users.

Ethereum needs to work hard to defeat its competitors, while Bitcoin just needs to lie there and welcome the collapsing fiat currency world with open arms.

The success of Ethereum comes from proactivity, while Bitcoin's success stems from passivity, requiring Ethereum to continuously improve and avoid fatal mistakes.

But I still look forward to the day when Ethereum and Bitcoin face off directly in an arm wrestling match, so at least before 2024, I will not sell my ETH.

Without dreams, what’s the difference from a salted fish? Only in this way can the blockchain world be more exciting, right?