Looking at Ethereum: The Great Reversal in the Crypto World

This article is from Rhythm BlockBeats.

Now, the voice of Ethereum is getting louder. Goldman Sachs stated in its Ethereum research report that the rapidly developing DeFi and NFT sectors within the Ethereum ecosystem have opened up infinite possibilities for ETH. BitMEX CEO Arthur also predicts that there is a 30% chance that Ethereum's market capitalization will surpass Bitcoin in the future.

The enthusiasm of institutions for Ethereum is surging, but whether they truly understand Ethereum or are simply making calls remains unknown.

Many people are comparing Ethereum and Bitcoin, with the core question being: between Bitcoin and Ethereum, who will be the king of the future?

Bitcoin, like the immortal gold, is heavy, not easy to carry, and has significant transaction resistance (rigid technical framework, long confirmation times, low processing performance…), but the beautiful luster of gold, much like Bitcoin's "first application of blockchain technology" halo, still makes it irresistible. The accumulation of time and the sedimentation of consensus have elevated gold to the throne of hard currency, while Bitcoin has brought a more secure value storage network.

Ethereum, the world computer, is the main clearing layer for the crypto application ecosystem. In the mainstream crypto world, if the Ethereum protocol is the global central bank, then ETH is the globally accepted native fiat currency, coordinating the production relationships of various protocols within its domain, facilitating the flow of value. While the infinite inflation of ETH may be a concern, healthy economic growth requires maintaining an inflation rate of 2% ± 1%.

So, is there really a comparability between Bitcoin and Ethereum? From certain dimensions, comparisons can indeed be made. But who is the king of crypto assets? Perhaps there is no answer; they each have their distinct missions.

This article is from Bankless analyst Lucas Campbell, who compares the Bitcoin network and the Ethereum network from three dimensions: total settlement volume, transaction fees paid, and settlement assurance. Rhythm BlockBeats has translated this article:

The Inevitable Reversal

Whether Ethereum can overtake Bitcoin is one of the most controversial topics in the crypto world. For over a decade, Bitcoin has firmly held the throne as the king of crypto assets by market capitalization. Whether Ethereum or other competitors can surpass Bitcoin has naturally sparked debates within the crypto industry.

People often boast that Bitcoin is the most "robust" and "stable" currency in the world to date. This may not be wrong; essentially, digital assets cannot be replicated, strictly adhering to coded monetary policies, and are backed by social contracts.

However, many in the Ethereum community disagree. Some even believe that Ethereum's "reversal" is inevitable.

Ethereum is a universal, programmable settlement layer for processing any value carrier, with processing capabilities far exceeding those of Bitcoin. The upcoming ETH 2.0 upgrade and EIP 1559 may transform ETH into a productive asset with potential deflationary attributes. Although this transition carries considerable execution risks, the combination of scalability and economic model upgrades cannot be underestimated.

While it may be hard for some to imagine a scenario where Bitcoin relinquishes its throne, in reality, Ethereum has already surpassed Bitcoin in many key public chain metrics.

These three metrics are:

Total settlement volume: The total economic value settled on-chain.

Transaction fees paid: The fees people are willing to pay to settle on that chain.

Settlement assurance: The security of value settlement on that chain.

These three concepts largely encompass the core purpose of any blockchain: to provide a secure (preferably public) ledger to facilitate peer-to-peer value exchange.

1. Total Settlement Volume

Blockchains serve as settlement layers. The total value settled on-chain reflects whether the network is fulfilling its core mission: to promote economic activity. Generally speaking, the higher the value settled on-chain, the better. This indicates that people are willing to trust and use the network to accurately record and protect their assets (whether ETH, BTC, USD, etc.).

Ethereum's current daily settlement value has surpassed Bitcoin, and the marginal growth rate is healthy. (Source: Money Movers)

Ethereum leads in this metric. According to data from Money Movers, Ethereum's daily settlement value exceeds $52 billion, while Bitcoin's settlement value is about $14 billion.

However, the Bitcoin community may quickly emphasize that these two networks are not comparable, as Ethereum's settlement layer can handle any value asset, while the Bitcoin network essentially only supports BTC, which means Bitcoin's "economic loan" is inherently limited to settling one asset rather than thousands of assets.

Yet, even when looking solely at the value transfer between BTC and ETH, Ethereum was already in the lead at the beginning of May. Bitcoin settled $13.9 billion worth of BTC daily, while Ethereum settled over $20 billion worth of ETH daily.

Even if Ethereum's "economic loan" exceeds Bitcoin's network by $400 billion, Ethereum still surpasses Bitcoin in settling its native assets. Ethereum now settles more "trustless value" daily than Bitcoin.

Does this mean ETH is used more as currency, while BTC is used for value storage?

Clearly, BTC is not meant to be used daily. It is supposed to store its value over time. Both are fulfilling their missions.

2. Transaction Fees Paid

The business model of public chains is to sell their block capacity. A good blockchain is filled with various economic activities that people are willing to pay for. For me, this is one of the core indicators of determining a blockchain's value, as it indicates the fees people are willing to pay to use that ledger.

Ethereum again crushes Bitcoin under this standard. Ethereum's current seven-day average fees are $32 million per day. In contrast, Bitcoin's daily transaction volume is $4 million, making Ethereum's transaction fees approximately 8 times higher than Bitcoin's. Why is that?

In short, Ethereum offers an irresistible ecosystem filled with opportunities for various economic and social activities.

If you can earn a 20% APY in dollars with a principal of $100,000, you might be willing to pay a significant fee to execute that transaction. If you want to buy a Cryptopunk for millions of dollars and show it off in the Metaverse, you might also be willing to pay a hefty transaction fee to ensure your transaction goes through smoothly. If you discover a "treasure" coin on Uniswap that you think could increase tenfold, you might not care at all about how much transaction fee you pay. Now you understand?

On the other hand, Bitcoin is merely sending Bitcoin from one address to another, perhaps transferring your Bitcoin to a BlockFi account to earn interest. In any case, there are fewer economic activity opportunities on the Bitcoin network, so users are not inclined to pay higher transaction fees.

More and more people are scrambling for Ethereum's block space, waving their bidding "gwei" to tell miners: shut up, take your money, and quickly include my transaction in the next block!

The numbers speak for themselves: people are willing to spend more to use the Ethereum network than the Bitcoin network.

3. Settlement Assurance

The last metric we need to examine is settlement assurance. Nic Carter published a detailed paper on this in 2019. He argues that this is one of the most critical issues to consider when evaluating any public chain because settlement assurance directly relates to the security of the blockchain.

Settlement assurance represents your confidence that once a transaction is verified on the chain, it will not be rolled back. This is crucial, especially for those cyberpunk idealists! Their envisioned economic system is resistant to rollbacks and irreversible…

One way to measure settlement assurance is to calculate the number of block confirmations required for a transaction to be settled as it would be on Bitcoin.

Author's Note: For Bitcoin, it generally requires 6 block confirmations for assurance. This means that once a BTC transaction reaches 6 block confirmations, it is considered final and unlikely to be rolled back.

According to howmanyconfs, from the perspective of confirmation block numbers, the Ethereum network is not necessarily less secure than Bitcoin. However, just a few weeks ago, this changed; for a time, Ethereum was actually more secure than the Bitcoin network! This is a turning point for the crypto ecosystem, as it is the first time in crypto history that another network has been considered more secure than Bitcoin from the perspective of settlement assurance.

But we can delve deeper into this issue. In Nic Carter's post, he mentioned that the cost of the ledger is one of the quantifiable measures of settlement assurance. So how do you measure the cost of the ledger?

In short, the cost of the ledger equals the total amount paid to validating nodes/transfer selectors over a unit of time.

This means that the more you pay miners annually (the total of transaction fees and block rewards), the less likely miners are to attack the network. In other words, the incentives for miners ensure they do not act maliciously, keeping the ledger secure.

After some elementary math calculations, we can derive the annual payments to miners:

Bitcoin pays miners about $14.25 billion annually (based on 900 BTC block rewards per day + $3.8 million daily transaction fees, when BTC is priced at $40,000).

Ethereum pays miners about $18.5 billion annually (based on the current block rewards and block time metrics).

Yes, Ethereum currently pays more to miners per unit of time than the Bitcoin network. The total cost of the ledger on the Ethereum network is higher than that of the Bitcoin network, which means that in this measurement dimension, Ethereum has a higher settlement assurance.

So What Is Preventing This "Reversal"?

Ethereum is settling more value, people are willing to pay more for it, and the Ethereum network is more secure than the Bitcoin network (under certain metrics).

So, what is preventing Ethereum from overtaking Bitcoin?

For me, it can be summed up in one word: currency premium.

Today, BTC is more widely known and understood than ETH, which is the key factor in generating currency premium. A decentralized currency like BTC is built on collective consensus! People understand Bitcoin more. Its narrative is simple: it is digital gold. Retail investors get this, and institutions are starting to understand it too. As the saying goes, the best thing for cryptocurrency is to be understood.

People understand Bitcoin, but they do not understand Ethereum… Investors have had over a decade to understand Bitcoin, but only half that time to understand Ethereum (and Ethereum is much more complex than Bitcoin).

But don't get me wrong: once ETH 2.0 and EIP 1559 are implemented, the narrative of ETH will stabilize. All the value generated within the Ethereum network will directly settle on ETH. The appeal of Ethereum to institutional investors will surge; they just need time to learn this new industry. Once they understand it, the narrative of ETH will seep into the mainstream.

Ethereum is settling more value, and this settled value is more secure on Ethereum than on the Bitcoin network, and people are willing to pay for this value.

On-chain data does not lie. Ethereum is indeed the better settlement layer for the value of everything in the world.

When viewed from this perspective, it seems that this reversal is inevitable.