Bitcoin is the world’s first and largest cryptocurrency. The coin has a value based on its position as a store of value that can conduct value transactions globally and comparatively more easily than other similar assets such as gold. Ethereum’s asset, Ether (ETH), has another value proposition that is arguably valuable for a number of reasons.
“Ethereum derives its value from a number of different factors including gas fees, its use as collateral, its ability to be lent and borrowed, its use as a medium of exchange for trading, and NFTs [nonfungible tokens]and the fact that it can be used for interest, “Scott Melker, a crypto trader and host of The Wolf of the Streets podcast, told Cointelegraph, adding,” It also has speculative value and is gaining increasing attention and interest of institutions investors. “
The background story behind Ethereum
Ethereum is the network in which the tradable ETH coin runs. Ethereum was launched in 2015 based on a concept by a programmer named Vitalik Buterin about two years ago. In short, Ethereum acts as a platform on which developers can create projects or solutions.
Over the years, the Ethereum network has become an integral part of the crypto space on which many projects are based. A large number of initial coin offers used Ethereum as a financing instrument in 2017. Crypto assets based on Ethereum’s blockchain are known as ERC-20 tokens, although ERC-721 tokens also exist on the network as unverifiable tokens.
If a project builds on Ethereum, it can be delivered with an asset for use in 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 initial launch on the Ethereum blockchain.
Much of the decentralized financial sector in the crypto space also started with Ethereum, with the decentralized exchange based on Ethereum’s blockchain hosting allowing numerous tokens associated with the niche to be traded. With DeFi, participants can, among other things, borrow and borrow crypto assets. As Melker notes, ETH can play a role in this ecosystem.
Ethereum’s transaction costs are known as gas fees
Part of the value of ETH is related to gas fees. When a person sends ETH, they have to pay a certain amount of the coin to pay for the transaction – a concept similar to the fees users pay when sending Bitcoin (BTC).
A big difference to ETH, however, is that there are gas fees for sending ERC-20 tokens. To send an ERC-20 token, the transactor must also keep the ETH in the same wallet to pay for the transaction. Trading DEXs also comes with gas fees. Someone could buy and hold ETH for gas fees, which gives the coin a basic demand in the market.
During the DeFi boom in 2020, there was high traffic on the Ethereum network, which increased gas charges to exorbitant levels. The high transaction fees lasted until 2021. According to YCharts, an average ETH transaction cost $ 39.49 in February 2021 – significantly more than in previous years. A fee of approximately $ 1 to $ 2 is considered normal. “The Ethereum Average Transaction Fee measures the average USD fee when an Ethereum transaction is processed and confirmed by a miner,” notes YCharts on its website.
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 to bet on the possible future success and acceptance of the Ethereum network in the mainstream world. The price of ETH could potentially also represent speculation about the success or failure of part of the crypto industry, given the number of projects built on the network.
Tyler Winklevoss, co-founder and CEO of the Gemini crypto exchange, expressed this thought process in a December 2020 interview with Casey Adams, an entrepreneur and podcaster. Winklevoss compared the innovation of the crypto industry to that of the internet, despite investing in a small investment, part of the internet in the early years would have proven difficult, except for roundabout methods.
The purchase of ETH arguably offers this type of partial investment to a broader development sector. Winklevoss explained this by comparing such a purchase to a hypothetical partial ownership on the circuit that would benefit from the activity rather than the individual race results.
“Ether is the same for indexing part of the Ethereum network, namely a […] decentralized global computer, ”he said. “A lot of people equate ether with digital oil,” he added. “If you want to get into the crypto game, my suggestion is to own bitcoin, digital gold and ether, digital oil, and with these you have most of your basics covered.”
Value in Ethereum 2.0
Scaling Ethereum has been an issue, as seen with the CryptoKitties fad in 2017 and the DeFi craze that began in 2020. Ethereum 2.0 is aimed at a faster experience, but upgrading is a process and has seen delays.
According to Aditya Asgaonkar, an Ethereum Foundation researcher, Eth2 includes the network’s transition to proof-of-stake technology, which depends on ETH holding at least some value.
“Proof-of-stake assumes that validators who do something bad – if they try to attack the system or misbehave in any way – will be punished,” he said during a panel at the LA Blockchain Summit. “These penalties apply to their use, which is included in the ETH coin. Therefore, the ETH price must be greater than zero for the penalties to have an incentive effect,” he added.
Therefore, validators need a 32-ether portion in order to be able to participate in securing the network. Validators who help run the blockchain in a PoS system receive a payout for the contribution they provide to the network. The demand from validators that accumulate ethers in batches of 32 pieces and the desire to generate income from the use creates a market demand for the coin.
Up and coming competitors
Given the highly competitive crypto market, Binance Smart Chain has emerged as one of the alternatives. The network behaves similarly to Ethereum, except that BSC uses Binance’s BNB coin for transaction costs instead of ETH, as the Binance Academy’s BSC explains.
Other network competitors are Cardano, Neo, and many others. Over the years, the prospect of usurping Ethereum’s network has been a hot topic. Given the widespread use of Ethereum, it would be significant to surpass the prevalence of Ethereum.
Due to the large number of applications, products and services based on Ethereum, it also benefits from the so-called network effect. “The network effect is a phenomenon in which an increased number of people or participants improves the value of a good or service,” explains Investopedia, adding: “The Internet is an example of the network effect. Initially, there were few users on the internet as it was of little value to anyone outside the military and some scientists. ”
“However, the more users got access to the Internet, the more content, information and services were produced. The development and improvement of websites attracted more users to connect with each other and do business. As the Internet saw an increase in traffic, it offered more value, which resulted in a network effect. “
The more something is used and built on, the more common it becomes, much like a wave, and gains momentum over time. In the case of Ethereum, the network effect means additional trust as the platform is known and known.
In the ever-changing world of crypto, the popularity and price of assets rise and fall. Over the years, ETH has shown both price strength and dominance as a platform on which developers can build. However, time will tell whether a faster and cheaper network will usurp Ethereum in the long run or whether Ethereum 2.0 will scale the blockchain to meet market demand.
