What is the intrinsic value of ether?
This is a question I’ve been wrestling with this past week as the ether price set a new all-time high of $1,439.33, according to CoinDesk’s price index.
Similar to how many view the current bitcoin price bull run as being credibly different from previous cycles for reasons to do with greater institutional involvement and mainstream interest, among other reasons, I get the sense that the valuation of ether by investors is being looked at this time around in a different light.
The primary reason for why I believe ether’s valuation has shifted in fundamental ways this market cycle compared to previous ones is because this December Ethereum officially launched its parallel staking network, Ethereum 2.0.
Pulse Check Jan. 20(Data as of 1/19/2021 @ 20:12 UTC)
Source: Etherscan
If you’re new to Valid Points and the topic of Ethereum 2.0 in general, be sure to check out our 101 explainer on Eth 2.0 metrics to get up to speed about jargon and terminology used throughout this newsletter.
The daily average income of Ethereum 2.0 validators in terms of ETH has been on the slight decline since last week. According to BeaconScan, average income has dropped over the month of January from 0.008063 ETH/day to 0.007768 ETH/day. In dollar terms, however, income has been on the rise given bullish price trends pushing the value of ETH up 66.03% year-to-date.
User participation on the Ethereum 2.0 network has also been increasing at a steady pace of close to 900 new validators each day. There are over 65,000 validators, each staking 32 ETH worth roughly $45,000, at time of writing. An additional 16,000 validators are in a holding queue for entry into the network over the next few weeks.
Because of the continued growth of new users on Eth 2.0, a greater percentage of total ether supply is getting locked away and becoming unusable on the original Ethereum blockchain. Roughly 2.4% of all ETH in circulation is now immovable from Eth 2.0. Some Ethereum investors believe this percentage will grow to be as high as 30% in the future.
Eth 2.0 Staking Rate (%)
Source: CryptoQuant
A large percentage of total supply being removed from active circulation among decentralized applications (dapps) and transactions between users impacts the velocity of ether as a digital currency. Velocity is the rate or frequency at which units of a currency are exchanged in an economy, or in the case of Ethereum, in a blockchain system. If we think about ETH as money, ETH’s velocity is negatively impacted as a result of Ethereum 2.0.
However, as certain Ethereum experts have pointed out, ETH, unlike BTC, is much more than an asset for transfers of value, or even a store of value for that matter. ETH can be likened to a commodity asset needed for fueling a new decentralized web and financial system. ETH can also be viewed as a capital asset inextricably linked in value to the popularization and adoption of proof-of-stake blockchain protocols.
With the advent of Ethereum 2.0, long-term holdings in ETH represent long-term bets on the decentralized web and/or finance, as well as the viability, scalability and security of proof-of-stake blockchains to the same, if not higher degree, than proof-of-work blockchains.
There are a number of other use cases for Ethereum’s native crypto asset, ether, besides its use as payment for decentralized applications and staking on Ethereum 2.0. However, these are two that are likely to continue motivating investments in ETH as Ethereum 2.0 development advances.