Podcast Summary
Understanding Ether (ETH) Beyond 'Ultrasound Money': Respected Ethereum figure John Charbonneau challenges the 'ultrasound money' framework for ETH and offers a new perspective in an upcoming Bankless podcast episode.
Ethereum's ether (ETH) may not fit neatly into the "ultrasound money" framework that has been proposed by some in the crypto community. John Charbonneau, a respected figure in the Ethereum space, is challenging this perspective and offering a new framework for understanding ETH as an asset. Charbonneau, who has gone deep down the Ethereum rabbit hole, will be sharing his insights on this topic in an upcoming episode of the Bankless podcast. While it may be uncomfortable for some to consider an alternative perspective on ETH, it's important to keep an open mind and explore new ideas. In the meantime, listeners can check out some of the fantastic sponsors that made this episode possible, including Kraken, a top-rated crypto exchange, and Arbitrum, a pioneer in Ethereum scalability. And for those looking to maximize their crypto earnings, Earnify is a great tool to help you claim any unclaimed airdrops and other types of earnings in your Ethereum wallet. Stay tuned for more insights on ETH and other crypto topics from the Bankless podcast.
Profitability of Ethereum: Beyond Traditional Company Income and Expenses: Ethereum's profitability isn't solely determined by traditional income and expenses. It comes from external sources like transaction fees and the value it provides to users, while costs are opportunity costs of holding tokens.
The profitability of Ethereum, or any blockchain for that matter, should not be viewed solely through the lens of a traditional company's income and expenses. John Charbonneau, a crypto expert and co-founder of DBA, argues that the income for Ethereum comes from external sources, such as transaction fees, which accrue to token holders and stakers. The cost, on the other hand, is not the issuance but rather the opportunity cost of holding the tokens. Charbonneau uses the example of owning all the tokens in a chain and receiving transaction fees, where the issuance percentage does not affect the revenue. The profitability of Ethereum should be evaluated based on the value it provides to its users and the potential return on investment for token holders. This perspective challenges the traditional ultrasound money argument and offers a fresh way to understand the profitability of decentralized networks.
ETH's Unique Properties and Profitability in Proof-of-Stake Networks: ETH's shift to proof-of-stake creates a more complex and potentially more profitable asset class due to its triple point nature as a store of value, consumable asset, and capital asset, with new token issuance viewed as revenue rather than cost.
ETH, as a proof-of-stake blockchain, operates differently than traditional companies or projects that issue new tokens, leading to potential profitability that is often underestimated. ETH is considered a triple point asset, possessing properties of a store of value, consumable asset, and capital asset. The speaker argues that the issuance of new tokens in proof-of-stake networks should not be considered an explicit cost, but rather a form of revenue. This perspective results in a more bullish outlook on ETH's profitability than traditional frameworks might suggest. The speaker also clarified that this argument is different from issuance in proof-of-work or DeFi protocols, which dilute existing shareholders. Overall, the key takeaway is that ETH's unique properties and the shift from proof-of-work to proof-of-stake create a more complex and potentially more profitable asset class.
Ether's Multifaceted Role in Ethereum Ecosystem: Ether functions as a store of value, consumable, and transformable asset in the Ethereum ecosystem. It's used to buy Ethereum blockspace, which is the actual consumable asset.
Ether (ETH) serves multiple functions in the Ethereum ecosystem – it's not just a single asset but a combination of a store of value, consumable, and transformable asset. As a store of value, ETH holds monetary premium and acts as a unit of account for purchasing block space, which is the actual consumable, transformable asset. This is similar to how the petrodollar functions as the unit of account for buying barrels of oil. While Ether and Ethereum blockspace are related, they are not the same asset. Ether is the money used to buy Ethereum blockspace, and the properties of the blockspace are essentially the properties of Ether as a money. This distinction is important to understand the unique role Ether plays in the Ethereum network.
Ethereum's Unique Selling Proposition: Blocks-based Profitability: Ethereum's value comes from its capital asset nature and blocks-based profitability, where it functions as a database selling scarce blocks. The debate revolves around what constitutes revenue and profitability, specifically the cost component.
While Ethereum's capital asset nature forms its baseline value, its unique selling proposition lies in its ability to produce and sell blocks, creating a demand-driven revenue stream. This concept of blocks-based profitability, where Ethereum functions as a database selling scarce blocks, is a significant aspect of its value. However, there is disagreement regarding what constitutes revenue and profitability. Some argue that only a subset of fees, such as base fees and priority fees, should be considered revenue. Others, like the speaker, believe that all fees, including MEV, should be included. The debate seems to be more about semantics than a fundamental disagreement. In essence, both parties agree on the revenue side, but differ on the profitability side, specifically the cost component. The cost side of the equation is where the disagreement lies, with some considering only the burn as the cost, while others believe that all fees, including priority fees and MEV, should be considered revenue and therefore, profitability.
Understanding Ether's Soundness: Burn vs. Issuance vs. Staking Rewards: Ether's soundness depends on the balance between issuance and burn for holders, while stakers focus on net payments from validators. Both factors significantly impact potential earnings and the overall value of Ether.
The soundness of a cryptocurrency asset, such as Ether, is determined by the balance between issuance and burn. While other factors like blockchain sustainability are important, they don't directly impact the asset's soundness. For Ether holders who don't stake, the burn is the only relevant factor, as it represents the value flowing to them. However, for Ethereum stakers, the net payments to validators, including MEV and tip payments, are the key metrics. The soundness of the asset itself is determined by the burn minus issuance, while the soundness of the protocol is determined by the net payments to validators. This distinction is crucial for understanding the economic implications of being an Ether holder versus a staker. The revenue generated from these activities significantly impacts the potential earnings for each group. Ultimately, the value of Ether as a whole accrues all of these revenues, regardless of whether they go to stakers or are burned. The definition of profit used in this discussion refers to income minus expenses, with the monetary policy aspect of burn minus issuance set aside for further consideration.
Difference in Issuance Costs between Proof of Stake and Proof of Work: In proof of stake, issuance is not an explicit cost to the network, while in proof of work, it leads to increased electricity consumption and overhead costs for miners.
In the context of proof of stake blockchains, issuance, or the creation of new tokens, is not an explicit cost to the network as it is simply a transfer of value from one party to another. Profitability for a validator is calculated by subtracting the costs of running a validator, such as hardware and internet connection, from the block rewards. This perspective focuses on the capital asset aspect of the token, ignoring the store value aspect and potential dilution concerns. The main difference between proof of work and proof of stake lies in the fact that issuance in proof of work leads to increased electricity consumption and overhead costs for miners, while in proof of stake, there is no net sell pressure from the protocol due to the transfer of value from non-stakers to stakers. However, there can still be sell pressure from taxes or other reasons.
Tax efficiency comparison between PoW and PoS blockchains: PoW systems like Bitcoin have no taxable dividends, while PoS systems' staking rewards may be taxed as income
The tax efficiency of proof-of-work (PoW) and proof-of-stake (PoS) blockchains can differ significantly, with PoW systems like Bitcoin being more tax efficient due to the lack of taxable dividends. However, the issuance rate and its impact on the network's security budget are essential considerations, especially when evaluating these systems as capital assets or stores of value. The issuance of new coins in PoW systems does not dilute existing stakeholders and is not a cash cost to the system, unlike PoS systems where staking rewards can be considered taxable income. While the debate around the monetary premium competition among layer 1 blockchains continues, it's crucial to remember that they also share similarities with nation-states, and their monetary policies can have significant implications for their users.
The distinction between layer 1 and layer 2 blockchains is not always clear-cut: A blockchain's sustainability depends on its token demand, utility, and value capture mechanisms. Even with inflation, a network can be sustainable if holders accept it.
The distinction between layer 1 and layer 2 blockchains may not be as clear-cut as some may think. While some layer 1s, like Ethereum, may aim to function as monetary systems, others, such as Solana or Cosmos app chains, may operate more like businesses. The sustainability of a blockchain depends on the demand for its underlying token and the utility and value capture mechanisms in place. Even with a suboptimal delta between issuance and burn, a blockchain can be sustainable if holders are willing to accept a reasonable amount of inflation. This was highlighted in a quote from the article stating that a net inflationary network is not inherently unsustainable. The specific implementation and use case of each blockchain will determine its role and function within the broader ecosystem.
Cryptocurrencies offer value despite inflation: Cryptocurrencies can provide value and utility, even with inflation, due to their predictability, reliability, and assurance. The sustainability of a network depends on stakeholder acceptance and utility.
The value and utility of a cryptocurrency, such as Ethereum or Bitcoin, can outweigh the potential negative effects of inflation, making it an acceptable and desirable asset for holders. The discussion emphasizes that the perceived value and utility of a cryptocurrency, along with its predictability, reliability, and assurance, can make people willing to accept a small amount of inflation. The ultrasound money thesis, which suggests that a cryptocurrency should deflate to maintain its value, is not strictly required, as long as the cryptocurrency has a mechanism to maximize value recapture and prevent value leakage. The sustainability of a network also depends on the stakeholders' acceptance of the inflation rate and the utility they derive from the network. However, if two identical networks diverge in value and economic activity, the deflating network is more likely to attract more value and grow in value over time.
Impact of Cryptocurrency's Monetary Policy on Long-term Success: Sound monetary policies, like deflationary or value recapture > issuance, contribute to long-term asset value and network activity. Ethereum's success doesn't necessarily require deflation, but understanding monetary policy's impact on value is crucial.
The soundness of a cryptocurrency's monetary policy can significantly impact the long-term value and network activity of the asset. The speaker argues that networks with more sound assets, such as those that are deflationary or have a strong delta between value recapture and value issuance, will ultimately be more successful. However, it was also acknowledged that Ethereum does not need to be deflationary to be successful. Instead, the monetary policy's impact on the asset's value should be considered in addition to the utility and economic activity provided by the network. The speaker, John, added nuance to the concept of ultrasound money by pointing out that treating issuance as a cost to the business may not be accurate, as Ethereum's issuance is necessary for the network to function. Overall, the discussion highlights the importance of understanding the monetary policy of cryptocurrencies and how it interplays with the network's utility and economic activity in determining the long-term success of the asset.
Understanding the complex economics of Ethereum: Ethereum's economics are multifaceted, focusing on deflation and inflation isn't enough, consider the accounting behind Ethereum's upgrades, and remember that issuance is a transfer of value, not a cost.
The economics of cryptocurrencies, particularly Ethereum, are more complex than just focusing on deflationary or inflationary aspects. The speaker emphasizes the importance of understanding the accounting behind these economics, as Ethereum's upcoming upgrades, such as MEV burn, may not result in long-term deflation. Instead, the difficulty of burning ether decreases as the supply increases, making it crucial to consider the nuances when making future changes. The speaker also suggests that treating alternative layer one's issuance less harshly is a natural progression as their growth tapers off, but it's essential to remember that the issuance is not a cost to the network as a whole but rather a transfer of value from holders to stakers. Ultimately, the focus should be on the growth in blockspace revenue and the long-term store of value properties of the asset.
Understanding Ether's Value as a Store of Value and Capital Asset: The value of ether as a store of value and capital asset are interconnected, leading to less economic burn and a more sustainable Ethereum network. The cost of ether and its impact on network sustainability should be distinguished.
The value of ether as a store of value and a capital asset are interconnected in the Ethereum network. When the secondary market value of ether is higher, more people want to stake it, leading to less economic burn and less need for the protocol to issue new ether. This holistic view of ether's value as both a store of value and a capital asset, often referred to as "ultrasound money," is crucial to understanding the sustainability and economics of the Ethereum network. Another important point discussed was the difference between the cost of ether as an explicit cash flow item and its impact on the network's sustainability. While high inflation rates are generally negative for Ethereum, it's essential to distinguish between these two concepts. Lastly, there was a mention of an upcoming discussion about modeling the future economics of ether as it relates to Ethereum's scalability roadmap. This conversation promises to delve into the intricacies of Ethereum's throughput and its impact on ether's value. In summary, the conversation highlighted the importance of considering ether's value as both a store of value and a capital asset within the Ethereum ecosystem, the distinction between the cost of ether and its impact on the network, and the upcoming discussion about Ethereum's future economics.
Bankless Premium: More Than Just an Ad-Free Experience: Bankless Premium offers ad-free listening, monthly token reports, discounts to conferences, and access to exclusive Discord communities. John Charbonneau also shared a complex Ethereum economic engine spreadsheet for exploring future upgrades.
Bankless Premium offers subscribers not only an ad-free listening experience but also valuable resources such as a monthly token report, discounts to conferences, and access to exclusive Discord communities. Additionally, John Charbonneau presented a sophisticated "theory of everything" spreadsheet for understanding Ethereum's economic engine and future upgrades, which is available for viewers to explore in the show notes. This spreadsheet, while not intended as a valuation tool, allows users to experiment with different assumptions regarding future protocol upgrades.
Understanding Ethereum's Execution Layer Potential: Ethereum's proposed upgrades like statelessness and roll ups aim to increase the gas limit and TPS on the execution layer, making it more efficient for validators and users.
Ethereum's current supply and stake can be analyzed to understand the potential impact of increasing the stake. The execution layer, which includes the gas limit and transactions per second (TPS), can be improved through proposed upgrades like statelessness and roll ups. The current Ethereum execution layer has a gas limit of 30,000,000 per block, with an average of 15,000,000 gas used. Different types of transactions use varying amounts of gas. With 15,000,000 gas, approximately 60 TPS can be achieved for simple transactions, but the actual TPS is much lower due to more complex transactions. Statelessness and roll ups are proposed upgrades that could increase the gas limit and throughput on the execution layer. Statelessness would make it easier for validators to validate the chain by not requiring them to carry the state, and eventually, they wouldn't need to validate all transactions. These upgrades are part of Ethereum's roadmap and could significantly increase the Ethereum protocol's execution layer throughput. It's important to note that these upgrades are still in development and are not yet implemented. The Ethereum execution layer, as discussed here, refers to the Ethereum protocol's execution layer itself, which is different from the execution layer moving to layer 2 in a modular blockchain world.
Ethereum increases blob space for more efficient data compression and higher transaction throughput: Ethereum's upcoming EIP 4844 upgrade increases blob space, enabling more efficient data compression for roll-ups, reducing competition, and improving network scalability and efficiency.
Ethereum is making significant strides in improving its data availability layer through initiatives like EIP 4844, which will increase the blob space from 0 to roughly a quarter megabyte per slot. This is a substantial increase compared to the current state, and it will enable more efficient data compression for roll-ups, leading to higher transaction throughput. The new blob space will be segmented, allowing for different fee markets and reducing competition between execution transactions and data availability. This upgrade is expected to occur later this year and is a significant step towards Ethereum's goal of full dank sharding. The impact of this change is significant because it addresses the current issue of jammed call data in the same execution layer, leading to increased efficiency and better performance. The new blob space will provide more availability, and its parameters can be tuned to accommodate more data as needed. The improvement in data compression from roll-ups, such as Arbitrum and Optimism, has already been substantial, with compression rates reaching up to 90%. This is crucial because the more effectively roll-ups can compress data, the higher the transaction throughput they can achieve. Overall, these upgrades will lead to a more scalable and efficient Ethereum network.
Explore Ethereum's potential network revenue with a 'run scenario' model: Users can input assumptions about Ethereum's transaction data, compression, and fees to estimate network's TPS and revenue, but economic projections should be taken with caution due to unpredictable factors.
The "run scenario" model discussed allows users to input assumptions about Ethereum's transaction data, compression, and fees to estimate the network's implied transactions per second and revenue. The model assumes a progression towards optimal compression and adjusts for significant increases in throughput, resulting in fluctuations in TPS and revenue. However, the model's economic projections should be taken with caution, as the average transaction fee in 10 years cannot be accurately predicted. The model's output includes a table showing the implied transactions per second based on user assumptions, as well as the total revenue from transaction fees. The model's numbers for the year 2025 may be overly conservative, as the actual increase in Ethereum's capabilities could be more gradual. Overall, the model serves as a tool for users to explore different assumptions about Ethereum's future and estimate the potential network revenue under those assumptions.
Exploring Ethereum's Transaction Throughput and Potential Outcomes: Ethereum's transaction throughput is expected to increase significantly, potentially reaching hundreds to tens of thousands of transactions per second, but actual numbers depend on factors like data compression and demand. The Ethereum ecosystem is dynamic and subject to change.
Ethereum's transaction throughput, particularly through roll-ups, is expected to significantly increase in the coming years. While current proposals suggest reaching hundreds to tens of thousands of transactions per second, these numbers could change based on factors like data compression and demand. Ethereum's roadmap aims to reach these targets, but the actual outcome depends on implementation and market demand. The model discussed in the podcast provides insights into potential Ethereum supply and revenue scenarios, but these should be seen as estimates subject to change. The Ethereum network and its underlying asset continue to evolve, offering exciting possibilities for the future. The speakers emphasized that these numbers should not be taken as definitive predictions but rather as a means to explore different assumptions and understand potential outcomes. The Ethereum ecosystem is dynamic, and factors like data compression and demand can significantly impact transaction throughput and asset supply. The podcast concluded with a reminder that this discussion was not financial advice and that investing in crypto, including Ethereum, carries risks. The speakers expressed their excitement about the progress Ethereum has made and the potential it holds. They highlighted the importance of understanding the underlying technology and its implications for the future of finance and the digital economy.
