ETH Is No Different Than A Fiat Currency

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To investors,

There is a new talking point being popularized in the Ethereum community around the DeFi movement. It is best summarized with the meme “ETH is money,” which refers to the possibility that Ether could become the base unit of account, and the store of value / medium of exchange, most desired in the decentralized finance vertical.

Before I get into a breakdown of why this logic is flawed, I want to make two things clear up front — (1) I want every team to be successful and generally cheer for anyone who has the courage to build new things and (2) I am a big proponent of experimentation to drive innovation, so we should encourage experimentation even if we don’t believe the experiments will ultimately be successful.

With that said, I believe the idea that ETH is money is fundamentally flawed.

My logic can be broken down into two separate buckets. The first is that the meme of “ETH is money” is really saying “ETH is (good) money.” If it wasn’t, people would be running around saying “Rocks are money” and “Cheetos are money.” Obviously, this is not what the Ethereum community is saying. They are making an intelligent analysis of Ether as a potential sustainable medium of exchange and store of value.

The issue is that Ether is no different than a fiat currency. Fiat currencies have (a) no fixed supply, (b) an inflationary supply schedule, and (c) monetary policy decisions that are decided by a small group of individuals. Ether has (a) no fixed supply, (b) an inflationary supply schedule, and (c) monetary policy decisions that are decided by a small group of individuals.

The monetary policy of Ether is driven by something called “minimum necessary issuance,” which is summarized by as:

“Ethereum’s Monetary Policy is defined by the rewards that are paid out by the protocol at any given time. Ethereum’s current yearly network issuance is approximately 4.5% with 2 Ether per block and an additional 1.75 Ether per uncle block (plus fees) being rewarded to miners.

Ethereum does not have a fixed supply because a fixed supply would also require a fixed security budget for the Ethereum network. Rather than arbitrarily fix Ethereum’s security, Ethereum’s monetary policy is best described as “minimum issuance to secure the network”.

Ethereum has had a history of reducing issuance to these estimated minimums and the network has never increased issuance. The move to proof-of-stake is also part of Ethereum’s effort to reduce issuance to minimum amounts without sacrificing security.

Ethereum’s minimum necessary issuance policy is enforced by a wide range of stakeholders within the ecosystem – including:

  • Developers

  • Community members

  • Ecosystem spokes/projects

  • Miners and other network participants

As Ethereum is a decentralized network, the Monetary Policy cannot be successfully modified unless there is overwhelming consensus from the aforementioned stakeholders. Ethereum follows an off-chain governance process meaning that any and all decisions on changes to the network happen extra-protocol.

That said, due to natural incentives, Ether’s issuance is unlikely to ever increase unless the security of the network is at risk. Additionally, the upcoming Ethereum 2.0 proof-of-stake transition will progressively allow for a drastic reduction of Ether issuance while maintaining the same level of network security.”

The good news for those that believe in ETH as money is that every change to the supply schedule so far have REDUCED the new issuance rate, but the bad news is that the option is always available to increase the new issuance rate. This is similar to our current fiat monetary policies, where the decision makers can increase or decrease the production of new money coming into the system.

Ultimately, there are two assets where this is not true — Bitcoin and Gold. You can’t produce more Bitcoin, regardless of how badly you want to. You can’t produce more gold than what is available in the earth, regardless of how bad you want to. Now there are plenty of people who will say that you could change Bitcoin’s monetary policy if you could get consensus from a majority of stakeholders, but the difference is that Bitcoin has never had a monetary policy change or deviation from the original design, while Ethereum has a long history of changing their new issuance in a non-programmatic way.

In addition to these system structure issues, Ethereum is also very volatile. In fact, Ether is historically more volatile than Bitcoin, which can be seen in this chart from Delphi Digital:

So how can the DeFi movement solve for the problems that exist with the “ETH is money” narrative?

Easy, they can create better forms of money that are compatible with the ETH-based DeFi movement. Thankfully, this is exactly what the community is doing. You can see it happening with the creation of ERC-20 stablecoins like DAI (pegged to $1) or the work being done to bring Bitcoin’s monetary policy to ERC-20 form (tBTC is good example).

What is interesting is that the DeFi movement is continuing to grow at an impressive rate. There was a recent milestone that highlighted more than $1 billion is locked up in the ecosystem (a core metric to measure growth of DeFi), which approximately 60% coming from the Maker / DAI system.

This brings me to my conclusion — DeFi is an important part of the crypto ecosystem today and it will likely become an incredibly important part of the global financial system over time. I am a believer in the idea of decentralized, trust-minimized financial services that leverage the beauty of digital assets. In fact, I actually think the DeFi movement is part of a larger trend that I call Automated Finance — the replacing of humans and middlemen by algorithms and software. In this new world, a good portion of services will be decentralized, but not all of them.

It is also not lost on me that there are plenty of people who disagree with me on my analysis of Ether. Take the recent interview that The Defiant and Camila Russo did with David Hoffman for example. In that piece, his summary was the following:

“Ethereum is a foundation for building an alternative Internet-based financial system. This financial system has the capacity to be completely open and trustless. This new financial system needs a native money to operate. Financial applications in this new landscape need a trustless form of collateral for their operation, and the only truly trustless asset on Ethereum is Ether.

As a result of this demand, Ether has become an economic-trifecta; a “triple-point” asset, satisfying all the requirements that a new economy needs, all at once. As a result of this, Ether has become the best model for money that the world has come up with.”

My general position is that the mechanics of the decentralized finance services will eventually be built around truly sound money (Bitcoin) and I am actively looking for teams to fund in that arena. I have nothing against Ethereum or Ether, but feel it is important to dispel a provable false narrative when I see them.

As I stated earlier in this piece, I generally cheer for any team that has the courage to build something new. Many of the new DeFi projects that are being built are not only cool, but have the potential to fundamentally change the relationship people have with financial services. That relationship will just use stablecoins or Bitcoin as the compatible money, rather than relying on Ether’s reproduction of many of the flaws that exist in fiat currencies today.

There will be plenty of people who disagree with this piece and/or think I am missing parts of the conversation. If you are one of these people, feel free to respond to this email and share whatever information you have. I am always looking to learn and am open to having my mind changed.


This installment of Off The Chain is free for everyone. I send this email to our investors daily. If you would also like to receive it every morning, join the 40,000 other investors today.

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Halting $9.8 Billion in Theft Is Key to Crypto Growth, KPMG Says: The cryptocurrency market needs to improve how it secures digital assets for the $245 billion industry to keep growing, according to KPMG. At least $9.8 billion in digital assets have been stolen by hackers since 2017 because of lax security or poorly written code, the accounting firm wrote in a report released Monday. Adoption of cryptocurrencies such as Bitcoin and Ether among institutional investors has led to competition for a place in portfolios, making safeguarding the tokens more important that ever, KPMG said. Read more.

West Virginia Ditches Blockchain Voting App Provider Voatz: Voatz, the blockchain-based voting app that was recently claimed by researchers to have vulnerabilities, will no longer be used in West Virginia’s coming elections. On Saturday, NBC News reported that West Virginia’s secretary of state, Mac Warner, had announced that disabled and overseas voters would not, after all, be able to vote with mobile applications during the state’s primaries. Instead, they will have to use a service by Democracy Live, which allows users to fill out a ballot online and return it via post. Read more.

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Lloyd’s Backs New Crypto Hot Wallet Insurance Scheme From Coincover: Insurance giant Lloyd’s of London is backing a new policy protecting cryptocurrency held in online wallets against theft from hacks. Provided by Coincover, a crypto “lifestyle” service provider, the insurance is underwritten by Lloyd’s insurance syndicate Atrium, Coincover announced on Sunday. The liability policy is said to be a new type of insurance with a dynamic limit that increases or decreases in line with the price changes of covered crypto assets. Read more.

Nevada’s $170 million “Blockchain City” facing challenges: The company behind an ambitious attempt to build a “Blockchain City” in the Nevada desert has laid off a tenth of its employees, according to a company statement. Two years in, the company, Blockchains, LLC, has yet to break ground on the city and is focusing its attention on the development of a “suite of Web3 products and tools.” Read more.

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Marty Bent is the man and legend behind Marty’s Bent, a daily newsletter about Bitcoin, along with the host of Tales from the Crypt, one of the most popular Bitcoin podcasts. He consistently shares original ideas and I’ve found him to be one of the most informed, thoughtful people about the world that we are living in. This episode was a lot of fun and people loved the livestream, so highly recommend listening!

In this conversation, Marty and I discuss:

  • The importance of freedom of speech

  • The mirage of central banking

  • Why Bitcoin can change an individual’s mindset

  • How relationship between technology and privacy is evolving

  • Why it is difficult to live in a time where information can’t be treated

  • What is going on with Coronavirus

  • How the current political structure is not well suited for the modern world we live in

I really enjoyed this conversation with Marty. Hopefully you enjoy it too.


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