Investment Thesis: $ETH

Hello everyone! I’m trialling out a new content piece that serves two purposes. The first one being a way to write out my thinking around investment decisions I make. Secondly, as a way to share that thinking and have it criticised. If there’s anything you disagree with here, please do reply to this email – I’m all ears.


Bitcoin was the first network in crypto that found product market fit and delivered unprecedented returns to long term believers in the network. While Bitcoin’s initial promise was censorship resistant digital cash, its morphed into a kind of “digital gold” that is a hedge against governments globally.

This clear, direct narrative has served Bitcoin extremely well from its ascent from $0 to $20,000 at the peak of 2017. On the other hand, it failed to provide the necessary flexibility in the form of a scripting language for use cases outside of digital cash. Ethereum was the response to this rigidity through its programmable virtual machine known as the EVM (Ethereum Virtual Machine). With an initial raise of $18m / ~$0.30 a coin in 2014, investors got the chance to get in at close to ground floor prices.

Ethereum offered to build a decentralised future beyond peer-to-peer cash, everything from a decentralised financial system to decentralised social network were possible with Ethereum’s expressiveness. After just 2 years of existence, Ethereum was trading close to $10, almost 30x its initial offering price. Although it still didn’t have a clear use case to propel it out of that range, that wasn’t until the bull run of 2017 which encouraged developers around the world to create their own Initial Coin Offerings on Ethereum to raise millions of dollars in mere seconds. The ability to create a quasi-equity type of value capture mechanism was highly novel and nothing else offered such functionality. Through this mania, one Ether reached a price of close to $1300 at its peak.

Narrative Shift

Unfortunately the rise of digital cats being sold on the Ethereum network brought the entire network to a halt for almost 2 days. This coupled with the decentralised, distributed nature of Ethereum’s team sparked a second mania – the “Ethereum Killer” mania. In 2017 you had teams with impressive resumes raising hundreds of millions of dollars (or billions) to create an Ethereum competitor that promised scalability, more features and impressive technology to investors. While Ethereum was promising Ethereum 2.0, uncertainty on when it would ship or if it’d ship were major concerns. Apart from execution risk, the other two often cited by bears are:

  1. Poor monetary policy. Ethereum’s high block rewards and inflationary supply made it seem like an asset that wasn’t worth holding, unlike Bitcoin which has an attractive 21m hard cap with a deflationary future.

  2. Lack of value capture. Sending billions of dollars of an asset on top of Ethereum would only result in a few cents of Ethereum being required. Many worried that even if Ethereum was widely adopted by developers there wouldn’t be any value accrued to the native ETH currency itself.

Once the market started pulling back, ETH was heavily oversold brining it down to $80 during the depths of December 2018. Investor sentiment was that ETH was going to zero or be forever worthless. Since then Ethereum has made tremendous progress and addressed many criticisms or a pathway to how it might become a scarce, store of value. What follows is the bull case for why Ethereum can become a multi-trillion dollar asset and the path required to get there.

The Birth of DeFi

First and foremost, Ethereum has product market fit for being the blockchain with a vibrant financial hub as demonstrated through the emerging DeFi (Decentralised Finance) economy. The largest protocol in this space is MakerDAO, a protocol which takes in Ether as collateral and spits out DAI, a stable token that maintains a $1 soft-peg. Should the value of the collateral be less than the amount of synthetic dollars (DAI) minted then the collateral is liquidated by autonomous agents observing the protocol. Since the two years MakerDAO has been live, its locked close to $700m worth of ETH or 2.4M ETH in absolute terms (close to 2% of the entire Ethereum supply). ETH locked in MakerDAO is sign of holders believing in the long term future as it costs anywhere between 5%-15% APR to borrowing/mint DAI.

Following in AUM are an assortment of lending protocols which currently have money markets for ETH, USDC and DAI. It’s not hard to imagine a future where we have 100’s of assets listed on these money markets available for lending and borrowing. We’re still in early days but there’s at least 5 venture funded companies (post-seed) building relayers that can allow regular people to earn interest. In a world where we start seeing negative interest rates, crypto provides a high-yield saving account for people to get access to, today. The long tail of DeFi has far more interesting primitives which don’t have much liquidity or AUM yet but will grow to be sizeable in the next bull run, some of these include:

  • Set Protocol: auto-rebalancing tokens based on programmable factors

  • Augur: prediction markets with no restrictions and accessible globally

  • Nexus Mutual: insure for smart contracts in the case that they get hacked

  • Uniswap: automated market maker that makes it extremely simple to bootstrap liquidity. I expect this in particular will render centralised exchange listing prices obsolete

I could carry on about DeFi but I want to leave it here and spend some time explaining the factors that have given developers confidence to build these projects and investors faith that they won’t lose their money by depositing them into DeFi.

  1. Developer tooling & support. I don’t think non-technical people really appreciate how deep and expansive the tooling for Ethereum really is. In the diagram below I’ve roughly outlined the developer stack and all the options developers have. The thing which money can’t buy is independent teams at each layer deciding to setup a business or devoting their own free time to maintain an open source library for other developers to use. Many competitors of Ethereum are lucky to have even just one of their own implementations at each layer of the stack (most haven’t even launched). I’ve created the diagram below to give you a glimpse of what the Ethereum developer ecosystem looks like on the surface.

To break each layer down in a bit more detail:

  • Active Node Clients = the number of blockchain client implementations that are actively maintained and run. The 4 listed are the ones currently being maintained and each have hundreds of contributors worldwide. Go Ethereum alone has 450. The difference between each of these implementations is usually language. I’m still probably missing another 2-3.

  • Node Providers = the number of for profit companies running node infrastructure for developers to connect to the blockchain. I take this as an important part of the stack since it shows the motive of for-profit service companies around a particular blockchain.

  • OSS Major Libraries = the number of open source libraries maintained by 3rd party developers for often no monetary benefit. This includes everything from IDEs, testing libraries, JSON-RPC native libraries, security analysis libraries and more. I’ve listed 10 I could think of quickly but I’m very confident the long tail of these libraries is in the hundreds.

  1. Expansive token holder demographics. One key factor which enables an army of developers worldwide to build extensive tooling for a blockchain is financial incentives. Ethereum launched with over 100 contributors writing code and in return benefiting in the tremendous upside as prices skyrocketed. With each astronomical price rise and fall, the old whales cash out of the ecosystem and a new set of buyers hold on till the next wave arrives. Bear markets are major contributor as they cause both individuals and organisations to shake out the ETH they have to fund their runways. This graph below from Santiment shows the dwindling amount of ETH in ICO treasuries.

If we were to summaries the main Ethereum token holder groups:

  1. Initial founding team (compromised of tens of contributors)

  2. Ethereum Foundation (now holding less than 1% of total supply)

  3. 2017 ICO raises

  4. Early ETH initial investors (anyone could get in ground floor prices)

  5. Bitcoin whales who flipped into ETH

  6. Retail investors who caught subsequent waves (from $10/ETH) etc.

Compare this to other layer 1 chains where where:

  • Foundations control large percentages. Most foundations have 10%-30% controlling interests which means community doesn’t have as much buy in, or they can dump on community (Thunder Token comes to mind).

  • Liquidity is poor or the coin itself hasn’t launched. Dfinity, Near, Polkadot + many more fall in this category.

  • VCs have outsized controlling interest compared to community members. Polychain owns 10% of Polkadot’s on-chain governance tokens. EOS has less than 10 block producers who determine consensus.

  • Coins have only been dumped from initial listing, no organic appreciation. Tezos recently got over this hurdle.

  1. Composability of permission-less financial primitives. The beautiful thing about every on-chain protocol that gets deployed, is that they works like legos – but for real money. Combinations of these tools are still being explored. For example:

  • Use your ETH to mint DAI (a stable coin) via MakerDAO, then use that DAI to pay employees while retaining the upside on your ETH

  • Use stablecoins earned from your salary and stream it in real time (Sablier) to earn interest on it at the same time (Compound/dYdX)

  • Use your idle tokens and become a liquidity provider in Uniswap or Curve Finance and earn LP fees for putting your assets.

All of the above can be deployed today, with no permission and interoperable with existing protocols. The world still doesn’t realise how powerful this can be. Crypto finance is literally 10x better than the legacy financial industry as the barrier to entries are almost nothing!

Now that I’ve finished addressing why I believe Ethereum has a sustained developer advantage, it’s worth addressing some concerns around ETH not accruing a monetary premium.

  1. When Ethereum started, the idea was to use inflation as a way to guarantee security of the network as miners had a continual incentive to mine ETH. However, this led to investor perception that Ether was a commodity that could be printed out of thin air forever and never accrue value. While those concerns were just, new developments have rendered that viewpoint less accurate as demonstrated through the graph below.

  2. That’s only base issuance reducing. One other major factor leading to a more deflationary model is the amount of ETH locked in DeFi. As Ether maintains the spot of the most widely distributed and liquid collateral, it becomes the primary asset to a whole host of other financial services. Graphs for the demand of ETH grows increasingly as time goes on as demonstrated through this graph:

  3. It won’t be too hard to imagine a world where ETH locked in DeFi surpasses over 10M ETH which would be close to 10% of circulating supply. I’m not here to speculate on the actual amount that will eventually get locked up, but simply to suggest that the trend is that more ETH is increasingly being locked up.

  4. Change in burn model. EIP1559 introduces some novel mechanisms to make paying for Ethereum transactions easier, however it also introduces the burn of ETH itself for every transaction. With ETH being burned at the base layer itself, we’ll have a truly deflationary currency on top of the already growing sink of DeFi. The key thing to realise here is that we don’t need more transactions going through the network, but rather each transaction increasingly using more gas.

Through the interoperable nature of DeFi, applications interact with more components to create new use cases for users. As we see more complex applications from layer 2 scaling solutions periodically saving data to L1 or complex derivative combinations, expect this graph to also rise.

“But what about ETH 2”

ETH 2.0 and ETH 1.0 might have a delta in their value while still being the same coin. This is a very interesting conundrum that I frankly don’t think is easy to quantify. You have a few unknown variables such as:

  • When will ETH 2.0 actually ship?

  • Will competitors outpace them?

  • Will it solve all the problems it sets out to solve?

I’d be lying to you if I knew the answers to these questions, however I don’t think you need to know those answers in the short to mid term in order for Ethereum to be a great investment. Why is that? The market is simply not sophisticated enough to care. Seriously, in a world where Ethereum Classic can be 51% attacked and not dump, you can be pretty sure the market isn’t highly sophisticated. The only thing that will matter is some visible number (price, ETH locked up etc) that gets crypto markets excited and speculative again. The factors I’ve outlined above address how absent of any speculation or sophistication we can see the price of ETH rising.

Now of course there’s arguable risk with employing such thinking, however it comes with a handsome reward as well. Bitcoin’s has 2x upside from its ATH, while Ethereum has 7x upside from its ATH. Clearly ETH’s upside is much larger and as it gains traction, the more you de-risk your assumption about ETH becoming a Store of Value.

Closing Thoughts

I’ve been a large believer in Ethereum since I got involved in the ecosystem almost over 2 years ago. Since then my confidence in the community and network has only increased as every week I see new tooling, protocols and applications being built. This piece is to share what’s driven my investment decision, however I don’t interpret it as ETH being the final end game.

I’m almost certain other chains will manage to create their own unique value proposition in the coming years and I’ll be actively looking out for them and sharing my thinking around them. However, until then, ETH is the most non-speculative fundamentals driven investment you can make with tremendous upside in the coming years.

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