The Value of Ethereum from the Perspective of the Flywheel Effect: It Will Become a Trillion-Dollar Metaverse Economy in the Future
New public chains cannot rely solely on TPS to defeat Ethereum, as ETH has already established a moat of network effects. Even with drawbacks such as high GAS fees and congestion, Ethereum will still maintain its king status.Author: BMAN, Founder of Metropolis Capital
Original Title: "The Flywheel of Ethereum | BMAN"
Preface
Today, Ethereum is priced at $4600, with a market capitalization exceeding $540 billion, ranking 15th among global assets, close to Tencent. Last month, Ethereum also experienced a community debate, and 3ArrowCapital has publicly declared its abandonment of Ethereum.
Many people are wondering, what is the essence of Ethereum? Is Ethereum going to be abandoned by history? What does the 2.0 upgrade mean for Ethereum?
Below is my speech from July 15 this year at Huobi University, approaching the understanding of what Ethereum is from the perspective of assets. At that time, the price of Ethereum was $1950, and looking back today, many views have been validated and are presented here for your reference.
To understand what Ethereum is, we can first understand what an asset is.
1. What is an Asset?
Robert Greer published a paper in 1997 titled "What is an Asset Class Anyway?", stating that any asset belongs to an asset class if it meets certain characteristics.
- First, an asset has the characteristic of cash flow; for example, if it can generate cash flow, it can be called an asset. For instance, company stocks and some rental properties can generate cash, so they can be referred to as assets.
- Second, an asset has a consumable property; for example, if it can be consumed and converted into something else of value, it can also be called an asset. For example, many raw materials like wood, ore, and energy can also be considered assets.
- Third, an asset has the property of value storage; for example, gold and precious metals.
Robert Greer believes that these three characteristics can encompass all asset classes:
- Stocks and bonds have cash flow characteristics;
- Energy raw materials are consumable assets; consuming material A can be transformed into material B, and consuming flour can turn into bread;
- Precious metals and gold have value storage properties;
- Real estate has two properties: it is both a cash flow asset, generating rental income by renting out houses, and a value storage asset;
- Moutai also has two properties; it is both a value storage asset and a consumable asset, as Moutai is equivalent to GAS Fee at Chinese dining tables.
So what kind of asset does Bitcoin belong to? Before 2018, Bitcoin clearly belonged to the category of value storage assets.
What changed after 2018? DeFi emerged.
Before DeFi, Bitcoin was purely digital gold; but with DeFi, Bitcoin can become an asset that generates cash flow. It can be wrapped into WBTC and stored in the DeFi network, becoming an interest-generating asset. Because of DeFi, Bitcoin has transformed from a purely value storage asset into one that generates cash flow.
So what kind of asset does Ethereum belong to? Before 2018, Ethereum was a consumable asset, serving only as a consumable Gas fee, with very limited functionality.
After 2018, Ethereum made significant breakthroughs, expanding many dimensions of assets, transforming from a purely consumable asset into an asset that meets all three characteristics.
- First, Ethereum gained the property of cash flow assets. After the emergence of DeFi, Ethereum now has approximately 20 million staked across the network, becoming an asset that can generate cash flow, truly capable of generating interest and cash flow.
- With the widespread application of DeFi, Ethereum has also captured a broader consensus, possessing certain value storage characteristics. In the Ethereum ecosystem, ETH has become a base asset, allowing for collateralization into USDT and USDC on Aave, Maker, and even on other chains.
*Image: * Ether: The Triple Point Asset * - David Hoffman*
Thus, after 2018, Ethereum made a significant breakthrough, transforming from a single consumable asset into an asset that satisfies all three characteristics.
Next, Ethereum has two key upgrades that will further propel its three asset properties into a self-reinforcing flywheel.
- The first is EIP-1559, which destroys the original base transaction fees, enhancing Ethereum's usability and transforming Ethereum's inflationary assets into deflationary assets.
- The second is Ethereum 2.0, which transitions from PoW to PoS, enhancing the security and scalability of the Ethereum ecosystem.
2. The Flywheel of Ethereum
The first flywheel of Ethereum:
The first level of Ethereum's flywheel is DeFi. From the earliest consumable asset, purely gas fees, it has transformed into a cash flow asset within DeFi, generating interest through staking Ethereum.
The second flywheel of Ethereum:
The second level flywheel is EIP-1559. After the EIP-1559 upgrade, approximately 4 million Ethereum will be destroyed each year, further enhancing Ethereum's consumable asset properties. The annual inflation rate of Ethereum has sharply dropped from 5% to 1%.
The third flywheel of Ethereum:
What truly brings together the three levels of Ethereum's flywheel is the upcoming Ethereum 2.0 upgrade next year. Ethereum is about to transition from PoW to PoS, which will not only be about Gas Fees and interest-generating assets but also the stock of the entire Ethereum network, further extending Ethereum's value storage characteristics.
Therefore, the upgrades of EIP-1559 and ETH 2.0 are crucial for Ethereum.
DeFi makes ETH more cash flow-oriented → ETH 2.0 makes ETH more value-storing → EIP-1559 makes ETH more consumable → DeFi makes ETH more cash flow-oriented
From this point on, Ethereum enters a positive feedback loop.
- Next year's ETH 2.0 upgrade will complete the final link of Ethereum's flywheel, allowing Ethereum to enter a self-reinforcing loop;
- These three flywheels operate automatically and enhance each other, like a snowball, causing the ETH economy to spontaneously grow larger;
- Once the ETH enhancement loop starts operating, it is irreversible; unless external forces break the flywheel or one of its links is eliminated, ETH will continue to enhance;
- The power of the flywheel effect lies in the fact that one cannot simply replicate one link to defeat it. This is also why new public chains cannot defeat Ethereum solely by relying on TPS, as ETH has already formed a moat of chain dynamics. Even with issues like high GAS fees and congestion, Ethereum will still maintain its king status;
- Ethereum's current TVL is $178 billion, market cap is $540 billion, DAU is 400,000, and MAU has reached 6 million, already reaching the scale of a small national economy. Today, Ethereum is an open economy without entry barriers, and in the future, Ethereum will become the largest metaverse economy, reaching a trillion-dollar scale.
