The Pains Of Success: ETH Price Value Could Sink Even If Ether Becomes Successful

The Pains of Success – Ether's Price Could Still Tank Even if it's Successful

There's a virtuous circle that's been hard at work for the many buyers of Ethereum-based ERC20 tokens, which have since driven its underlying price to $1,400, its highest level during mid-January, but has since transformed to become the complete opposite.

For companies taking on an Initial Coin Offering (ICO) will have the unfortunate demonstration of this decline in value, as Ethereum tokens sink to just above $200.

So what is the diametric opposite to the virtuous circle? That would be the vicious cycle, and its one that is demonstrated by Ethereum's current downturn, which has doubled up to expose the deeper mechanics of Ether's market, and its connections to the ICO boom and bust. It's a horrible lesson to take, as it's painful for anyone that's bought Ether, especially for those joining in the market over the last 12 months.

But in the interest of encouraging the cryptocurrency community, it must embrace initial failures as a means of real-world learning and growth for the market, it also provides an incredibly informative way of understanding just how value is formed, grows and is resultantly lost in crypto assets which are directly attached to blockchain platforms.

This is a dynamic still being figured out in more detail. However, one of the strong hypothesis is emerging, which places a correlation between the underlying price of a token such as ETH, and its actual or anticipated network utility. In summary, it's the value which serves as the ‘fuel' in a blockchain ecosystem, but it may not be a very strong argument.

This presents an interesting challenge for those that are otherwise holding onto the ‘fat protocol thesis.' To provide a recap, the fat protocol thesis was presented in a convincing manner by Union Square Ventures partner, Albert Wenger, and he held that the prospect of rising prices for utility tokens allows for developers of open-access software platforms to extract value for their work even when the underlying protocol is open and free.

One of the arguments made is that cryptocurrency assets and blockchain would overhaul the internet paradigm as we know it. This internet being one in which value could only be extracted by application developers who could charge users for their services whereas developers of open-access protocols, these include the SMTP and HTTP, which were previously condemned due to the requirement that they be free of any charges.

But now we're left with the burgeoning question of whether or not tokens, and these units of value / mediums of exchange, whatever they should be called, may find that their upside fiat-currency power to monetize is something that is tethered to other factors which can cap their price, and would inevitably represent the antithesis of utility.

Bad Overcomes Good in the World of Money

So where does this issue come from, it has to do with Gresham's Law. This law, in particular, refers to the notion that ‘bad money drives out good', the underlying theory being that if you want a currency, or any token which is used for economic exchange, to function as a fluid enabling force of transactions within the investing community, you don't want it to become an overly attractive addition to the investment pool or store of value.

Hypothetically, if a currency offers a ‘good' quality such as if it's durable, fungible, scarce or can't be debased by an outside centralized user, it will obtain greater appeal more as something to hold as opposed to use.

As a result of this theory, it's fuelled the idea among major economists that there's a particular sweet spot in which the interests of the community as a whole, but not essentially in the interests of the individual, are best served by their money having just a slight tinge of ‘bad'.

With any kind of investment, there needs to be some level of expectation that it will undergo some level of inflation or depreciation, especially if a currency is to be trading. Communities require people to be willing to offload and move their currency, instead of simply hoarding it, as the former promotes, while the latter damages liquidity.

The father of monetarist economics, Milton Friedman argued that a very modest degree of inflationary monetary expansion is desirable. But it's not by any means an argument for the debasement of currencies, and a rampant abuse of fiat power. It's essentially about optimizing exchangeability, in contrast to investment prospects.

It's been argued in the past that this might be a long-term, intrinsic problem for the likes of Bitcoin, not essentially for HODLing investors, but in whether it can ever be a challenge the dominant fiat currencies as a medium for exchange. When it comes to its own scarcity mechanic and incorruptible make-up makes it a strong store of value, and this trumps transactional utility.

There are a great many Bitcoin enthusiasts that argue against this, stating that after establishing itself as a solid store of value, a currency would then become useful as a transactional unit. It's a matter of time that will solidify whether or not they are right, but at the moment, the store of value treatment that Bitcoin is regarded as is winning.

Factoring out the previous price drop since December, anyone who brought into bitcoin in the last eight years before its run up in the previous autumn were otherwise satisfied with the returns that they had by simply holding it over this duration. If we were to contrast this with real-world, non-capital transactions which are otherwise few and far between. There are Layer solutions such as Lightening that will simplify transactions. While they offer interesting perspectives, it's not a clear sign that this scarce ‘good currency' will become a widely transacted one.

So Can/Does Ether Have a Reservation Demand

So, the centre of this conversation has been regarding Bitcoin, so what does this have to do with Ethereum?

According to Vijay Boyapati illustrated through, what can only be described as a ‘provocative' Twitter storm, Ethereum's smart contract functionality depends on the people that are using and committing transactions with ETH. This is where ETH's metaphorical identity as the ‘gas' of Ethereum centered around. Boyapati stated that, because of this, ETH's gas is antithetical to the overall concept of ‘Reservation demand', which refers to a measure of how long people hold a currency, and the core driver of the price of that monetary unit.

During a brief segment of the ICO mania in 2017, Boyaparti argued that ETH suddenly attracted reservation demand, this was due to investors feeling a need to acquire and hold a store of ETH in order to participate in the ongoing flow of ERC20 token offerings.

While that hope was going good and strong yesteryear, that's a trend that has dwindled and subsequently stopped. The issuers of these tokens who initially just wanted dollars to fund their operations as opposed to Ether. They didn't want a store of ether with which to conduct smart contracts, but they have since been faced with the existential threat that if they don't dump their now rapidly declining ETH tokens. Hence the conversion of a virtuous circle into a vicious circle.

A former developer for Stellar, as well as a former member of MIT, Jeremy Rubin argues over a TechCrunch piece that these and other attributes of the Ethereum ecosystem may very well drive the price of ETH all the way down to zero.

One of the critical points that Rubin brings up is that the issuers of tokens that trade on top of Ethereum can and will be given ample incentives to build models, in which, their smart contract network is managed, not essentially by transactions in the underlying ‘Gas' of ETH, but by the various incentives within the trading in their own token.

The piece stirred up a lot of emotion, including a rebuttal of this “economic abstraction” argument from ethereum founder Vitalik Buterin.

Where Exactly Does Value Meet With Price?

In spite of it being a concise and unique opinion, it's not a fully . convincing argument that Rubin puts forward, especially when he argues that the price is destined to hit zero, even if ETH ends up inevitably succeeding in its role as a ubiquitous smart contracts platform which enables world changing dApps to become possible.

Overall, It's not unreasonable to suggest that there is some kind of natural base level of reservation demand which will always need to be taken into consideration for a unit of exchange, allowing it to make a powerful blockchain tick. As a result, it's hard not to imagine that this level of demand increases if, and when, Ethereum makes its move to a proof-of-stake consensus mechanism. Sooner or later, utility value serves to correlate with price, just not essentially with the same coalescence as others assume.

This debate, in itself, is a critical one. If there is a confirmed disconnect between the utility value and price, it will profoundly affect how participants in token markets generally treat the assets that they are trading in.

We need to take note, on the other hand, this may in fact, encourage the development of dApps that emphasize the functionality, and not just operating as fronts for quick money-grabbing efforts by crypto startup founders.

Is Ethereum, or any other blockchain platform even successful in the grand scheme of things? Well that's a question yet to be answered. But if you look into the community of Ethereum, there are a large number of developers tinkering with the blockchain in order to find out what it can do in order to improve the world. It's through this that they are creating a deeper level of value.

For those that thought to the contrary, the concept of value for Ethereum may actually be at odds with,  as opposed to running with the concept of price. At the very least, this is true when it is defined in fiat currencies.

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