Can Ethereum Compete with Bitcoin as Hard Money by Eric Wall - TOKEN2049 London 2021

hello hello it's great to see that some people left the room because it was getting a bit hot in here so now perhaps we can have a more enjoyable experience um we're going to talk about something fun today and if you're feeling a bit tired i'm going to try to wake you up by let's do a raise of hands all right so um so the question is and i'm actually interested to hear what you guys think about this can ethereum compete with bitcoin as hard money if you think yes raise your hand all right i mean i suppose ethereum can of course i mean it can but perhaps a more interesting question is will ethereum compete with bitcoin as a hard money asset let's do another raise advance i'm just showing you to how you raise your hand i'm not actually raising my hand for that purpose uh and perhaps it's a bit of rude of me to um not explain what is hard money perhaps that's a fuzzy concept for people and i only have 15 20 minutes to talk so i'm just gonna give you this super brief uh version what is hard money well it's basically it's money that can't easily be printed willy-nilly um so a little bit about myself my name is eric wall i am a hedge fund manager for a scandinavian cryptocurrency hedge fund the uh company is called arcane crypto it is a publicly listed entity in scandinavia i manage the hedge fund for that entity and i'm a computer scientist in education but i manage a hedge fund so i've pivoted into finance basically so i want to talk about hard money and what it means so this is a gallon of milk and you can look at in 1930 a gallon of milk costed 30 cents and now it costs three dollars so it increased in price by 10x but since the 1930s we have gotten extremely better at producing milk there's much more milk that we can produce much more cheaply now so realistically the price of milk should be cheaper it shouldn't be more expensive and if you compare for example the price of a gallon of milk in gold then well the price of a gallon of milk has dropped by a factor of 10 instead so there's about 100x difference there instead of increasing 10 times it's actually dropped 10 times and it of course has to do with the denominator the denominator so dollars are not hard money and the premise of bitcoin and cryptocurrencies scarce assets that have fixed supply they should increase in value over time actually they should increase the gdp is not a perfect metric of how much this asset should increase over time but it's as close as we can get but if you look at the purchasing power of the dollar it's been decreasing so the gdp is growing by three percent each year on average i ran the numbers and the purchasing power of the dollar is decreasing by three percent each year so it's really the when you think about how much monetary modern fiat monetary policy is actually suppressing the value of the currency it's not three percent each year because you are the currency is supposed to gain three percent per year so it's that difference that monetary policy is actually suppressing so it's about six percent that we are losing uh with the current modern modern uh fiat monetary regime so how do we solve this problem how do we invent hard money and this is a quote from frederick hayek in 1984 he talks about well we're not going to be able to change the fiat system but what we can do is we can introduce something in a sly roundabout way that they can't stop and that is of course cryptocurrencies that is the sly roundabout way that we are creating something that they can't stop so what's the promise of bitcoin well the promise of bitcoin is that we're going to mint a bunch of them but after some time we're going to stop minting bitcoins and it's going to be 21 million units and we're never going to go beyond that so that's how we're going to create a hard money asset and the interesting thing here is that if you [Music] take a a currency like bitcoin and let's just assume that bitcoin there's no speculation in bitcoin it's this has nothing to do with the price of the value of bitcoin going up because more people are investing in it i'm just comparing here the uh natural value appreciation of a currency that grows with the rate of gdp versus a currency that has as its target to lose three percent of its purchasing power per year and in less than 25 years the different you would be four times richer if you had the fixed supply asset versus the dollar so that's in less than 25 years it's a it's a four times difference so that's that's what we want that's the kind of money we want that's that's why bitcoin is interesting as an investable asset class so how do we go about inventing hard money this is a picture from murad mahmoud i think it's a very good explanation of how bitcoiners think about how we reach the ultimate state of universal hard money global full money so it starts with a speculative asset a digital collectible and then as the value appreciates and the regulatory climate needs to take a stance around this assets we gain more regulatory clarity as we gain more regulatory clarity the volatility goes down and as the liquidity improves and we have better custodial solutions and we have better tax regulations it might turn into a reliable store value something that you can store your wealth in um and once you have this digital gold asset wouldn't it make sense i mean bitcoin is intended to be transfer transmitted easily around the internet so if you are comfortable with storing your wealth in bitcoin wouldn't you be comfortable with also paying in a bitcoin so that's how we also start to embark upon the medium of exchange use case and the medium of exchange use case like if you look at the an asset class like gold it's around 10 trillion dollars nine nine trillion dollars but the value of fiat currency globally speaking is in the magnitude of a hundred trillion dollars and uh if you now imagine and and you have to keep in mind here that fiat currency is something that people don't want to hold on their balance sheet because it's designed to lose value what if you instead had a money that increases three percent in purchasing power each year that could double in value in 25 years maybe the incentive to go put all your money into real estate stocks you could just be happy storing your wealth in money because it's good money and if you look at the premiums in real estate and stocks like how many people are just investing in these things to preserve their value to escape the debasement of fiat um if we reason in those terms the ultimate market cap of bitcoin could be closer to 300 trillion dollars um if we actually achieve this ultimate goal of hard money and if somebody's good at doing math and thinking about okay so what does that translate into a unit price for bitcoin if we have 21 million units of bitcoin well it's around 15 million dollars per bitcoin so that's very of course very good i'm not going to give people false hopes here but that's that's the goal right so what's the relationship with bitcoin and ethereum because this is what the talk is supposed to be about right if we go back to 2017 ether was actually not described as a currency it was just described as something to be treated as crypto fuel a token whose purpose is to pay for computation in the ethereum virtual machine so they never branded themselves as a currency initially so what's happened since then well one of the big things is that ether ethereum is transitioning to a new consensus mechanism called proof of stake and that appeals to a lot of people because well there are some people that believe that proof of work is extremely in energy intensive uh i recommend this i i recommend for those who don't understand why uh there may be arguments against that to speak it's a good water cooler discussion uh but we don't have time to cover that today there's both both pros and cons of proof of work uh from an environmental perspective but really the interesting thing with proof of stake apart from being an esg compliant consensus mechanism it's also that you can with less of a security budget and when i say security budget i'm talking about how many units does the protocol need to mint in order to secure the blockchain proof of stake is leaner in that way you can with less issuance like less inflation monetary inflation in the protocol attain a higher degree of economic security which means that you can settle for let's say you could secure the protocol with just 0.5 inflation each year because proof of stake and the intuition here is that with proof of work you actually have to have build these minor mining equipment and you have to burn electricity whereas in proof of stake you just lock up liquidity and the amounts of liquidity that you can lock up there becomes much larger than in the case of proof of work so right now in in in ethereum there's around 7 million ether locked up in proof of stake that translates into 27 billion dollars and you need two thirds of that to attack the system so really it's 18 billion dollars at stake in in ethereum right now if you wanted to launch an attack uh and they do that with just 0.5 issuance per year of new ether and there are other things that we uh in in there are other ways in which ethereum differentiates itself from bitcoin look at the fees that ether ethereum the ethereum blockchain generates compared to bitcoin 48 million dollars a day in transaction fees uh that's because i mean ethereum is a it does so many more things than bitcoin does it's this uh open permissionless fintech platform where you can trade assets so i think around seven percent of all the trading activity uh uh for uh for for ethereum on decentralized exchanges versus centralized exchanges about seven percent happens on chain on ethereum uh so that's the reason why these transaction fees are very high there are arbitrage opportunities there are lending protocols there are leveraged protocols there's so many things to do so many activities to engage with and also participating in nft auctions so the fees are much higher but do we really need i mean bitcoin is secure right but do but and bitcoin is secure with seven hundred thousand dollars a day in in reward for the money for for the miners um in transaction fees do we really need 48 million dollars per day to secure the ethereum protocol it's a bit much and with the eip 1559 it was an upgrade to the ethereum protocol in august we are now burning approximately 80 we're now burning approximately 80 percent of the transaction fees in ethereum and with the combination of burning transaction fees and proof of stake the supply of ether is actually decreasing over time if you run the simulations and i'm spending i've been spent so i've spent some time running the simulations on uh what the ultimate net issuance of ether could be when you take into account the transaction fees that are getting burnt and the proof-of-stake consensus mechanism that requires less of issuance to secure protocol and when i've run these numbers and looking at the current data it's not it's not at all uh weird to expect that we would have maybe even two percent uh minus two percent net issuance in the ethereum protocol and this in the system would still be secure because we are burning so much of the transaction fees so if the ethereum supply is shrinking by two percent each year and the bitcoin supply is just static what does that if you run those numbers and you look at okay so what's the value appreciate appreciation going to look like here with a shrinking supply versus just a flat supply well now you don't only have four times as much versus the dollar you you reach six times more than six times uh ether could appreciate in value six times more than the difference between if you held dollars versus ether could be six times in less than 25 years but there's more there are more things here uh so in ethereum right now you have roll ups i don't know if you know about roll up technology it's basically a scaling mechanism for ethereum transactions that are the user experience is better than if you have used these tools you're going to notice that the user experience of roll-ups is much better than lighting in my opinion so it might become a more prolific transaction mechanism and we also know that there's tons of defy activity happening happening on the ethereum chain which is making it the more active chain and the nfts it's very hard to get uh something like bitcoin or ethereum to be the native currency for an economy but in the nft space people are actually transacting with ether so and apart from that if you look at something like stable coins stable coins are proliferating on the ethereum platform form but they're not on bitcoin and that means that we might have payment rails that might emerge on the ethereum system for stable coins that may later translate into also payment rails for ethereum so the narrative here is basically that we don't ethereum people don't agree that you necessarily need to follow this trajectory that i was speaking about earlier they say that we can just focus on the medium of exchange part and just make it as usable as possible and then it's going to become a store value and they also don't really believe that bitcoin with the low transaction fees that they have when they are no longer issuing more bitcoin they are unsure whether that's going to be sufficient to create a stable secure blockchain so the last question i want to go into here is that why doesn't ethereum have a leg up on bitcoin well there are there are more things than just having a reducing net supply i think one of the primary things people think about when they think about sound money hard money is the predictability of this issuance rate in the ethereum community they are always tweaking the parameters of the issuance rate they call it minimum viable issuance to keep the system safe but it also means that you don't actually know you don't really know for sure what the issue is going is going to be in the future and that is causing a lot of concern for people like how do i know that the issuance rate is going to be minus two percent you don't really know that it's up to the governance of the ethereum protocol and they have a tendency to change these parameters which causes an attack vector if that governance process gets infiltrated by let's say government entities or something else it doesn't really adhere to the properties of sound money it's not like gold where it's limited about with how much gold you can dig out from the ground so conclusion uh can ethereum compete with bitcoin as hard money i think yes it can i mean of course it can and it probably will uh the question that remains i suppose is whether it should i personally think that the main innovation that we have been able to create with cryptocurrencies is that we have been able to create digital scarcity and we have been able to create something that resembles digital gold but how can we make the argument that we have invented the digital gold if something else comes and replaces that digital digital gold that doesn't really happen with gold gold doesn't find you know it's very unusual that another precious metal comes around and replace replaces gold if that happens in the cryptocurrency economy that the number one gets replaced by another uh cryptocurrency then people are going to start to lose faith in that we've actually created anything that resembles digital gold and even in ethereum ethereum has a lot of competitors as well there's solana there's avalanche there's uh hedera hashgraph there's tons of all these other ones and what happens then if ethereum gets replaced by something else if that's the case then how can we even describe these assets as store value how can we even say that we've invented a digital form of gold and if we haven't invented a digital form of gold something that you can preserve your wealth in who's going to invest in this how are we going to reach a 300 trillion dollar market cap if people aren't investing in it as long-term stores of value and at the end of the day i just want to finish with this so i have all these opinions about bitcoin and ethereum and why it shouldn't become a hard money why it shouldn't become a hard money asset but it's not up to me it's not my decision my opinions on this matter are irrelevant it's up to what other people consider is good and i just want to finish with some last closing remarks that i had uh written down so ultrasound money with no carbon footprint is a batshit powerful meme it's not a matter of opinion at least not your opinion your opinion doesn't matter it's other people's opinions that matter we are all slaves underneath the burden of other people's good memes so you can reject the meme you can dismiss the meme you can debunk the meme but never underestimate the meme only think how good is this meme and rather than thinking how correct does this mean when assessing your opponent's power level and that's all i had thank you very much