Exploring the Financial Value and Cultural Value of Ethereum Under Its "Deflationary Model"
Since its launch in 2015, Ethereum has continued to gain attention and has firmly established itself as the second-largest cryptocurrency, with a market cap of $556.5 billion, surpassing Alibaba/Visa/JP Morgan, making it the 15th largest entity in the world by assets.
Protected by the world's most powerful computing network after Bitcoin, users have immense confidence in the security of the Ethereum ecosystem. Following the formal implementation of the EIP-1559 protocol, ETH has lower inflation than Bitcoin. With the support of the DeFi ecosystem, Ethereum possesses greater financial attributes than Bitcoin. Backed by protocols such as ERC-721, Ethereum has captured unprecedented cultural value. In other words, Ethereum today combines high security, low inflation, strong financial value, and cultural value all in one.
1**, Ethereum's Financial Value**
Ethereum's high gas fees have been lucrative for miners but have left many network users deeply dissatisfied. However, with the London upgrade introducing the burn mechanism to Ethereum in early August, while it did not reduce network gas fees, its fee burn mechanism has already ushered Ethereum into a "deflationary" era ahead of schedule.
The Ethereum network has become one where the more it is used, the more deflationary it becomes, and the more deflationary it is, the more valuable it becomes. This stands in stark contrast to the Bitcoin network, where miners' transaction fee revenue has been steadily increasing. Currently, the Bitcoin network has an annual inflation rate of 1.7% and will remain in an inflationary state until 2140.
Bitcoin network miner returns, data source: glassnode
In contrast, according to data from the Ultrasound Money burn tracker, since the London upgrade, Ethereum has burned 797,900 ETH, at a burn rate of 5.97 ETH/minute, with an average burn of 1.3122 ETH per block. Approximately 15,000 ETH (worth $65 million at current prices) are burned every day.
Additionally, according to estimates, as long as Ethereum's average gas fee stays above 150 Gwei, the network can be maintained in a deflationary state. Since mid-September, Ethereum gas fees have remained above 150 Gwei for half the time. During the last week of October, Ethereum gas fees exceeded 150 Gwei for seven consecutive days, placing the entire network in a deflationary state. Taking into account the rate at which new ETH is being created, Watchthe Burn reports that as of early November, the weekly net issuance was -8,034 ETH (approximately $34 million).
This current situation overturns the previous notion that "for Ethereum to enter a deflationary state, it would have to wait until after the merger between ETH 1.0 and ETH 2.0" — that is, the merger of the current Ethereum chain with the Beacon Chain, which is currently expected to take place in the first half of 2022. Therefore, it appears that Ethereum's deflation has arrived at least six months ahead of schedule.
Although high gas fees have led to traders bearing excessive transaction costs — for example, the average cost of transferring an ERC-20 token is currently $46. If traders engage in more complex operations, such as providing liquidity to DeFi protocols or swapping tokens on Uniswap, current costs could be as high as $140 — the rapid development of L2 solutions is expected to reduce transaction fees without disrupting the Ethereum ecosystem.
L2 network staking, data source: L2BEAT
According to L2BEAT data, as of early November, the total value of assets locked across networks such as Arbitrum and Optimism reached a record $4.87 billion, representing a nearly 600% increase over the past three months.
Of course, deflation is only one aspect of Ethereum's financial value. The prosperous development of DeFi is the true backbone of Ethereum's financial value. This is because Ethereum exists both as an interest-bearing asset and because the decentralized finance network empowers the Ethereum network.
According to the latest data from DeFiPulse, more than 6.27 million ETH is currently staked as a crypto asset in DeFi, accounting for over 6% of ETH's circulating supply. Nearly 3,000 lending, DEX, payment, and derivatives projects are operating on the Ethereum network. Together, they form the foundation of Ethereum's DeFi empire. Among them, Uniswap, focused on spot trading; dYdX, focused on derivatives trading; MakerDAO, focused on stablecoin issuance; Synthetix, focused on asset synthesis; and Curve, focused on lending, each hold the top position in their respective DeFi sub-sectors.
In terms of network activity, according to bitinfocharts data, from early 2020 to the present, despite Ethereum network fees increasing over 100-fold in fiat terms during this period, the number of active network users has also risen from 200,000 at that time to 1 million currently. During the same period, the number of active addresses on the Bitcoin network only doubled.
Daily active addresses, as an important indicator of network growth, can be used to measure the total value of a network. Metcalfe's Law, applied when valuing Facebook (now Meta), states that the value of a network is proportional to the square of its number of users. If we apply Metcalfe's Law to measure the value of Ethereum and Bitcoin networks, the former's growth rate is more than six times greater than the latter's over the same period.
Finally, assuming that in 2022 the Ethereum protocol successfully upgrades to 2.0, with the support of the Layer 2 ecosystem, Ethereum network activity is expected to increase by an order of magnitude, and network value will rise exponentially.
Overall, the deflation of the Ethereum network, DeFi growth, and rising network activity are all key supporting factors for the value of the Ethereum network. The explosion of NFTs in 2021 serves as an important pillar of Ethereum's "cultural value."
2**, Ethereum's Cultural Value**
Since early 2021, NFTs have emerged as a remarkable phenomenon in the crypto world, demonstrating that the crypto world is not limited to finance but can also carry "cultural value."
You may think that culture is esoteric, but in reality, culture is a specific identity and value consensus formed by a group of people based on their habits and customs. For example, if you believe that an investor who collects CryptoPunks is wealthy, or feel that owning an Art Blocks piece of your own is cool, or believe that holding an Axie Infinity creature has appreciation potential — rather than thinking NFTs are nothing more than a Ponzi scheme like MMM — then you have a value consensus for NFT-based cultural products. As long as you identify with it, you may be willing to spend real money on these artworks.
Currently, the total market cap of NFTs in the Ethereum ecosystem is close to $6 billion, and the total trading volume of the top ten projects exceeds $7.8 billion. The related NFT sub-sectors include: 1) Crypto art; 2) PFP NFTs; 3) Generative Art; 4) Crypto gaming (GameFi); 5) Community NFTs (represented by LOOT), among others.
On the NFT development timeline, crypto art was the first to gain popularity. In March 2021, during Christie's single-lot online-only auction, the digital artwork "Everydays: The First 5000 Days" by American artist Mike Winkelman, known by the pseudonym "Beeple," was sold for $69,346,250 (approximately RMB 451 million). This sale price ranked as the third-highest for a living artist's artwork and broke records for digital art auction prices and the highest price for an online-only lot. This event became a landmark moment in NFT history.
Following that, PFP NFTs entered the mainstream. The 10,000-pixel avatar collection CryptoPunks, launched by Larva Labs in June 2017, suddenly went viral in the crypto community in July 2021, sparking a months-long crypto avatar frenzy. The design style of CryptoPunks is cyberpunk-inspired and, to some extent, represents the rebellious spirit of the crypto world's revolution. Investors who hold CryptoPunks are seen as pioneers of crypto art and identifiers with punk culture.
Afterward, the NFT market saw the emergence of generative crypto art represented by Art Blocks. Generative crypto art refers to the process where artists write programs, add randomness to their works by triggering changes through seeds, and then the artwork is automatically generated by computer algorithms. In other words, generative art is a process in which the human mind and computer algorithms jointly produce randomized artworks.
Top 10 NFT projects by trading volume, data source: cryptoslam.io
According to the latest data from cryptoslam.io, Art Blocks is the largest generative art trading platform, with historical trading volume exceeding $1 billion, ranking third after Axie Infinity and CryptoPunks. This is enough to demonstrate the popularity of generative art within the NFT space.
While crypto PFPs, crypto art, and generative art were developing rapidly, crypto gaming (GameFi) was also gaining momentum. The most representative of these is Axie Infinity, whose creation provided a practical and viable solution for the "Play to Earn" sector. Although Axie Infinity runs on the low-cost customized Layer 2 network Ronin, its settlement layer remains Ethereum, making Axie Infinity a project fully belonging to the Ethereum ecosystem. As of now, Axie Infinity has dominated the NFT market with total trading volume approaching $3 billion, demonstrating the immense potential of the Play to Earn sector.
Finally, since the NFT boom, large institutions and publicly listed companies have also actively joined the NFT space, contributing to the cultural value of the Ethereum ecosystem. This includes Visa purchasing a CryptoPunk, Louis Vuitton launching the NFT treasure-hunt game Louis the Game, and Twitter enabling individual users to set NFT profile pictures, among others.
Previously, Bankless co-founder David Hoffman proposed that if Ethereum can become a value settlement layer, it can also become a cultural settlement layer. Truly a combination of both literary and martial excellence. Looking at it now, Ethereum is moving in this direction.
Disclaimer
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