Is Ethereum money?

Or what is money actually and what's the simplest yet useful definition?

Non-Oracle Smart Contracts Are Useless, Anyway

Ethereum’s value proposition was something general (enabling a high rate of project-creation).

However, Ethereum’s use cases are few (if not nonexistent), making the “generality” objective inappropriate.

The vast majority of successful Ethereum use cases are to go long on Ethereum itself.

Is this valid objection?

It’s very hard to build DeFi applications on Bitcoin directly.

In fact entire Ethereum “investment idea“ is based on the fact that general platform would provide quick way to market adoption via actually useful software while bitcoin doesn’t allow you to anything but speculate.

Entire bitcoin “investment idea“ is based on the fact that due to coordination problems ( incentive alignment, Schelling point, game theory ) is hard for people to create multiple valuable virtual currencies. In order for some currency to become valuable it has to be an obvious “exception“

Theoretically, there is an infinite number of possible equilibria of which cryptocurrencies maintain a nonzero value: just Bitcoin maintains value, just Bitcoin Cash maintains value, just Bitcoin and Ethereum, just IOTA, just those in the current top 1000 on coinmarketcap where the sha256 of the listed name is a prime number, etc. But there are also equilibria where the set of cryptocurrencies with nonzero value is not fixed, and new cryptocurrencies can join. However, if just about any cryptocurrency can join the club, then everyone will be able to issue new cryptocurrencies, driving the price of all of them to zero. Is there some equilbrium in the middle, one that comes closer to explaining our present situation?

What about creating financial infrastructure on top of bitcoin?

Examples of this approach:

Here’s an idea for a contract:

1. User A freezes funds required to fulfill the put/call option on a multisig address managed by the contract
2. User B buys the option, paying into the same address
3. Once the contract expires, the oracles pay out to B (if necessary) and send the rest of the funds back to A.

That way you can replicate most useful financial products as long as you have secure oracle system providing a price feed.

Back to the main question

  1. Holders are more important than merchants ( adopting the currency )

    Hoarders are more important than merchants. If a restaurant downtown starts accepting bitcoins, this does not necessarily create an incentive for anybody to buy more bitcoins. Why would anyone bother if they can still just use a credit card? If you can convince a merchant to accept bitcoins and stop accepting dollars, then I’ll be impressed.

    Unless a merchant is offering something that cannot be bought for dollars, or at least offering a discount, he is only benefiting Bitcoin to the extent that he encourages more hoarding. If he immediately converts the bitcoins he receives as payment into dollars, and if his customers only buy bitcoins so as to spend them at his shop shortly thereafter, then neither has much direct effect on Bitcoin’s demand. The real hero is the hoarder behind the scenes who buys from the merchant and enables him to convert his payments into dollars.

  2. Only speculators have a meaningful impact on token price.

    Since only speculators have a meaningful impact on price according to Premise 9, there are only two ways by which its price can increase over time: either (a), an increasing number of speculators buy and hold the token (thereby removing supply); or (b), the token is a better store of value (retention of purchasing power) than existing alternatives. In the case of (b), both speculators and protocol service consumers and providers gain utility just from holding the token (i.e. thereby removing supply; speculators get utility from storing value in the token besides profiting off of higher prices in future).

What makes something money?

Why is this question important?

Because valuation of something that’s Store of Value (SoV) may be significantly higher than valuation of other thing based on discounted cash flows.

  1. Long time moats that allow you to charge rents are valuable

In Ethereum today ETH is a payment token. And while ETH is scarce there would be likely no long term reason to hold ETH because Ethereum tx (which are valuable) are IMHO NOT priced in ETH. Other then using default software a miner has no good reason to price transactions in ETH or even accept ETH. The miner could just accept any token they like e.g. via a payment channel or accept Paypal. The miner has no costs in ETH to produce the block - so why would they accept ETH.

HOWEVER - this would change completely with POS. Now owning/staking ETH WOULD be a requirement to create blocks. I still think that payments to miner can happen in ANY currency but you can now use the DCF model and say that all transaction revenue will go to miner/staker. POS only is secure if ETH is valuable thus the network should reward staking and thus the tx costs for a user needs to be higher than the computation costs for the average staker.

This difference between costs could be seen as rent. The idea that forking is free is absurd as soon as you would have to coordinate thousands of independent actors. This is why I define independent actors doing connected transactions on Ethereum as the measure of success. (increases forking costs 12)

So if any I would be concerned that Ethereum has TOO MUCH potential to turn into something rent extracting and I am more wondering about mechanisms that ensure that transaction fees will stay reasonably low.

P/E ratio ~ Mcap / 365 days of “fee cashflow“

In the end

How to make Ethereum money / valuable SoV?

Get your salary denominated and paid in ethereum.

It would require your employer to either buy enough ETH to pay for a year of work or buy ETH futures.

The currency of human labour decided which thing may become money. By ethically rejecting “not ethical fiat money“ influential IT guild may swing the game.