Why is Ethereum the best choice?

Ethereum has won the title of the most frequently used cryptocurrency in the market, not just the hardest money.

One of the most important questions new capital entering the crypto ecosystem has to ask is where to place its money, and as the two largest cryptocurrencies with over 50% of market cap, the relative question of Bitcoin vs. Ethereum is perhaps the most important question asked by institutions and high net worth individuals looking to move beyond the asset class.

Bitcoin is a crypto asset that has consistently ranked number one, dominating the crypto asset class 13 years after the creation of the first cryptocurrency.

OG cryptocurrencies are currently worth $420 billion, or about 38% of all crypto market cap. Bitcoin has the highest brand recognition, with about three times the number of searches as Ethereum, the next largest cryptocurrency. It also has the most institutional investment. Bitcoin is the only cryptocurrency that a publicly traded company, MicroStrategy, and a country, El Salvador, are fully invested in.

Bitcoin’s rise from nothing to a $1 trillion+ asset in a little over 10 years is perhaps the most incredible technology story ever. However, despite its status today, Bitcoin is likely to lose its dominance over time. It is even possible that Bitcoin will become irrelevant in the not too distant future. It is not enough to simply be the “hardest currency”, the most decentralized, and the most secure.

These are all desirable properties of an internet-native currency, but they are unlikely to define the successful internet currency, which will ultimately be the most used currency.

Judging by this most important metric, Ethereum is the best bet as the number one and most enduring cryptocurrency of the future.

The cryptocurrency that is used by the most people will be successful

Fiat currency is one monetary instrument that cryptocurrencies are trying to disrupt, and specifically the king of fiat currencies, the U.S. dollar (USD), is the best example of how it is being adopted, rather than other possible “defining” factors that make cryptocurrencies successful.

From an asset perspective, the dollar is deeply flawed. One of the core properties of the dollar is that it will always depreciate. Over the past century, the dollar has depreciated by more than 96%. Economist Amus estimates that the annual currency depreciation may be as high as 8%.

Furthermore, the dollar is used as a tool of aggression by its creator, the U.S. government. The dollar’s ​​status as the global reserve currency enables the U.S. to finance ongoing wars and force other countries to submit to U.S. policies under the threat of sanctions or even aggression and violence.

The dollar’s ​​defining attributes as a medium of debasement and financing of hostile hegemonies are not ideal for its users—American citizens—or America’s trading partners, but that’s beside the point.

Despite accumulating a trade deficit of over $10 trillion and recently attempting to wipe a country out of the global financial system, 59% of global foreign exchange trading is done in U.S. dollars. The second and third most common currencies are the Euro at 21%, and a basket of “other” currencies at 10%, with the U.S. dollar dominating.

Why is this so? Because the US dollar is the most universal currency. The United States of America has the largest economy and military in the world. After decades of growing trade and military power, the dollar has become the most used currency in the world. As the largest consumer market and military power, the United States dictates terms of trade that far exceed its 24% share of global GDP.

This is despite the fact that the dollar is depreciating every year and the United States has a history of foreign aggression. In other words, it is not the attributes of the dollar that determine the success of the dollar, but its acceptance.

Bitcoin is unlikely to become the most used cryptocurrency

Compared to Bitcoin, Ethereum has a significant advantage in terms of potential widespread adoption. This advantage spans two general and interrelated areas - technology and culture. Ethereum's technology and culture promote innovation and encourage adoption, while Bitcoin does not.

The key feature of Bitcoin is its immutability. Among all cryptocurrencies, Bitcoin is the most resistant to change. The ultimate cap is only 21 million coins, "the hardest money in the world". Because Bitcoin is the least susceptible to change, it is touted as the ultimate store of value (SoV).

To its credit, the SoV MEME (store of value meme) kicked off cryptocurrency’s first $1 trillion+ use case. However, Bitcoin’s core SoV use case raises several unappreciated issues for the #1 cryptocurrency.

What exactly are you going to do with a store of value? Hold it, accumulate it, hoard it for consumption at some indeterminate point in the future. In other words, not very useful.

This value proposition sounds a lot like the other existing store of value, namely gold. While gold remains the world’s largest asset by market capitalization at around $11 trillion, the yellow metal’s share of global assets is shrinking.

Gold has little utility and no yield (i.e., cash flow). On the other hand, competing stores of value such as stocks, bonds, and real estate pay those who hold them through yield. In addition, stocks and real estate generally appreciate in value at a faster rate than gold and provide an increasing return on investors' cost through growing cash flows.

More capital appreciation coupled with growing cash flow? What makes sense for savers to hold gold? It’s a good question, and one that will likely become more relevant to Bitcoin as Ethereum and other yield-producing crypto assets become better understood.

While Bitcoin improves on some of the weaknesses of gold, such as transportability and divisibility, the biggest value proposition of a static technology is to do virtually nothing, and in the market competition, Bitcoin may be replaced by superior competitors, just as gold is losing to yield-generating assets. Again, the Bitcoin community has not taken this seriously enough, and the value proposition of Bitcoin as a "sit-and-talk" asset advocates converting its increasing influence into a future value store.

Bitcoin’s long-term security model depends on a strong fee market “mining rewards”, which today account for 98% of Bitcoin’s security budget (about $18 million, while daily fees are $300,000), and the mining reward halves every four years. Bitcoin’s halving rewards determine that Bitcoin’s rewards are decaying rapidly and need to be replaced by strong fee generation in the near future.

The use case for a store of value is inconsistent with the amount of activity, and therefore the fees. From one cycle to another, the fees generated by the Bitcoin network have dropped by more than 60% in Bitcoin terms:

The problem is likely to get worse over time. Uncertainty about whether Bitcoin can generate enough fees to support the network in the long term has raised doubts about the cryptocurrency’s appeal as a store of value.

In other words, if users cannot say with 100% certainty whether the Bitcoin network will still exist in 100, 50, or even potentially only 20 years, can Bitcoin really be a store of value?

Ethereum encourages adoption and innovation

In contrast, Ethereum encourages adoption in a fundamentally different way than Bitcoin. Ethereum’s most important feature is its smart contract functionality, which enables a virtuous cycle of development and user acquisition that Bitcoin does not have.

Being able to develop applications on Ethereum, with tokens issued at key times for developers and early users to benefit from their work, is perhaps the most important difference between the two chains.

For most of its history, and even to this day, the United States has provided desirable resources such as cheap land, education, and strong property rights to encourage entrepreneurs to build companies, promote U.S. economic growth, and continually improve the living standards of its citizens.

Likewise, Ethereum provides developers with the opportunity to build innovative applications that unlock tremendous value for users brave enough to explore the cryptocurrency and public blockchain frontiers.

The first breakthrough application was the initial coin offering (ICO) in 2017. The second was decentralized finance (DeFi) applications such as Uniswap and Aave in 2020, and the most recent breakthrough application was non-fungible tokens - NFTs in 2021.

All of these applications have attracted new users to Ethereum and encouraged the use of the blockchain. In fact, Ethereum has attracted twice as many users as Bitcoin, as measured by addresses with balances greater than $0 (86 million Ethereum to 43 million Bitcoin), and generated 47 times as many fees in the past 12 months ($9 billion Ethereum to $200 million Bitcoin), despite being six years younger than Bitcoin.

Ethereum has made thousands of individuals wealthy, and not just by holding Ethereum, the cumulative value of applications built on Ethereum is in the tens of billions of dollars.

As long as it is possible to build new applications and reap the rewards of risk-taking, Ethereum will continue to attract talented developers and early adopters to create the next frontier of applications, and thus attract the next billion users of Ethereum.

The technology reflects the culture of Ethereum. While Bitcoin culture is extremely conservative and resistant to change, Ethereum culture is open, self-aware, and risk-seeking.

The most prominent example of Ethereum's innovative culture is the merger of Ethereum, the merger and the transition from Proof of Work (PoW) to Proof of Stake (PoS) consensus is a highly risky move for an already very successful chain. However, the merger undoubtedly makes Ethereum stronger, providing more security with less cost and energy consumption.

Perhaps most importantly, the merger provides Ethereum token holders with the opportunity to earn yield. Depending on the staking rate and percentage of activity on Ethereum, Ethereum stakers could earn yields between 5-10%.

Since Bitcoin cannot generate raw yield, a merged Ethereum could gradually attract more capital, just as gold’s share of global assets continues to be replaced by yield-generating alternatives such as stocks, bonds and real estate.

But the merger is just one part of a longer development roadmap. Over the next decade, Ethereum will be followed by:

• The Surge (introducing sharding to enable massive scaling of the Ethereum blockchain).

• The Verge (introducing the Verkle tree and extending it further).

• The Purge (storage reduction and bad debt reduction).

• The Splurge (a series of smaller upgrades to keep Ethereum running smoothly).

A strong fee market is going to be critical for any cryptocurrency that aspires to be number one in the long term. For Ethereum, you know that a strong fee market exists today, and that developers will likely continue to be heavily incentivized to build on the chain and attract more users to grow the fee market over the next few decades.

Every new investor who invests a dollar in crypto assets will constantly ask themselves, why should they risk their money on Bitcoin now that Ethereum has surpassed Bitcoin? They will figure this out.

It’s all about adoption, and Ethereum encourages innovation and adoption

all in all:

• Adoption and ubiquity determine the success of existing currencies (such as the dollar), not properties of the currency such as "soundness".

• Compared to Bitcoin, Ethereum has built a superior system to encourage adoption. Compared with Bitcoin, which has no applications and no yield, a strong application ecosystem and yield-generating properties are likely to attract more and more users and capital.

• Without a vibrant fee market, cryptocurrencies cannot thrive long term. The Ethereum model maximizes the likelihood of generating strong fees in the future. The Bitcoin model does not.

Just as gold was surpassed by fiat currencies and yield-producing store-of-value assets, Bitcoin is likely to be surpassed by technologies with stronger value propositions such as Ethereum.

The Ethereum community's ability to foster innovation and chart a compelling path to build an increasingly powerful public blockchain over the coming decades suggests that Ethereum is more likely to become the most adopted and largest cryptocurrency in the medium to long term. In addition, Ethereum's culture of risk-taking and innovation suggests that Ethereum is at low risk of being surpassed by alternative technologies in the future.

Therefore, Ethereum is the best choice.