In defense of Ethereum and its fatness: a discussion of ETH's value capture potential


A lot of projects want to develop a fee-less protocol to attract attention and adoption but I really don’t think such model can be sustainable at all.

Two reasons out of many that I can think of:

  1. A decentralized system means you need to maintain a server/computer whereby it records ALL transactions done worldwide 24/7 for the rest of its existence. So if scaling becomes 1 million TPS, it means your server/computer will save up 86 billion transactions worth of memory space every day. If you are not being financially compensated for all the memory space you expend for storing transactions done by strangers around the world because you are using a fee-less protocol, then your server/computer will break down followed by the network very soon.
  2. A truly fee-less protocol, or a protocol whereby I can develop a dapp that does not accept ETH but rather accepts my own token as fee, in which that means I can create a huge amount of my own token, pump its price up sky high with hype and manipulation, and sell my token to the next sucker for real money and end up discrediting the entire system.

I am not aware of any rules in place that can prevent the 2 above from happening, but I don’t think projects hyping feeless protocol can be real or practical in real life. Which is good to say that Ethereum network needs to have fee and the fee needs to be its native coin (not some 3rd party tokens). Anyone promoting feeless protocol is probably selling a lie or a dream.


I agree the “zero-fee” fad is stupid, though the economic reasons why are a little more subtle:

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One other data point regarding protocol value capture is that plain old utility token value, or in other words value through expected future use for paying transaction fees, can be quite substantial.

The total transaction fees that have been paid on the Ethereum blockchain so far can be calculated by dot-producting the raw data for these two charts here ; as of today, the result is $199.2 million, obviously with the vast majority happening within the last 12 months.


@jimmygatz I agree with most of the points that you made. I was actually thinking about writing something similar a few months ago. Especially like your visualizations of demand curves for gas, which I hadn’t thought of.

One smaller point: you can’t use discounted cash flow to value Ethereum via POS. DCF models use cash as the return, not the given asset. You hold ETH and you get paid out ETH. not in cash, so you have to create a new model which introduces certain assumptions to the value of the paid ETH (trailing 60-days price, etc.) as converted to USD.

One larger point: I think your argument on velocity can elaborate on how POS can enlist market forces to stabilize the price of ETH along the expectations for transaction fee growth

  1. Price of ETH goes down. Useful transactions on Ethereum get cheaper. Demand for ETH transactions goes up. Greater Return on ETH for staking (more transaction fees). More people stake, and more people seek to buy into ETH return. Price goes back up.
  2. Price of ETH goes up. Useful transactions on Ethereum get more expensive. Demand for ETH transactions goes down. Less Return on ETH for staking (fewer transaction fees). Fewer people stake, and more people sell out of their stakes of ETH. Price goes back down.

This feedback loop works because as ETH gets adoption, the transaction fees paid in ETH increase in inherent economic value. After all, people are choosing to buy ETH instead of keeping in fiat or some other currency for the right to acquire goods-&-services on the network. As velocity increases, these fees accumulate to those who stake, increasing the value of each stake, but also making each transaction more expensive which fewer people are willing to pay. The reverse happens as velocity decreases.

Ultimate result here is that the ETH price should on average reflect the expected earning potential on current and future transaction fees for staking minus the opportunity cost (the discount rate, essentially). Total fee $ value should roughly approximate the total economic value of current use cases on the network.

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This is essentially the “dollars have value because you pay taxes with them” argument, which I never found really convincing. Transaction fees are variable and can easily be denominated in any currency — 1 ETH does not guarantee you any fixed amount of gas, so the fact that ETH is used to pay gas shouldn’t really affect its value. Users can always convert whatever currency they use to ETH to pay gas and not care about whatever price ETH is.

As an aside, I wonder whether this whole argument is putting the cart before the horse. There’s no need for Ethereum to be “fat” in such a way that all the value is captured in the price of ethers. In fact, making Ethereum too fat probably conflicts with the idea that Ethereum has “no features”. TCP/IP, or rather ISPs don’t capture the vast majority of the value of the Internet, but that’s probably a symptom of a good thing for a foundational technology.

In general I think bottom-layer protocols attempting to capture value and interface directly with top-layer applications usually results in overcomplicated, difficult-to-adapt designs, like traditional telecom networks vertically integrating phones, phone calls, routing, etc. This is especially the case for blockchains since blockchain applications will change all the time, and trying to “stay fat” by hard-forking all the time, adding opcodes, etc to capture value actually compromises the very purpose of an immutable blockchain.

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I think, if the Ethereum network is built to be the superset of the next economic paradigm, then it is valid that Ethereum and its native coin to remain as fat as possible. The same is/was with USD and crude oil. Anyone arguing in favor of a fee-less structure with close to zero ETH value is probably the one that puts the cart before the horse. Otherwise, BTC, EOS, XRP, XLM, and many other native coins of their own blockchain should be close to zero too. You may say the same can’t be said of BTC but many others would beg to differ with their own point of argument and reasoning. I don’t think ETH should be considered a sort of 3rd-party coin, but rather a sort of “universal” coin with a very fat value that everyone has full liberty to acquire by creating something of value on top of its blockchain, in which it has no discrimination and cannot be gamed.

The USD has value not only because it is used to pay tax, but also because of all the successful businesses (and their associated value creation) on top of its USD-based national economic policy. The dollar value may be artificial now and may change in the future, but the main point is the value of a currency depends more than just being accepted to pay tax.

“Transaction fees are variable and can easily be denominated in any currency” is just the same as someone that travels to a foreign country and refuse to pay in local currency because he thinks since there is forex in place, any currency should be acceptable to the local merchant.

If a system allows more than 1 currency to be its medium of exchange, then it is effectively running a barter system, and thus inherits all the inefficiencies that come with a bartering system. Jeremy Rubin’s argument is technically in favor of a bartering system in which if I want to buy a car I must own some BMW token (example) for a purchase. And if I want to buy a phone I must own some Samsung token (example). And I cannot pay BMW with Samsung token directly (having a market to facilitate 3rd-party token exchange is not a good solution). Eventually, everyone would ask for a single medium of exchange for all of BMWs and Samsungs, in which ETH is already well in place to be one.

Note: Yes, BMW and Samsung may not necessarily create their own tokens and make it mandatorily needed for purchases, but in a system whereby anyone can create his own token for trading, BMW and Samsung are incentivized to do so. Instead of going forward, we would actually be going backward with such approach. Thus tokens should not have the function of being a medium of exchange.

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My point is that currency value is really just nominal and doesn’t necessarily correlate with how useful the currency is. ETH might really become the reserve currency of “web 3.0”, but that doesn’t really mean ETH will go to the moon since nothing requires you to hold x amounts of ethers. USD — in the Bretton Woods system let’s say to remove the factor of governments printing money to cause inflation — doesn’t go to the moon because of the extraordinary growth of the US economy. Buying index funds is way better than buying dollars as an investment in the growth of the US.

I perhaps have misunderstood what “fat” and “thin” meant. I more meant that ETH is not and shouldn’t be “fat” in the sense that buying ETH is the best way to earn a return from the growth of dapps rather than, say, investing in dapp tokens / stocks / lending money to dapp developers. It’s hard to imagine a world where all the value of dapps gets hoovered up in ETH without ETH becoming a sort of leviathan introducing new layer 1 features to preempt layer 2 innovations.


Buying index fund is definitely better than buying the inflationary dollar, but do not ignore the fact that corporations are tirelessly creating values to earn dollars.

I believe you can earn a return by 1) buying ETH, 2) investing in securities tokens (not utility tokens), and 3) creating useful dapp that earns ETH.

ETH at layer 1 is still the same ETH at layer 2. What matters is how productive are you in creating values to the society in earning your ETH.

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Yes, but there could be innovative dApps that are very ETH-frugal. For example, say somebody comes up with a new flashy STARK that is hard to efficiently implement in existing EVM. Then a dApp comes up that uses this STARK by making a metacoin-style system on top of Ethereum, where the STARKs are not computed inside the smart contract at all even though Ethereum is used like a communication bus to ensure consensus. Perhaps a sort of Truebit-style challenge mechanism is used to assure thin client security, but the high-value dApp does not use much ETH at all overall.

For a more extreme example, consider a dapp like Conifer (disclaimer: I’m the first author of that paper), which is a naming system using vaguely ENS-like semantics, with consistency enforced by blockchain rules but literally everything else enforced off-chain, and only generates one small transaction per block height. A Conifer-based naming system can scale to millions of names while not increasing its use of gas at all, and be funded using some non-ether currency.

“Thin is okay” would mean such dApps are absolutely unproblematic, while “Ethereum must be fat” would suggest hardforking Ethereum to add this new STARK as a precompiled opcode to encourage the dApp to run more directly on Ethereum and use more ETH, and, say, cripple thin clients to make Conifer-style dApps difficult to deploy.


I am truly unaware of any dapp that can run on top of Ethereum without the need for ETH in whatsoever way. If this is really possible, then the protocol is probably economically misaligned.


Obviously ETH would still be used, but it might not be used in proportion to the popularity of the dapp. Imagine a dapp using log(n) gas for n transactions processed


Thanks so much for all the responses, really fantastic discussion here!


This is effectively valuing ETH as a traditional cashflow generating asset where transaction fees are equivalent to earnings in traditional companies and a similar P/E ratio could be applied to arrive at an ETH market cap. Interestingly, this would give ETH a P/E ratio of ~90 right now which, while still high compared to most public tech companies, is not inconceivable, especially for a 4 year old high-growth startup.

While this is an interesting valuation methodology to use, I feel it doesn’t really capture the network effects (i.e. “moat” in traditional stock market speak) inherent in Ethereum as a network, both from users/developers and from security coming from scale. It also poses a problem when addressing arguments made by Pfeffer in “An Institutional Investors Take on Cryptoassets”, namely the velocity argument (ETH is working capital and agents will seek to minimise working capital) and the argument that if a) ETH’s value is derived from transaction fees paid to miners and b) mining is a perfectly competitive market such that transaction costs will trend towards the MC of mining and c) forking is a close to 0 cost activity, then d) ETH has no ability to extract economic rent and its value will simply be equivalent to the total cost of computing transactions on the network.

For me, the reason these arguments don’t make sense to me intuitively is because forking is obviously not a 0 cost activity and the cost of forking is basically equivalent to ETH’s network effects which in turn determines the economic rent ETH is able to charge. However, these dynamics are not present in traditional joint stock corporations and I’m unsure how they can be adequately modelled using the P/E ratio mentioned above. Are these network effects simply reflected in a higher P/E ratio? Has anyone done any interesting work in terms of coming up with an appropriate transaction fee multiple to apply?


Thanks for this, great response! Is the main reason a DCF couldn’t be used the fact that when people receive their quarterly block rewards, they may all rush to sell simultaneously, thus crashing the price? If so, wouldn’t this eventually be built into market expectations such that this would no longer happen?

As for your larger point, I totally agree. PoS gives ETH a yield and makes it a cashflow-generating asset, meaning there’s a natural price floor which is the price at which the yield from staking becomes greater than some X (whatever the risk-adjusted market discount rate is for ETH). At this point, not only will arbitrageurs buy in to pocket the extra yield, but as you mention there will also be the positive feedback loop of transactions being cheaper and thus increased demand for them. Similarly, there should theoretically also be a price ceiling at which point expected risk-adjusted yield will become so low that stakers will sell their stakes in addition to the positive feedback loop of transactions becoming more expensive and demand decreasing. Interesting stuff!


I will note that the transaction fee argument only works if ETH moves to PoS. If it goes to miners, then yes, I agree it depends on complicated spooky stuff about velocity.


Ultimately the value of ETH depends on the decision of the people in charge. Minimally to do with scaling, governance, adoption or development of dapps as these are all secondary.

  1. If the decision is to make ETH reserved for paying transactions fees only, then its value can be estimated with DCF.
  2. If the decision is to make ETH as well as any other 3rd-party tokens usable for paying transaction fees, then its value is as close to zero as possible. Next question to ask is what are competing blockchains like EOS, Stellar, etc doing differently that they have non-zero values while ETH does not.
  3. If the decision is to make ETH a natural medium of exchange in the Ethereum network, then valuation with DCF is not enough as its value depends on how much of the conventional economic values (commodities, securities, real estate, forex, etc) can it displaces.

We are talking about 3 possible outcomes of ETH: 1. Having decent worth no different from traditional businesses, 2. Having negligible worth, or 3. Having massive worth. Eventually, the blockchain industry will displace most conventional economy, but the value capture of ETH depends on what role do the people in charge want it to be.


I haven’t seen any conversation related to the money thesis in this thread, yet this is where the underlying value of BTC seems to resides (just ask the BTC community). The idea: a sufficiently hard (difficult to inflate) commodity asset can become a money by first becoming a Store of Value, then a Medium of Exchange, and finally a Unit of Account. This is the path taken by Silver, then later dominated by Gold. Gold itself has low utility value, but high monetary premium due to its history as a Store of Value. It is moated by strong network effects.

Monetary premium can quite literally be memed into existence.

Why does this matter?

If Ether does not become some form of money, it will not have a monetary premium. If no monetary premium, the security of the Ethereum network will be less than the security of a similar network whose underlying asset has monetary premium, thus Ethereum will not be most secure. If Ethereum is to continue hosting currencies (e.g. DAI) and high value financial assets (a decentralized world financial stack), it must be competitive as the most secure network.

Given this, it seems we should encourage Ether’s use as a money, both in protocol economics & monetary policy.


Great discussion thread. Decided to go for it, and finally opened an account – first substantive contribution here, so pls be kind if the post offends some community norm or whatever. Just getting to know everyone, and so on.

Ok, so about Eth as money. The key thing to note is that Eth already operates as money, and that nobody has a working methodology (and, ideally, methodologies) for assessing the value of this money-form. Current price-based valuation methods simply don’t work for Ethereum. Here’s why:

Today, the “monetary premium” that should attach to Eth/Ethereum is best understood by analogy to paper and the printing press (two inventions that are as integral to our modern understanding of “money” as anything else out there). So, it’s less whether Ethereum is a money form, but to what extent it allows other Eth-based currencies to emerge as money forms. This is the genius of Ethereum, and why it’s one of the most valuable technology projects in development today.

Like paper and printing blocks, it allows for an infinite number of permutations of the money-form, allowing scalable monetary units for an infinite # of socio-economic transactional spaces. Ethereum basically allows people to micro-monetize micro-transactions, on their own terms.

Of course, Ethereum’s not the only game in town, but it has a clear first mover advantage. Can BinanceChain, or BitcoinScale, or whatever, overtake Ethereum? Yeah, of course, just like competing OS systems had every chance to displace Windows. But in tech, once adoption curves start growing exponentially (which seems to be the case with Ethereum), the first-mover advantage is very difficult to overcome.

Now, that being said, it should also be kept in mind that tech crews are also notorious for squandering first mover advantage (myspace, BlackBerry, Palm, etc.). In this respect, the Ethereum community would be well-advised to stop getting high on its own [monetary] supply.

Paper + printing press ≠ money.

Money becomes valuable not only as a “medium of exchange” – that’s too techy and abstract. One of the easiest tests for money-ness isn’t whether you can sell your apples for ETH or BTC. Rather, it’s whether lots of people start agreeing to do labor in exchange for a particular crypto instrument.

Labor and goods are related. One needs labor inputs to grow the apples, harvest them, and bring them to market. But the reason it’s important to emphasize labor now is because it seems to be fading from view. Today, there is much more attention on crypto financialization, collateralization, oraclizing, etc.

“How should we BlockTrack those organic SmartApples from tree to market to make sure they’re not tampered with?”

The question above is very important.

But in order for Ethereum to showcase its full potential (to adopters, and also to regulators, competing chain communities, other stakeholders), cryptoeconomic theorists must be able to explain how Ethereum permits radical expansion of labor markets. To do this, one must be able to point to very simple use cases that permit a normal person to, say, download a crypto app and easily earn crypto. That use case can be as simple as the inevitable integration of ETH into Uber, AirBnB, and so on. But to unlock Ethereum’s monetary potential, we should posit more ambitious micro-transactional targets at global scales (instead of just offering a “more secure” alternative to the greenback, or whatnot).

Bottom line: to understand crypto valuation, and Ethereum’s monetary potential, we have to realize how easy Ethereum has made it to create entirely new labor markets (e.g., getting paid for doing micro-location mapping; incident reporting; litter pick-up; etc.).

(Micro-transactions) x (global scale) x (t) = hyperutility = value

Even though we don’t have firm empirical inputs for the full range of possible micro-transactions and their globally-scaled markets, we can and should start building and refining these models.

Now is a great time to start because platforms like EthBounties will give us a front-row view into the development of these micro-incentivized, micro-transactional, micro-monetary (as opposed to “micro-financial”) exchanges. Right now, EthBounties has 43 live bounties (and a platform total of 200+). When that number is 43K, 43M (and, yes, 43B! by EthBounties and/or competitors), then we’ll actually have world-first quant data sets on global labor markets (beyond just disembodied “financial markets”).

Ethereum will have pulled off one of the most audacious feats in global economic history–bringing actual liquidity to global commodity and labor markets (the biggest % of the world’s real economy pie).

Here, again, lies the genius of Ethereum, and the enormity of the potential that has been unleashed by the indefatigable Ethereum crew. To keep realizing this potential, and to keep striving for this potential, everyone in crypto and especially in Ethereum should understand just how fragile the aforementioned “micro-transactional spaces” are – and how easy it is to extinguish them and stomp them out.

The antidote to financialization at the expense of full-spectrum marketization is simple. Everyone just needs to keep asking one basic question:

What’s the easiest way for a no-coiner to earn crypto by doing socially useful work?

Instead of “what’s the value of all the Eth-based coin out there?” the question should be “what’s the real value of all the Eth-based tokenizable micro-markets out there?”

Three takeaways:

  1. In addition to making it easy to spend and borrow crypto, we need to make it extremely easy for people to earn crypto.

  2. CryptoEarning dApps are crypto’s tastiest fat reserves.

  3. There’s nothing like winter to trigger the mind to seek out fat.


I do not believe an object goes through a progression in stages of being a store of value, then being a medium of exchange, and then finally a unit of account in order to become money. Rather, these 3 are different aspects of the same thing that is money and I believe they come into existence together at the same time. If a seashell is treated to have a store of value, it must also have an accounting unit and already being exchanged by 2 or more persons at the same time. These aspects do not work separately.

Indeed, ETH must be engineered as a form of money, and have substantial monetary value associated with it. Otherwise, anyone can sabotage and hijack the network from within at minimal cost without even the need to invest into 51% mining power (in PoW) nor stake any ETH (in PoS). This can be done by any rogue agent creating his own 3rd-party token and then manipulate such token to an artificially elevated level to create any form of monetary significance and acceptance. Once such elevated state is reached, anything is possible from there as the network structure allows it. Binance coin is an example of a token (not coin, even though it has the word “coin” in its name) being marketed and promoted as money because of its burn policy. But its burn policy depends on business profit. And business profit depends on how sustainable is the business. If the business flounders due to competition, i.e. more exchanges cropping up with better services and attractive trading fees, then BNB may eventually deflate. In the long run, I do not see BNB to stay, i.e. another way of saying the bullish trend is short-term. So if Ethereum Foundation does not focus on promoting ETH as a form of money, then all its effort spent on scaling, governance, and security may be just a waste, as Binance coin and many others will persist and overshadow ETH in authority eventually. You can create a deflationary economy just the same with money, not necessarily possible only with fuel.

Of course, there can be many ways of hijacking the Ethereum network beyond controlling 51% mining power. And creating a 3rd-party token and manipulate it upward, monetarily, is one such ways, cheaply, as long as the network allows it, by way of making ETH potentially “subservient” to any non-native coin or token in its own network. Once a non-native coin or token become significant enough (monetarily and economically), the network’s governance and security model will revolve around it. That is why I said effort on scaling, governance, and security would be a waste if such situation is allowed. Any other way to resolve this may be far less than ideal and lack elegance than making ETH an official reserve currency.

Clarification: “Making ETH an official reserve currency” as in making ETH a primary medium of exchange within the Ethereum network, regardless of whether it is marketed as money or fuel, in a way that it is not subservient nor subordinated to any “coin” or token made from the network that is not native to it, in any way related to scaling, governance, security, and economics of the network.

“What’s the real value of all the Eth-based tokenizable micro-markets out there?”
Assuming your wording is correct, then whatever the real value is, is at micro-level, i.e. insignificant.
Otherwise, the total real value of all ETH-based tokens should at best be a subset of ETH. And if the network structure allows them to be a “superset” of ETH, then I deem the EF decision-making to be very unwise.



Sorry for slow response. Just got back from lots of much needed vacation. I love the discussion this sparked.

I don’t want to say that DCF is unusable, only that you need to insert some important and somewhat unvetted assumptions (e.g. 90-day trailing price as sell price for ETH). However, I will say that a DCF isn’t exactly a scientific way to value company, so you could probably make one for staking. The key point here is that, if you assume that people will care about fiat for the foreseeable future, you have to explicitly determine the exchange rate between ETH and fiat for the model to work. This is because ETH and fiat do not have the same risk profile.

For example, imagine you get own 100 shares of Apple, and as a dividend, you got another share. That additional share is subject to the same risks as your existing 100 shares of Apple. It can increase and decrease in value dramatically. It’s not the same as cash. As such, you need to value your returns accordingly.

A model using these guidelines should roughly capture the network effects. A “moat” is and should be a quantifiable feature of the network. A good moat will manifest itself in continued growth of first-order metrics (transaction counts, gas fees paid) and second-order metrics (developers on platform, $'s raised by Ethereum-based projects, etc.).

After all, what is a company’s moat? As my equity analyst friends would say, it’s the ability to consistently provide returns on capital above average for the industry. My company (Morningstar) actually time-binds it to years. Narrow moat is 10 years while wide moat is 20 years. I think this concept is applicable with a discounted transaction fee model in crypto. If Ethereum can grow transaction fees and volumes at a rate that’s faster than comparable networks, it demonstrates its “moat.”