4 ms·

> ETH executes all VISA payments > ETH Value: $0.088 (There are 100M ETH) Correct me if I made a mistake, but it seems like this is not a stable market. What

by rytill 8y ago

> ETH executes all VISA payments > ETH Value: $0.088 (There are 100M ETH) Correct me if I made a mistake, but it seems like this is not a stable market. What's to stop me from buying a large chunk of the supply and sitting on it? That would increase the value of my ETH because VISA throughput would have to be maintained. Many others would come to this same conclusion, driving the price up massively.

bby 8y ago
It would increase the value up until the point where people leave the ETH network entirely and move onto an ETH fork...
chrisco255 8y ago
Right, this would place the value of the ETH network at $8.8 million if it were processing all VISA payments. Something is wrong with the author's math or conclusions on that point. The value of processing as many transactions as VISA should be self evidently worth billions. Another factor in crypto is that especially with proof-of-stake coins (like ETH is heading toward), part of the security of the protocol is in the expense of doing a hostile takeover of the network. A paltry $8.8 million valuation would presume that someone with as little as that could buy up all the supply (or 51%) of ETH and take effective control of the network. You're right that attempting to do so would drive up the price, very rapidly. Another sweeping point the author makes without backing up is the idea of "infinite competition" in the crypto space. Yes, anyone can fork BTC or ETH and make their own coin, but miners, stakers, exchanges, users, app developers, etc, won't necessarily flock to it. "Trust" is not built into the protocol. I have no faith that someone who clicks the "Fork" button on Github necessarily has any idea how to run, maintain, secure, and grow a blockchain into doing something unique or novel. And I wouldn't stake my business or assets on it, per se, unless I was convinced that a team of people and a community was able to spring up around that blockchain. Network effects matter, especially in crypto-assets. I trust the BTC network, because it's gone 9 years without a major exploit. I trust it because of the community, network, and ecosystem behind it. To act as if a fly-by-night crypto can swoop in and steal that crown so easily is foolish. Anyone can make a Linux fork, doesn't mean you're going to dominate the desktop market.
- DennisP 8y ago
  The author is assuming that (a) someone who's making all their ordinary purchases with ETH instead of VISA isn't holding any ETH, but making a separate buy on an exchange for each individual purchase, and (b) anyone who receives ETH immediately sells it for some other currency, despite living in a world where it's possible to use ETH for all purchases. These seem like questionable assumptions at best. There's an underlying assumption that a cryptocurrency must be either a store of value or a medium of exchange, but not both, which is a bit odd since every fiat currency is both, and gold was both for thousands of years.
  - msall 8y ago
    That brings up a good point I should make explicit, which is that I think those two sources of value are separate but not necessarily mutually exclusive. I think you can consider them individually and then add them up. John Pfeffer makes this argument too, that the two sources of value likely don't affect each other too much, allowing you to consider them separately.
    - DennisP 8y ago
      That makes some sense, but I think there's also significant friction in the conversion. If I'm a store owner getting paid in ETH (or whatever), and I can buy a lot of my supplies with ETH, then it makes sense to just keep the ETH and buy my supplies with it, instead of paying unnecessary exchange fees. And if people do that, you don't have super-high velocity anymore. You're just an everyday currency like dollars (which are also mostly digital these days). In fact, if people were to contact an exchange for every transaction, it's hard to see how there'd be any advantage over just using legacy financial systems. I used to put a lot of stock in velocity of money considerations but now I'm thinking it doesn't have that much predictive value. All it's really saying is that the GDP is defined as the number of transactions, times the nominal amount of those transactions, times the real-world value of the currency unit. The currency price could be anything and the equation still holds true. If you assume a maximum achievable velocity, you can work out the minimum currency price for a given GDP, but the price could also be arbitrarily higher than that.
msall 8y ago
That's a good point. The main reason for the low price is that velocity is so high — all of the coins are changing hands every 10 seconds in this scenario. So there is still a huge amount of demand for them. If you tried to buy a lot to drive up the price, I think all of that demand would be recalibrating the price so quickly that practically speaking it would be hard to sell them back fast enough at a price any higher than you paid. So I think it would be hard to manipulate the price in a profitable way. But it's a good point — maybe there's some minimum level of holding that happens (could be high, 99%? 99.9%) that is solely about making it expensive for others to increase the price arbitrarily (even if they can't do so profitably), in order to maintain price stability. But that would be about paying for stability, not for the underlying utility. I need to think about that more.
- rytill 8y ago
  I see what you mean about not being able to sell back into a different currency profitably. I need to think about this a little more myself. On a slightly different note, another relatively minor but important thing to take into account when valuing from fundamentals is the percentage of permanently burned supply. ETH may have a supply of 100M in theory but in practice, maybe it's 70-90M due to private key loss or smart-contract lock.

by rytill 8y ago

bby 8y ago

It would increase the value up until the point where people leave the ETH network entirely and move onto an ETH fork...

chrisco255 8y ago

Right, this would place the value of the ETH network at $8.8 million if it were processing all VISA payments. Something is wrong with the author's math or conclusions on that point. The value of processing as many transactions as VISA should be self evidently worth billions. Another factor in crypto is that especially with proof-of-stake coins (like ETH is heading toward), part of the security of the protocol is in the expense of doing a hostile takeover of the network. A paltry $8.8 million valuation would presume that someone with as little as that could buy up all the supply (or 51%) of ETH and take effective control of the network. You're right that attempting to do so would drive up the price, very rapidly. Another sweeping point the author makes without backing up is the idea of "infinite competition" in the crypto space. Yes, anyone can fork BTC or ETH and make their own coin, but miners, stakers, exchanges, users, app developers, etc, won't necessarily flock to it. "Trust" is not built into the protocol. I have no faith that someone who clicks the "Fork" button on Github necessarily has any idea how to run, maintain, secure, and grow a blockchain into doing something unique or novel. And I wouldn't stake my business or assets on it, per se, unless I was convinced that a team of people and a community was able to spring up around that blockchain. Network effects matter, especially in crypto-assets. I trust the BTC network, because it's gone 9 years without a major exploit. I trust it because of the community, network, and ecosystem behind it. To act as if a fly-by-night crypto can swoop in and steal that crown so easily is foolish. Anyone can make a Linux fork, doesn't mean you're going to dominate the desktop market.

DennisP 8y ago
The author is assuming that (a) someone who's making all their ordinary purchases with ETH instead of VISA isn't holding any ETH, but making a separate buy on an exchange for each individual purchase, and (b) anyone who receives ETH immediately sells it for some other currency, despite living in a world where it's possible to use ETH for all purchases. These seem like questionable assumptions at best. There's an underlying assumption that a cryptocurrency must be either a store of value or a medium of exchange, but not both, which is a bit odd since every fiat currency is both, and gold was both for thousands of years.
- msall 8y ago
  That brings up a good point I should make explicit, which is that I think those two sources of value are separate but not necessarily mutually exclusive. I think you can consider them individually and then add them up. John Pfeffer makes this argument too, that the two sources of value likely don't affect each other too much, allowing you to consider them separately.
  - DennisP 8y ago
    That makes some sense, but I think there's also significant friction in the conversion. If I'm a store owner getting paid in ETH (or whatever), and I can buy a lot of my supplies with ETH, then it makes sense to just keep the ETH and buy my supplies with it, instead of paying unnecessary exchange fees. And if people do that, you don't have super-high velocity anymore. You're just an everyday currency like dollars (which are also mostly digital these days). In fact, if people were to contact an exchange for every transaction, it's hard to see how there'd be any advantage over just using legacy financial systems. I used to put a lot of stock in velocity of money considerations but now I'm thinking it doesn't have that much predictive value. All it's really saying is that the GDP is defined as the number of transactions, times the nominal amount of those transactions, times the real-world value of the currency unit. The currency price could be anything and the equation still holds true. If you assume a maximum achievable velocity, you can work out the minimum currency price for a given GDP, but the price could also be arbitrarily higher than that.

msall 8y ago

That's a good point. The main reason for the low price is that velocity is so high — all of the coins are changing hands every 10 seconds in this scenario. So there is still a huge amount of demand for them. If you tried to buy a lot to drive up the price, I think all of that demand would be recalibrating the price so quickly that practically speaking it would be hard to sell them back fast enough at a price any higher than you paid. So I think it would be hard to manipulate the price in a profitable way. But it's a good point — maybe there's some minimum level of holding that happens (could be high, 99%? 99.9%) that is solely about making it expensive for others to increase the price arbitrarily (even if they can't do so profitably), in order to maintain price stability. But that would be about paying for stability, not for the underlying utility. I need to think about that more.

rytill 8y ago
I see what you mean about not being able to sell back into a different currency profitably. I need to think about this a little more myself. On a slightly different note, another relatively minor but important thing to take into account when valuing from fundamentals is the percentage of permanently burned supply. ETH may have a supply of 100M in theory but in practice, maybe it's 70-90M due to private key loss or smart-contract lock.