Why hasn’t Ethereum’s market value caught up with Bitcoin?(1)

——How to value Ethereum

I have great respect for the friends of Ethereum and respect their innovation and idealism, even though they are not perfect. Initially, I didn’t want to say anything. Still, I wrote this article because I read “Thoughts on Key Issues in Ethereum in 2023” by Danny Ryan of the Ethereum Foundation. Danny loves Ethereum, which is excellent, but just saying that Ethereum is good is ok; it should not disparage Bitcoin. Judging from his beautiful beard, he should understand beards very well, but he doesn’t understand Bitcoin as well as he understands beards. He said: “At this time, the ‘Ethereum Killer’ is swaying in the uncertainty of the bear market, and Bitcoin culture and technology are struggling in a void, but Ethereum has shown unprecedented strength, and we continue to build and improve. , think and make an impact”. Ethereum Killer refers to a competitor. Is there any project that has not wavered in the bear market? Below, we use charts and analysis to illustrate that Ethereum is also volatile in the market.

Danny cannot bully Satoshi Nakamoto and cannot speak. The future bull market must start with the rise of Bitcoin. In addition to knowing their strengths, Danny and the others should also know their shortcomings. The market price reflects all the information disclosed and implicit in the market. Let us start with the market price of Ethereum. By comparing valuations, we can objectively judge the level of “construction, improvement, and thinking” of the project. A reminder to my friends: don’t be arrogant.

The complexity of Ethereum exceeds that of Bitcoin. Currently, Bitcoin as a stored-value currency only has stored value, while Ethereum has ecological and stored value. From a valuation perspective, both aspects must be valued.

Comparing the stored value of Ethereum and Bitcoin

Valuation is a phenomenon unique to market economies. Both Bitcoin and Ethereum are purely market-oriented commodities. The market may make mistakes in the short term, but in the long time, it is a “weighing machine.” Theoretically, Ethereum has a negative inflation rate, that is, deflation. Its inflation rate is smaller than that of Bitcoin, and it should not be lower than the value of Bitcoin. Vitalik also sees it this way. He believes that the market does not understand Ethereum. Market prices reflect the judgments of countless smart money. Is the market wrong?

Figure 1

Market performance during the Ethereum merger phase

Ethereum has lower inflation than Bitcoin, but why isn’t the market showing as much strength as it should? Vitalik envisions Ethereum being more scarce than Bitcoin and, therefore, performing better than Bitcoin. Apparently, Vitalik didn’t understand the market. Figure 1 is the monthly chart of the Ethereum/Bitcoin trading pair, which is the market performance after Ethereum’s shrinkage action.

Ethereum began speculating on expectations in 2021, eventually forming a consolidation curve. What does consolidation mean? Explain that all values are reflected. Ethereum has been busy for 5 years, just making up the gap with Bitcoin and keeping pace with Bitcoin.

In recent years, the Bitcoin system has done one thing: “lying down.” Then what? Then, nothing was done, relying entirely on Bitcoin’s consensus diffusion. There is no “church,” and no “Jesus.” It depends entirely on “believers” to preach in a roving manner.

In general, shrinkage benefits Ethereum, but the market does not recognize that its stored value is better than Bitcoin. It’s not that “Bitcoin culture and technology are struggling in a void” but that Ethereum “struggled” for 5 years before catching up with Bitcoin and keeping pace with Bitcoin. In terms of this achievement, I admire Ethereum very much.

Judging from the monthly chart, the second peak in 2021 is the data on August 1. On August 5, the 1559 burning agreement came into effect. It began to fall, rise, peak in November 2021, and then fall. It is a historical peak, which means it has not exceeded the market’s expectations for Ethereum in 2017. On September 6, 2022, the Ethereum main network merged, equivalent to 0.068 Bitcoins at the time of the merger. It then rose but did not exceed the currency price created when the 1559 burning protocol was created. On April 12, 2023, the Shanghai upgrade was completed to allow the sequential withdrawal of mortgage coins. It also fell first and then rose. It has not exceeded the high point in September 2022 after the merger. This chart reflects Ethereum’s stored and ecological value market performance.

The difference between the eldest and the second oldest

Generally speaking, the eldest brother occupies 70% of the market share, and the second eldest brother and all other “little brothers” after the ranking together account for 30% of the market share. There is no such relationship between gold and Bitcoin. In the entire value storage market, gold is the dominant player.

Bitcoin and Ethereum have a relationship between the boss and the second child. In 2017, when Ethereum was the most promising year, 10 Ethereums were almost equivalent to one Bitcoin, 10:1. However, Ethereum did not exceed its previous high due to shrinkage and mergers. Now, nearly 15 Ethereums are exchanged for one Bitcoin. It’s the relationship between the boss and the second child. The combined market value of the two on May 28, 2023, was US$749.1 billion, with Ethereum accounting for 29.6% and Bitcoin accounting for 70.4%.

Ethereum has the stored value of Bitcoin and ecological value, but why does the market give such a low valuation? Does the market undervalue it? The market showed high expectations for Ethereum in 2017, but after falling, it has not returned to the price increase in five years. The high prices reached in the past reflected the market’s expectations for Ethereum. The market is now calm, which is why today’s price performance is achieved. Looking back at the history of 2017, Bitcoin encountered a fork controversy, which was also one of the reasons why the market underestimated Bitcoin at that time. However, comparing the weekly chart of Bitcoin in 2017, there is no obvious evidence that Bitcoin itself is the main cause of the price gap with Ethereum.

What are the problems with Ethereum as a store of value?

1. Without computing power, there will be no cost support

Ethereum changes to POS consensus, which saves electricity and also loses the cost threshold. The new Ethereum is issued, similar to the issuance mechanism of legal currency. The newly issued Ethereum only contains minimal electricity costs and equipment depreciation, so it can be considered as not having asset value conversion; that is, it is not an asset currency but a credit currency. The source of credit for the dollar is taxes and the strength of the United States. The credit of Ethereum comes from the Ethereum system and ecology, as well as the team’s credit. Credit money still has value as a store of value.

2. Modifications to the Ethereum plan destroyed credibility

Satoshi Nakamoto said: “The structure of Bitcoin version 0.1 remains unchanged, ” which is true. Bitcoin’s currency issuance rules have not changed, and the system will not move as long as possible. What is accumulated in this way is credit. Satoshi Nakamoto began researching cryptocurrency in 1995, published B-money in 1998, and issued Bitcoin in 2009, which took 15 years. If you have questions about this process, please refer to my “Invite Out Satoshi Nakamoto to Welcome the New World series (chainless.hk). The Vitalik team has the most profound understanding of cryptocurrency besides the Bitcoin team. They have a good knowledge of technology and the community and have improved on Satoshi Nakamoto’s shortcomings, which is an achievement. However, they do not have the skill and level that Satoshi Nakamoto has developed over the past 15 years.

Therefore, they failed to understand why Satoshi Nakamoto disappeared. Vitalik is a very responsible idealist and was eventually tempted by the market to turn to an extensive and comprehensive plan. Danny said: Considering the complexity of the task and the general speed of online production, it will take no less than 5 years or even 10 years. I am worried that advances in cryptography and emerging issues will make this list less likely to be available. The foreseeable future continues to grow and change”, and Satoshi Nakamoto was not tempted to enter the market. Danny believes that “Bitcoin culture and technology are struggling in a void,” which reflects the Vitalik team’s technology. The staff has no artistic ability and cannot understand the beauty of the Venus statue. In fact, the more complex the system, the less likely it is to be safe. It is a long, long story.

Nor do they understand the profound implications of finance and credit. Initially, Ethereum could compete with Bitcoin, but POS later lost the price bottom that supported its value storage function, thus losing its positioning as a benchmark against gold. They lack a deep understanding of finance, picking up sesame seeds, and losing the watermelon. The market’s current price for Ethereum represents the market’s respect and tolerance for an innovator.

3. Ethereum drives away miners without checks and balances, destroying credibility

A fundamental principle of machine credit is the machine’s automatic checks and balances mechanism. One cannot be allowed to force the other. You can drive away miners today; it won’t be surprising if new control methods appear tomorrow. That is because the programmer has complete control over the project. After comparing it with the Bitcoin system, we found that the Ethereum system is, at most, an automatic system with central control, requiring weak subjectivity and a decentralized structure rather than a decentralized system. Vitalik mocked Bitcoin’s BCH fork, dismissing miners as insignificant. Yes, after Ethereum 1559 burned the protocol, the miners did not resist, allowing a “dictatorship” to succeed. Therefore, the miners deserve to be looked down upon and kicked out! Judging from the market performance, Vitalik is correct, but the market valuation performance is neutral and has a consolidation pattern. Will miners resist in the future? How to resist? We do not know.

4. Ethereum has lost its status as a stored-value currency, and this status needs to be restored

The new design of Ethereum is not impossible, but the valuation method is entirely different from the value storage method. Google also has valuation, but it is not a valuation method for value storage. No matter what you do, the market will give you a valuation. There is no absolute right or wrong, only appropriateness or inappropriateness. Cryptocurrency is making history, allows for multi-party exploration, and requires idealism. When Steve Jobs failed, he was called the Madman of Silicon Valley; when he succeeded, he was named the Godfather of Silicon Valley. Idealism is excellent and benefits humanity if it succeeds; if it fails, when a magnifying glass is used to look at his shortcomings, he will burn a lot of incense if he does not go to jail. It is a pity that FTX exploded his head and panicked when the crisis came. Judging from the reported facts, he is an idealist.

The market’s valuation of Ethereum’s store-of-value properties is low because it can no longer compete with gold and Bitcoin. Houses and stocks can also store value, but they are not stored currencies. It is a pity that Ethereum has lost its status as a stored-value currency in vain. Therefore, restoring Ethereum’s status as a stored-value currency is more critical than Ethereum sharding.

Ethereum’s flaws as an ecosystem

1. Self-limiting contradiction

The value of Ethereum comes from its ecology. The increase in ecological value will increase the price of Ethereum. Unchanged transaction fees and higher currency prices will increase the Ethereum system’s cost, thereby inhibiting ecological prosperity. It will, in turn, suppress the currency price and affect the further rise of the ecology. This phenomenon is called self-limiting. Bitcoin can also be used for transactions, but there is no self-limiting effect on the price of Bitcoin because Bitcoin does not represent the value of the Bitcoin system. The following article will discuss it in detail as a problem that must be solved.

2. Risk of technical personnel’s knowledge deficiencies

Danny Ryan believes: “I firmly believe that anything formalized other than “developers write code and users run software” is a long-term existential threat to Ethereum.” “Bitcoin has tarnished the concept of solidification. Solidified Bitcoin is viewed by the Ethereum community as a useless protocol.” Shouldn’t the system be solidified? Is the role of the user just to run the software? These words alone are the biggest threat to Ethereum’s survival. Therefore, the Vitalik team cannot stand at the height of Satoshi Nakamoto, and the ignorant are fearless, although they appear to be full of confidence and ideals.

The opposition to coin-based voting also reflects Vitalik’s knowledge shortcomings and lack of understanding of human nature. For example, some people in the market are opposed to POS and believe that POS is subject to a 51% attack on currency monopoly. This view ignores the role of human nature. Satoshi Nakamoto’s meaning is very clear. When people can make money easily, why do they do evil? The 51% attack assumption is correct, but it won’t happen. Bitcoin’s 14 years of safe operation proves Satoshi Nakamoto’s judgment on human nature. Vitalik wrote a long article trying to prove that POS is more secure than POW, which is meaningless. Satoshi Nakamoto’s hypothesis of human nature is correct and cannot be overturned. The so-called safer is unnecessary. Vitalik ridiculed Bitcoin, saying that despite having a market capitalization of $500 billion, $5 billion could topple it. But the question is, I can make more money with $5 billion; why should I overturn it? Is there water in your head? It is not a technical issue.

The meaning of writing this sentence is that Vitalik and his team did not jump outside technology like Satoshi Nakamoto but relied on technical thinking to solve problems. In other words, finding loopholes in the Vitalik team is technically tricky. There is no major problem except that it is slower, so it can be inferred that there will be no major technical loopholes in sharding. The following article will discuss it in detail as a problem that must be solved.

3. This Ethereum is not that Ethereum

Can Ethereum produced by POW be the same as Ethereum produced by POS? The two have different costs and production methods but have the same name. One is an asset currency, and the other is a credit currency. The asset currency is mainly burned, and the credit currency is issued.

It’s interesting to mix two completely different things, put a label on them, and achieve the same function. It is similar to traditional technological improvements and upgrades, so the market accepts it with inertia. Gary, the chairman of the U.S. SEC, is a cryptocurrency expert. He always feels something is wrong, but he can’t explain it. Not to mention that Gary was dizzy; Vitalik himself was dizzy. Apart from technology, he knew very little. Only people who think that “developers write code” is everything can come up with such a bad idea. After further discussion, we found that this problem must be solved.

A project contains two coins, which are easy to value. How do you value two coins with one name? Is it based on credit currency valuation or asset currency valuation? The credit currency represents the Ethereum ecosystem, while the asset currency valuation is compared with Bitcoin. Ethereum is better than Bitcoin in terms of hardness, and it must at least have the same or similar market value as Bitcoin. Obviously, the market values Ethereum based on its ecology. In “Cryptocurrency Innovation Road Series 11: Looking at Cryptocurrency from 12 Head Projects”, the reasons and methods for valuing Ethereum based on equity after the merger are given.

The following article will discuss it in detail as a problem that must be solved.

4. Ethereum still has development work and is not a mature product

The Bitcoin system only has maintenance work, not development work. The Bitcoin system is a mature product and currently has only 4 maintainers. Ethereum’s sharding is incomplete, and there is uncertainty about the future. Therefore, the valuation of the ecological future is, at most, equivalent to the valuation of a Series A investment. Are there any projects with a Series A valuation of over US$5 billion? Those methods of discounting future profits to value Ethereum are pure deception. Therefore, the current valuation of US$200 billion does not include a future valuation.

5. The merged system is a new system that takes time to trust

Although Ethereum ran on the test network for a long time before the merger, and there were no problems after the merger, it still needs to be regarded as a new system. According to machine trust rules, trust takes time. Not long ago, Ethereum had a final confirmation problem. Although it was finally solved, the market still doesn’t know why. The problem may not be significant. But there are many minor problems for a new system, which means there may be new problems that have not been solved. Danny Ryan, for example, admitted that “maximum extractable value (MEV) – not only the impact on the application layer but also the impact on first-layer consensus and security” must be addressed as soon as possible. Satoshi Nakamoto worked in customer service for the Bitcoin system for two years. Of course, he had no concept of an experimental network at that time. However, the experimental network is not a formal network after all. As a new project after the merger, uncertainties will affect the valuation.

6. Changes in monetary policy

Ethereum has repeatedly changed its currency issuance rules, increasing market concerns about uncertainty. Valuations are made based on assumptions. Ethereum must clearly commit to this and under what conditions and approval procedures changes can be made. The 1559 agreement is a community decision, but there will no longer be checks and balances in the future. What should we do? There should be new community procedures. Without computing power checks and balances, Ethereum needs new checks and balances. Vitalik is opposed to voting by currency because, in this case, his team will be in the minority. They can design it with reference to the A.B. share system of listed companies.

7. The underlying risks of decentralized structures

As mentioned, the Ethereum system is an automatic system with central control, requiring weak subjectivity and a decentralized structure rather than a decentralized system. Centralized control is easy to understand. Weak subjectivity is what Vitalik himself said. The market has different views. I don’t think Vitalik is wrong. Although the design difficulties POS brings are complex, they are not insurmountable. However, there are also practical operational issues. Most of Ethereum’s client nodes are hosted on nine major operators, and any cloud failure will cause a batch of nodes to fail. Just like Binance cannot withdraw money after Amazon’s cloud failure. An essential aspect of machine trust is that the system does not go down; it must work reliably under downtime conditions. It is the Byzantine General’s Problem. Bitcoin’s solution is the longest chain principle. In this case, if the Torch Chain randomly assigns the block confirmation nodes, will it affect the final confirmation if it happens to be stuck? I still think technical problems like these are solvable.

Furthermore, according to Chen Kobe’s article, “Ethereum 2.0 has been upgraded for less than a day and is already showing signs of centralization”: “In the past 20 hours, 40% of the new blocks generated by Ethereum were composed of two Entities Responsible: Coinbase and Lido”. “Martin Köppelmann, co-founder of Ethereum application Gnosis, pointed out that there are currently 7 major participants in the Ethereum network, controlling two-thirds of the pledge rights.” The biggest problem is that these entities are subject to government regulation by the minute. The government had no interest in the system, and the methods used to solve the Byzantine general’s problem could not solve the government’s problem. To solve this problem, as personal cloud devices become more powerful, a truly distributed private cloud system will emerge instead of a public cloud system.

In short, keep exploring along the way. It is the most significant difference between Ethereum and Bitcoin.

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