The Case for $150,000 Ether
The reason that cryptocurrencies and Web3 are so difficult to understand is because they’re a revolution in multiple areas — they’re disrupting computer science, economics, politics and social organization.
As Dhruv Bansal pointed out almost five years ago in “Why It’s Hard to “Get” Bitcoin: The Blockchain Spectrum”, if you want to understand crypto, you need to study a variety of topics such as cryptography, distributed computing, economics, finance, politics, money & banking, game theory, etc…
If you don’t have a base understanding of many of these concepts, it’s going to be tough to grasp the full potential of the technology.
But if you do, it starts to become very clear that coins like Ether have the potential to 100x.
I’m by no means an expert in all (or any) of the above fields, but I am fortunate to have a background in economics and finance. Realizing my limitations, I took two coding bootcamps this year to learn a bit about computer science as well. This opened my eyes and I started to see the space in a completely different way. In short, I realized that:
Ether is going to be the native currency of the Internet.
In other words, there’s a strong chance that it will be used as the unit of account and medium of exchange for all online transactions within the next 10 to 30 years.
Why do I say that? Well, to understand why Ethereum is so revolutionary, you need to understand a bit about how the Internet works, what its flaws are and why Web3 is such a better alternative:
- The Internet is one of the greatest inventions of humanity, but it currently needs centralized third parties such as governments and banks to function (i.e. the money used on the internet is created by the government, issued by banks and supervised by regulatory bodies)
- The invention of “smart contract platforms” such as Ethereum allow us to create a “self-governing Internet” that can create and store its own money and enforce its own laws (without the need for these centralized third parties)
- This new Internet — known as “Web3” — will use cryptocurrencies as its native form of money
- Ether is currently in the best position to be the reserve currency of the new Internet
If this prediction is correct, then Ether could reach a total valuation of $20.7 trillion, or $169,137.57 per coin.
Let’s dive into each of these points below to explain how I reached this conclusion:
The Internet is a Puppet State
While most people imagine the internet as a purely democratic system that allows for the free flow of knowledge, nothing could be further from the truth.
In reality, the Internet is a vassal to corporations, banks and governments.
It is almost entirely controlled by third parties — we make transactions in national currencies such as the US Dollar, digital goods are created and controlled by companies such as Google, Amazon, Facebook and Apple and the space is subject to a patchwork of local laws and regulations (such as the European Union’s GDPR).
To understand why, we first need to understand how the internet works today:
The Internet Cannot Store Information
The core problem with the Internet is that it cannot store information — it can only transfer it.
Although the late Sen. Ted Stevens was relentlessly mocked for saying that “the internet is a series of tubes”, he was 100% correct.
At its core, the internet is nothing more than a collection of computers that are connected to each other through a global network of wires (aka “tubes”). In fact, that’s where the word comes from — interconnected networks.
Wires, by themselves, cannot store information.
If you’re old enough to remember, this makes intuitive sense. After all, there was no way to record a TV show until someone invented the VHS player, and no way to take messages over the phone until someone invented the answering machine.
This greatly limits the inherent functionality of the web. For instance, if a system can’t store information, it has no way to conduct economic transactions such as sending and receiving money.
After all, imagine having an online bank account that forgets your balance everyday!
We Built a System on Top of The Internet to Store Information
To get around this problem, companies started storing your data on their privately owned computers (known as “servers”).
Each time you need to access information — such as accessing your online bank account — your computer sends a request to one of these servers.
Your Data is Stored Outside of the Internet on a Company’s Privately-Owned Servers
This evolved into an ecosystem known as the client-server-database architecture which, as the name suggests, has three components:
- Clients: Your personal PC or laptop is known as a “client”. When you want to visit a website it makes a request to a server to get the relevant information
- Servers: Servers are responsible for routing your request to the correct database and then sending the information from the database back to you
- Databases: Almost all of the information that you find on the internet is stored somewhere in a database
While this architecture solves the problem of data storage, it unfortunately also requires the oversight of centralized parties.
For instance, all of your money is stored on servers owned by Bank of America, Chase, Citibank, etc…, your data is stored on servers owned by Amazon, Microsoft and Google, and all of these companies are controlled by the federal government.
The system gives too much power to 3rd parties
This gives these entities too much power and introduces a host of concerns such as:
- Asset Seizure: Governments and banks can arbitrarily revoke your assets. While this may seem far-fetched, consider that in 2013, the Government of Cyprus seized 47.5% of all bank accounts over €100,000 to bail-out its failing banking system. And if this wasn’t bad enough, Big Tech is starting to exercise its power over the payment channels. In October, PayPal threatened to seize the funds of users who shared “misinformation” online (although they quickly backtracked after a public outcry).
- Limited Privacy: Our current system offers citizens very little privacy. Governments require extensive documentation, banks must collect detailed personal information to adhere to KYC, AML and CFT regulations and companies such as Facebook own all the data you post. While in some cases this produces comical effects (such as a man learning from Facebook that he was going to be a father before his wife told him), it has also produced dystopian ones (such as Facebook illegally sharing user vast amounts of private user data with third parties in the Cambridge Analytica scandal)
- Limited Access: In order to buy goods and services on the internet, you need access to a credit or debit card. Unfortunately, banks and credit card companies can decide whether or not they want you as a customer. While the latter is generally not a problem in the developed world, this is a huge issue in growing economies. Today, nearly 1.7 billion people remain unbanked simply because they aren’t profitable enough to be considered by global financial institutions
- Censorship: While many modern democracies have codified freedom of speech, this unfortunately doesn’t always apply to private institutions. Companies such as Twitter have full discretion over who can access its site and whom they can ban. To date, they have banned hundreds of thousands of people, including several high-profile users. This problem also isn’t limited to social media, as Apple recently banned Epic Games, the creator of the multi-billion dollar game Fortnite, from its App Store after a revenue dispute
- Hidden Taxes: In addition to the taxes we pay to the federal government, citizens of many developed nation states are also subject to a variety of “hidden taxes”. For instance, banks often charge enormous fees on credit card transactions and international money transfers, and “Big Tech” often takes a large cut of revenues earned by artists and entrepreneurs. For instance, Spotify garners 30% of the revenues from a song, and Apple often charges a 30% “tax” on every sale made through their App Store
Together, these concerns represent a major problem. Not only do they limit growth, but they also continue to drive inequality.
So why do we tolerate these inefficiencies? Well, we simply didn’t have a choice as it has historically been impossible to build computer networks that don’t rely on centralized third parties.
That is, until recently…
Smart Contract Platforms Can Create a Sovereign Internet
The game changed in 2015 when Vitalik Buterin launched Ethereum, the world’s first “smart contact platform”.
Smart contract platforms — also known as “Layer 1s” — are revolutionary because they are computer networks that can store data directly within the system (removing the need for centralized third parties).
From a consumer standpoint, their functionality is almost identical to the Internet today. Users can view websites, run programs and access applications. Much like the Internet today hosts an assortment of digital businesses such as Airbnb, Uber, Facebook, Tinder and Netflix, smart contract platforms also have their own suite of apps.
Unlike the Internet, however, smart contract platforms are “decentralized” and “distributed”, meaning that instead of being controlled by companies such as Apple, Google and Microsoft, data is hosted across on multiple computers located all over the world and isn’t owned by any one entity.
This means that no one party can control the network and tell users what they can and can’t do, and no one can ever turn them off or shut them down (which is why many refer to smart contract platforms as “shared world computers”) .
Smart Contract Platforms are Decentralized and Distributed Computer Networks
The ability to store data within the system is groundbreaking, as it means that we can create an entirely new Internet that doesn’t need:
- Banks: Banks are no longer needed because money can be created, traded and stored on the network
- Big Tech: Large technology companies are no longer needed to host user data
- Governments: In theory, the entire legal system is no longer needed because the system can enforce its own rules though code
This new Internet — often referred to as “Web3” — will allow us to reap all the benefits of the traditional web while removing most of the downsides. It will be:
- Seizure-Proof: In Web3, you control your assets. Instead of relying on banks, governments and corporations, you hold your funds, identity and digital goods in your own digital wallet. As such, there’s no one to seize your assets, limit withdrawals or tell you where you can and can’t spend your money
- Permission-Less: No one can stop you from accessing Web3. Anyone with an internet connection can participate in markets that are open 24 hours a day, 7 days a week and 365 days a year
- Borderless: Web3 has no borders. Users can store millions (or more) on a thumb drive or online wallet (not recommended) and go anywhere they please. They can send money to relatives living abroad, perform cross-border transactions and invest in foreign companies without having to pay outrageous fees or navigate a labyrinth of international laws
- Private: Web3 is designed so that users have complete ownership of their data — in fact, it’s completely possible (and often preferred) to navigate Web3 in a completely anonymous fashion
- Eliminates Censorship: No one in Web3 can censor you. Anyone is free to upload any content, no matter how controversial, to any platform they so choose
- Permanence: Because a decentralized internet is hosted on thousands of devices across the world, it’s very resistant to failures and almost impossible to shut down
- Transparent: Every transaction in Web3 is broadcast to the public allowing for real-time monitoring and maximum transparency. In addition, protocols are built with open-source code allowing any user to audit them, greatly reducing the threat of corruption and serving as a safeguard against negligence
Indeed, the potential of Web3 is massive, as it will liberate trillions of value and turn the Internet into its own “sovereign” economy that operates outside of the purview of the existing financial, legal and political ecosystem.
Ether Will Become the Reserve Currency of the Sovereign Internet
The new Internet will use cryptocurrencies as its native form of money.
This is not a choice, but a technical requirement, as cryptocurrencies are required to operate smart contract platforms (to understand why, check out “The Complete Beginner’s Guide to Smart Contract Platforms”).
I believe that Ether (the native coin of the Ethereum smart contract platform) is best positioned to become the dominant cryptocurrency of the decentralized Internet as it has:
- Proven P/M Fit: Ether is already being used as money
2. Established Moat: It is the dominant smart contract platform across a variety of metrics
3. Consistent Growth: The protocol has shown consistent growth over the last five years
4. Robust Architecture: Ethereum maintains a robust technical architecture
5. Line-of-Sight Improvements: Ethereum 2.0 is set to address many of the protocol’s technical challenges
Let’s dig into each of these…
Growth Driver #1: Ether has proven its use as a form of money
As the name suggests, cryptocurrencies can function as a replacement for traditional money.
ETH is the preferred currency for NFT purchases
Ether has already proven itself in this capacity, and is currently being used to satisfy all three functions of a currency:
- Store-of-Value: Ether is the preferred form of collateral for DeFi protocols
- Unit of account: Most NFTs are priced in ETH
- Medium of exchange: Many decentralized applications only accept ETH as a medium of exchange
With the continued rise of decentralized markets such DeFi, NFTs, P2E games, the metaverse and DAOs, it’s likely that ETH will become more widely accepted as a valid form of currency.
Growth Driver #2: Ethereum is the dominant smart contract platform
Ethereum is the dominant smart contract platform across a variety of metrics: it has a robust ecosystem of dapps, one of the highest wallet counts of any L1, an entrenched economic moat in DeFi and NFTs, the strongest brand and robust communities on Reddit and Twitter.
Robust ecosystem of decentralized apps
There are over 3,500 dapps in the Ethereum ecosystem with 1.75K daily active users. In DeFi alone, Ethereum boasts 1.6x more dapps than its closest competitor.
Second most wallets of any Layer 1
When measured by the number of unique addresses, Ethereum has the second most wallets of any smart contract platform, with 214 million registered wallets
Entrenched economic moat across multiple sectors
At $148B Ethereum has the highest market capitalization of any Layer 1 — over 3x greater than its closest competitor.
The protocol is also the clear market leader in DeFi with a 60% share and the all-time sales leader in NFTs with 74% of sales.
Highest mindshare of all Layer 1s
Ethereum is the most well-known smart contract platform and 2nd most recognized cryptocurrency after Bitcoin.
It has twice as many social engagements — e.g. favorites, likes, comments, replies, retweets, quotes and shares — than any other Layer 1.
Robust communities on Discord, Reddit and Twitter
While having a strong community is a major asset to any business, it’s especially important to Web3 protocols.
Unlike in a traditional corporation — where “community” is generally synonymous with “customers” — a decentralized platform’s fans are also often its investors, suppliers, managers and employees. They help build the protocol, crowdfund it through token purchases, serve as the validators and miners that maintain the network and are the primary marketing arm.
Ethereum has a very strong community with 1.6 million Reddit subscribers and 3 million Twitter followers.
Growth Driver #3: The protocol has shown consistent growth over the last five years
While Ethereum’s market share and price have waxed and waned, it has continued to show consistent growth across multiple metrics.
In particular, the protocol has achieved:
- 2.7% monthly user growth: When measured by the number of wallets, Ethereum has grown its user base from 81M wallets in 2019 to 214M wallets today (38% per year)
- 3.6% monthly growth in its dapp ecosystem: The number of decentralized applications on Ethereum has grown 52% per year over the last five years
- 3.6% monthly growth in social communities: Ethereum’s Reddit subscribers have grown from 447K in 2019 to 1.57M today (52% per year)
This is an encouraging sign, as it shows that the protocol is continuing to build through both bear and bull markets.
Growth Driver #4: Ethereum has one of the best technical architectures
In addition to being the most used platform, Ethereum may also be the most architecturally sound.
According to DeFi Safety, a third-party technical auditor that measures blockchains on a variety of characteristics (including the decentralization of the nodes, technical support and documentation, testing protocols and security measures) Ethereum is the highest-ranking Layer 1 with a security score of 90%.
In fact, of the top ten smart contract platforms, only Ethereum earned a passing grade.
Growth Driver #5: ETH 2.0 offers Line-of-Sight Improvements to Ethereum’s Greatest Challenges
Ethereum is not without its challenges. Perhaps the most pressing of these is its historically high fees.
Although fees today are relatively low at~$2.00 per transaction, they were in the $10 — $30 range for much of 2021 and 2022. This is orders of magnitude greater than the competition, and a primary reason that Ethereum’s market share dropped from > 95% to ~60% today.
The cause of these high fees is the Ethereum network’s limited throughput — the platform can only execute around 25 transactions per second (compared to 24,000 per second for Visa).
Because space on the network is limited, priority is determined by an auction process. This means that gas can get very expensive when the network is busy.
Fortunately, the network is hard at work on an upgrade that will combine three innovations to increase throughput:
- Consensus Protocol Improvements: Ethereum switched its consensus protocol from Proof-of-Work to Proof-of-Stake in September 2022
- Rollups: Rollups are an innovation that allows smart contract platforms to execute programs and perform complex calculations off-chain, and then return the results of those calculations to the main blockchain
- Danksharding: An update to Ethereum’s original plan to break the network into 64 shards. Proposed by Ethereum researcher Dankrad Feist, danksharding is designed to work with rollups, using data availability sampling to make Ethereum a universal settlement layer.
Many expect that when the final upgrade is complete — Vitalik estimates that we’re halfway there — Ethereum will be able to achieve a throughput in excess of 100K TPS, making it one of the fastest (and cheapest) Layer 1s
Ether Has the Potential to be Worth > $150K per Coin
As the native currency of the Internet, I believe that Ether has the potential to be worth > $150K per coin. This is based on the following assumptions:
1. The TAM for cryptocurrencies is $138 trillion
2. The SOM for cryptocurrencies is $35 trillion
3. Ether has the potential to capture 60% share
4. The long-term supply of Ether will likely stabilize around 122 million coins
Let’s walk through each of these assumptions
The TAM for Cryptocurrencies is $138 Trillion
The total addressable market opportunity for Layer 1 coins is immense. In short, they can function as a replacement for traditional money and, as such, could capture a significant share of global M3.
In fact, if we compare Ether to fiat currencies using the six properties of money — durability, portability, uniformity, divisibility, scarcity and acceptability, we see that it is superior in almost every category.
The only area where Ether falls short is that it’s not widely accepted. But this is changing, as we have recently seen Layer 1 coins being used as real-world currency in a variety of decentralized markets such as DeFi, NFTs, P2E games, the metaverse and DAOs.
As such, we can make a reasonable argument that the TAM for Ether is $137T, the global M3 base.
The SOM for Cryptocurrencies is $35 Trillion
While the thought of the digital currencies replacing physical ones may seem ridiculous at first glance, such a feat is not without precedent as:
- Digital entertainment makes up 72% of all entertainment revenue
- Online advertising makes up 2/3rds of total advertising
- Global eCommerce sales are approximately 20% of total retail sales and expected to grow to nearly 25% by 2025 (and in some countries, such as China, online sales make up almost half of all purchases)
As cryptocurrencies mature, they too will likely begin to take share. While how much is still up for debate, we can start to make some predictions using digital penetration in other industries.
Let’s take a conservative estimate though, and assume that cryptocurrencies can capture 25% of the global M3 base within the next 10–30 years (in line with the penetration of eCommerce into physical commerce)
That will yield a SOM of $34.5 trillion.
Ether has the Potential to Reach an FDV of $20.7 Trillion
So how much of this $34.5 trillion will Ether capture?
As argued above, Ether is well-positioned to become the dominant digital currency for online transactions. In mature industries, market leaders tend to trend to 30% to 60% market share.
Right now, Ether holds a bit more than that, with a market share of 60% of DeFi and 74% of NFTs.
If we assume that the coin can maintain a 60% share going forward, it would achieve a potential FDV of $20.7 trillion.
The Long-Term Supply of Ether Will Likely Stabilize around 122 Million Coins
Calculating the long-term supply of Ether is somewhat challenging as the coin has both inflationary and deflationary mechanics.
Like Bitcoin, Ethereum started out using a Proof-of-Work consensus mechanism, issuing miners 2ETH plus transaction fees for each new block mined.
Unlike Bitcoin, this reward was not designed to decrease over time. While one would expect that this would make Ethereum a purely inflationary coin, the protocol has some features to balance this.
Ether has Both Inflationary and Deflationary Mechanics
In particular, transactions on Ethereum have three components:
- Base Fee: All transactions have a base fee that is a function of the traffic on the network. The base fee is burned, reducing the supply of ETH.
- Priority Fee: Users can choose to add a “tip” to miners to incentivize them to prioritize their transaction. The priority fee has no effect on the supply of ETH.
- Block Reward: Miners receive a reward of 2 ETH for validating a transaction. This increases the supply of ETH.
Historically, more coins have been created than have been burned, making Ether an inflationary asset.
That said, the recent switch to Proof-of-Stake has accelerated the burn rate, and many argue that this will ultimately make Ether a deflationary currency. According to the site Ultrasound.money — which tracks the supply of ETH since the merge — total supply has decreased slightly in the past 73 days.
To be conservative though, we’ll make the assumption that the long-term supply stays stable at 122.3 million Ether coins.
The Potential Value of an Ether Coin is $169,137.57
Taking the estimated fully-diluted market capitalization of $20.7 trillion and dividing by a total supply of 122.3 tokens gives us a potential price of $169,137.57, a 139.3x increase over today!
This is not out of line with other estimates, including Cathie Wood’s prediction that Ether could exceed 20 trillion in market cap within the next 10 years:
The main area where I differ from Cathie is that I’m not as confident in the 10 year time frame.
Disruptive innovations can take a very long time to play out — for instance it took eCommerce markets roughly 30 years to achieve 25% penetration of retail markets.
Crypto markets do tend to move faster, but there could be a thousand unforeseen obstacles along the way (such as government regulation). As such, it’s almost impossible to tell whether this will happen in 5, 10, 30 or even 50 years.
But ultimately, the timing doesn’t matter much for me. I firmly believe that Ethereum’s path is inevitable and I’d prefer to be on the right side of history.
Note: This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
