Jeff Bezos is the wealthiest person in the world for the third straight year in a row. Do you wish you bought shares of Amazon in 2001 at $12.21 per share? Amazon was not the first company or ecosystem to grow and it is not going to be the last. Seeing the value in something early is the best way to spot the next Amazon. In this article I will explain the story of Ethereum and why I think it will be the next Amazon.

Why Ethereum Matters?

In my previous article Back To Basics I covered Bitcoin as a store of value. To understand Ethereum value we must first be clear on Bitcoin’s value. Bitcoin was established in 2009 on a principle of 3 major actors of the ecosystem – Miners, Users, and the Dev Team.

  • Users of the Bitcoin ecosystem are people who store or send Bitcoin to each other. They pay a small transaction fee for each Bitcoin transaction.
  • Miners are solving complex math functions, burning their electricity, validating transactions and getting rewarded for it in Bitcoin.
  • Developers (or Dev Team) are the programmers that create or maintain the codebase for Miners’ and Users’ software that runs the network.

Neither of the 3 major actors control the ecosystem:

  • If Developers go rouge and create faulty software, then Users and Miners will simply not use that version of software, preserving the integrity of the network.
  • Miners can’t really take control the network, because it requires over 51% of all miners to agree on which software runs the network.
  • Users can’t change the network, because they simply use the tools and services provided by the Miners and Developers.

Ethereum introduced a concept of a smart contract to this ecosystem. This dramatically changed the picture.

Now we have:

  • Users of the Ethereum ecosystem are people who store or send Ethereum to each other. Just like Bitcoin, they pay a small transaction fee as well.
    With Ethereum however, Users are also able to interact with Smart Contracts hosted on Ethereum network. Smart Contracts are little programs that run on the Miners’ equipment and implement creative business models.
  • Miners are solving complex math functions, burning their electricity, validating transactions and executing smart contracts on Ethereum. As the result, they are and getting rewarded for it in Ethereum tokens.
  • Developers (or Dev Team) are the programmers that create or maintain the codebase for Miners’ and Users’ software that runs the network.
  • Smart Contract Developers are the programmers that create new and open source business models that run on Ethereum network.

Ethereum community and the development team recognized that Proof of Work mining is slow (15-30 transactions per second) and consumes a lot of electricity. They developed a new type of network security algorithm called Proof of Stake. With this algorithm Ethereum blockchain can achieve thousands of transactions per second and take a shot at becoming the new Internet.

Ethereum Value

Ethereum is set to launch phase 0 of the Proof of Stake transition in November 2020. The new, highly scalable network will be called Ethereum 2 or Eth2 for short. This network will continue to support all the smart contracts built on Ethereum today, but will do it a lot faster and at a fraction of transaction cost.

Ethereum value is not just in scarcity of its token, but also in the network effect of the open source smart contracts that run on it. All the DeFi applications, decentralized exchanges, prediction marketplaces, games, insurance, lottery, and more are getting built every day. All those applications run on Ethereum, allowing for entire business models to be run unattended. To really put this in perspective, imagine a traditional insurance company burdened by legacy systems, large regulatory and compliance costs, fraud costs, some manual processes and administration, sales and marketing. Now, contrast it to fully automated insurance company like Nexus Mutual running as a series of smart contracts on the Ethereum network. Nexus Mutual would have no such costs and can simply pass those savings to its policyholders. Traditional insurance companies will have a very hard time competing with this.

Ethereum value is also backed up by large corporations formed Ethereum Alliance. Ethereum Alliance is working on real-life use cases to implement in today’s business environment with use cases in AI, Payments, Education, Healthcare, Real Estate, Security and Supply Chain.

To top it all off, a number of Stablecoins run on Ethereum. I would not be surprised if some countries chose Ethereum platform to host their Sovereign Central Bank Digital Currencies (CBDC) in the future.

Price and Potential

Ethereum price has been shadowing Bitcoin and it always has been just another alt coin. However, I believe we are at the confluence of events that, when all happen at the same time, will dethrone Bitcoin from the number one market cap cryptocurrency. Ethereum has both scarcity, network effect, and scalability to offer. The price will ultimately reflect it.

I created a chart of Ethereum/Bitcoin pair to illustrate my point. In years 2016 and 2017, Ethereum also was able to break out of the overhead resistance and launched into a parabolic price rise in 2017. Fast forward to today, we can see a similar technical structure as in 2016-2017, but at the larger scale. Last time it exceeded the last high by 3x (from 0.04 in early 2016 to 0.14 mid 2017. Exceeding the last all time high of 0.16 by 3x would put us at 0.48 which is almost half of the price of Bitcoin for each Ethereum. If this model materializes, this would put Ethereum at $5,750 per token at today’s price of Bitcoin of $11,660. Ethereum is currently trading at $390 per token.

Hope this was valuable to some of you. If you liked the content, please subscribe to my newsletter at lukin.substack.com

As usual, none my articles or charts here constitute a financial advice. You and only you are responsible for your financial decisions.

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