Ethereum’s Vertical Competition With its Own Tokens – Trustnodes

Ethereum’s Vertical Competition With its Own Tokens


Imagine you’re so successful that services running on top of you are even more successful. Something we have not yet seen in public blockchains, but some ethereum tokens are now gaining in popularity. Raising the question, do they compete with eth itself?

Vitalik Buterin, Chief Scientist at the Ethereum Foundation, holds a number of ERC-20 tokens, including MakerDAO’s MKR.

He has the vast majority in eth, of course, and eth is used as collateral in MKR’s dai, so there is a symbiotic relationship. However one can see potential competition in regards to the interest rate.

As you may know, dai users are charged an interest rate of 1%. That goes to MKR holders. The more dai is used, the more is paid in fees to MKR holders. That makes MKR more like a stock with dividends.

Eth currently doesn’t provide any returns save for potential price increases. That will change once the Beacon launches perhaps by the end of the year.

The Beacon will allow ethereans to lock their eth and get interest in return at a rate of 5%-8% a year. MKR is far away from that, but instead of giving interest, MKR’s supply is burned.

So while in eth only the stakers benefit by the network being used more, in MKR everyone benefits because they all collectively risk their token funds as MKR acts like a lender of last resort for dai.

For now, only eth can be used as collateral, but soon they will launch a system where many other tokens can be collateralized.

If all goes well and there is sufficient demand, then the stability fee might rise to 5% or more. If it rises above what eth pays for staking, then in this very limited and somewhat artificial comparison, one might wonder why hold eth instead of MKR.

There’s also the BNB token where they burn the supply, but this time from Binance’s profits. That has been in a bull run against bitcoin and eth, weathering far better the bear market.

Binance coin price, Feb 2019.

That it would do so is very logical. Bitcoin has no returns on investment. Its price obviously rises if demand for it rises, but thats a tautology.

In BNB or MKR, obviously their price rises if demand rises, but in addition, their supply falls if usage increases. In other words there’s an actual return on investment, although somewhat indirectly.

In eth it will be more directly, whoever locks funds will get x% interest. So here we have an extra reason for demand to rise due to the returns on investment.

This is a bit artificial because there are many more other parameters. That 5% has to be paid by someone, for example. Why should they? Well maybe because they want eth to buy MKR or some other token. Maybe they just want to use a dapp, etc.

Likewise, even though bitcoin doesn’t have a more direct return on investment, it could well be that more people want it to make international payments and so on, making the “dividend” aspect irrelevant.

So the comparison is in isolation and artificial, but if we stick to that only, would eth be in competition to something like MKR if the latter provides a higher effective interest rate than staking?

Vertical Competition

While some might say eth is in competition with something like bitcoin or likewise networks, and bitcoiners definitely think so, vertical competition against eth based tokens is more difficult to envision.

An analogy here might be like saying earth is in competition with the sun. MKR runs on eth smart contracts and on the network, with all of these tokens revolving around ethereum and very much dependent on it.

Eth gets plenty in return too, including the fact these tokens increase demand, with that increasing demand paying more gas fees, in addition to eth ownership being an entry point to these tokens.

However you can look at this from two perspectives. You can argue there’s a limited amount of capital to go around, and if all that capital went to eth, then eth would be more valuable from an investment perspective.

Currently the combined market cap of all ERC20 tokens is $9 billion, while eth’s market cap is $16 billion. If all that $9 billion had gone to eth, then eth investors would gain a bigger return on their investment.

This is basically bitcoin maximalism 101. If all of these s**tcoins didn’t exist, then they all would have given us the money and we’d be a lot richer.

Such lab thought, however, has a lot of complexities when more maturely applied to reality and to objective considerations rather than wishful thinking.

That’s sort of why science exists, to fight simplistic thinking or explanations and to provide a more wholistic understanding.

When it comes to the matter in question, that’s not easy, but things like value and so on don’t necessarily have to be objective.

Eth would be more boring, for example, if it did not have all of these tokens. “Fun” isn’t something you can easily evaluate, but as an example these pages would have a lot less to talk about if things like MKR didn’t exist.

That works for bitcoin because eth exists and because bitcoin is or was quite innovative. It has its use cases and so on but if the entire crypto space at this stage was limited to just bitcoin, there would be far less people under the general crypto umbrella.

Variety is beauty and beauty is truth. Any competition between eth and tokens running on top of eth would be far more limited in its effects than the general gains from their symbiotic relationship.

Yes, in the abstract, if all that $9 billion had gone to eth, eth would be worth more. In practice, however, if that $9 billion had not gone to those tokens, then it may well be the case that eth would perhaps not even be written about any longer.

One can argue eth is worth $16 billion because of that $9 billion and in the absence of that $9 billion it might not be worth much at all.

We do even have an A/B test of this. Not a perfect one because nothing is perfect, but there’s not one top 100 token running on EOS or other likewise platform and eos is of course worth much less than eth.

In contrast, the most valuable crypto token is Tether and that runs on top of bitcoin through a layer. Bitcoin is, of course, far more valuable than eth at this stage.

There are a lot more nuances that can be added to this equation, but at a high level view, it does appear that tokens running on top of a network do benefit that network even if there might be some limited competitive aspects.

The more valuable the token in market cap, the bigger the benefit based on the very limited data we have so far.

Presumably because it increases general utility and it increases the “solar system” or the sphere of influence in geopolitics, and thus the “power” or the “dominance” or the network effects, and thus the demand for the token that governs all on top of it.



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February 25, 2019 8:56 am

It seems to me that the “interest” that will be paid to ETH-hodlers has more to do with coin staking (aka the reward distribution mechanism of PoS) than attracting investors on to the platform.
This will be one of the many avenues used for securing the Blockchain over time.