0/ A thread on Ethereum economic abstraction. I’ve recently seen a lot of nonsense spread about how Ethereum could be wildly successful but ETH itself could be worth 0. It’s time to debunk this myth so why don’t you go on a journey with me into economic abstraction?
1/ So what IS economic abstraction when it comes to Ethereum and why is it used to argue Ether will go to 0? The theory is that users could pay their transaction costs to miners in something other than Ether. Therefore, if that becomes rampant, Ether itself would have no value.
2/ Let me start by saying this argument can be used against ANY PoW blockchain (yes, even you, Bitcoin).
3/ Quick recap on how tx work on Ethereum. Each tx uses a set amount of gas. Users pay miners to include their transaction using a gas price. Gas x Gas Price = TX cost. The base protocol assumes gas price in ETH and every wallet calculates transaction cost in total ETH to pay.
4/ The argument against ETH value begins here. It says that users could pay their TX cost in TokenX instead of ETH. This is actually true (in a very roundabout way) but it’s very irrational for a user to do this. It adds both friction, cost and a UX nightmare. Let's dive in...
5/ To pay for a tx in something other than ETH:
1. Open communication with a miner
2. Manually calc the cost of the tx in that tokens value
3. Send miner payment & wait for confirm
4. Execute initial TX and get the nonce
5. Tell the miner the nonce and wait for his next block
1. Open communication with a miner
2. Manually calc the cost of the tx in that tokens value
3. Send miner payment & wait for confirm
4. Execute initial TX and get the nonce
5. Tell the miner the nonce and wait for his next block
6/ On top of the added friction to users mentioned above, there is an added cost to users to pay for their transaction in something other than ETH. Sending ETH in a transaction costs 21000 gas while sending tokens costs 40000 gas or more. No one likes extra tax...
7/ Calculating gas cost and understanding the gas market is no easy task. Wallets have spent years making this UX smooth. There is no incentive for a wallet to streamline the payment of gas in tokens. The complexities are deep.
8/ We haven’t even talked about the miners yet. Miners are trying to make a profit and have to pay for hardware/electricity costs. They do not want to have a portfolio of 50 different ERC20s with wild volatility and no liquidity. This creates an operation nightmare.
9/ As mentioned, this is possible on ALL PoW chains. Bitcoin even has a tool that enables users to pay for transaction speed in payments other than BTC (confirmtx.com). However, because of the arguments above, it's not rampant in BTC or ETH, because it's not logical.
10/ The key that most miss when arguing the above is that Ether has value well beyond just being used to pay for gas in transactions. Proof of Stake will allow users to stake only ETH to secure the network and receive payments for doing so. This is a great value add for ETH.
11/ In 2 years, Ether’s inflation will fall from 8% to near 0. As an in demand asset with rising scarcity, it is a strong SoV.
Many open finance applications are coming online and the future looks bright for Ether as money.
And let's not forget about those instant value xfers
Many open finance applications are coming online and the future looks bright for Ether as money.
And let's not forget about those instant value xfers
12/ Sometimes I’m told to “not feed the trolls” but I think it’s better to lay out clear and concise counter arguments to false narratives I see about Ethereum. Hopefully they can be used to stop the spread of misinformation that is so rampant in the space.
13/ I often see people argue that Ethereum may add full economic abstraction to the protocol layer which would make all of this easier. I have personally seen no traction for this proposal and there is no incentive for the community to add it.
