15 - ETH is undervalued - Bonus Episode

welcome to bankless where we explore the frontier of internet money and internet finance this is how to get started how to get better and how to front run the opportunity this is ryan sean adams i'm here with david hoffman and we're here to help you become more bankless david this is a special bonus episode why are we doing this man we are doing this because so much good stuff has happened in ethereum in the last couple weeks and also our interview with the winklevoss twins was absolutely fantastic so it was

just too much good content to be put into one single episode so we're splitting it out and releasing this as a bonus episode uh the big picture stuff the the topics that we have today i think are are crucial and they definitely deserve their own episode so we're recording this extra episode for all you bankless fans speaking of bankless fans if you guys could please go to wherever you listen to podcasts and give us those five star reviews so we could show up higher on the charts there is a bunch of old crypto podcasts that haven't released episodes in months

and years ever since 2017 and just because they came out in 2017 they still are there so if you could go to itunes spotify wherever you listen and give us those five star reviews so we can get bankless to the top of the crypto podcast charts we would really appreciate it let's spread the revolution guys let's do it before we begin want to talk about our fantastic sponsors today our first sponsor is monolith if you guys have your assets inside of ethereum but you also want to live your life monolith for our european customers

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mismatch between fundamentals and price going on right now and and specifically i'm talking about ethereum bitcoin's been covered a lot but ether the asset is there a mismatch going on what's going on yeah it's really hard to value ether because it's really hard to value these systems as a whole right like crypto systems are inherently impossible to value there's no price to price to earnings ratio there's there's no none of these fundamental metrics that we know about in the legacy world to price these assets but at the same time uh ether has been you

know you know volatile but flat over the last two years and the fundamentals of ethereum have never been greater uh spencer noon has put out some fantastic charts on the tweet thread which we are definitely going to link in the show notes and if you guys are on twitter right now you should definitely just open that up and find his his charts because we're going to go through some of these uh it's it's pretty crazy the fundamental growth that we have seen in ethereum metrics if you guys have listened to episode 7 ether's value mechanisms a lot of the charts and

graphs and data that spencer put out in this thread directly relate to some of the concepts that we talked about in that episode what this data and information show is just the increase in fundamentals according to the concepts that we put out in that episode so we're going to go through some of these today yeah let's take let's take seven from that thread i think it's a great thread so the the first is right now on the ethereum network we are charting the highest gas that ethereum has ever consumed so that's higher than 2017

at peak mania when you know everything was going crazy and everything was was bogged down it's higher than any time in 2019 in 2020 it's higher than it's ever been what does that mean david like gas usage what are we talking about here you know why does that matter the gas usage metric is is a really interesting one and it really talks about a couple of things the complexity of transactions being made so a normal ether transfer uses the minimum amount of gas at 21 000

uh and then more complex things like depositing money into a maker vault drawing dye doing anything on compound uh takes more gas because there's more complex transactions and so and so what this means is that people are using ethereum for more complex economic activity more often a larger amount of fees per block is being spent on ethereum block space so ethereum block space is being sold at a higher faster rate than than previous yeah so it means network usage is at all

time highs so more smart smart contracts more token transfers more moving of eth it's all at all time highs and as you said that's another metric so maybe we'll talk about this as number two transaction fees on ethereum are about 200 k per day so all of the gas that's being used as you know every time you use an ethereum transaction or interact with a smart contract you're paying gas all that gas culminates in a total all those gas fees culminate in a total revenue amount right now that revenue amount per

day is 200k on ethereum it's been higher in the past but this is still a very high number and really when you compare the transaction fee revenue to all other blockchains the only comparable blockchain here is actually bitcoin so bitcoin's doing about you know half a million a day 600 000 a day something in that range whereas ethereum is hanging out at the the 200k range everything else is like a hundred dollars a year like a thousand dollars a year basically nothing the

only valuable uh block space on the market today is the block space of bitcoin and ethereum and i'm just saying that from a market perspective because no one else is paying for any of the other block space they're only paying for the block space on these two networks this is such an important metric this directly reflects how much people value these systems like how much are people willing to pay to have a transaction included into the respective blockchain so so bitcoin and ethereum

have really high daily revenue of block space sales per day and this really relates to how well you can depend on these protocols being here into the future all blockchain protocols need some amount of sustainability through fees and so the higher fees being paid per day to the blockchain just kind of illustrates the longevity that these systems are going to have like all businesses need revenue to to survive and blockchains are the exact same thing so if you see your

blockchain of choice bringing in a ton of fee revenue you know that your product is in demand and that's exactly what's going on with bitcoin and ethereum here and ethereum especially i don't know if you guys have been trying to make transactions over the last month but guy prices have been super high and that just means that everyone wants to use the network uh and so it just means it's just a fantastic indicator that the demand for ethereum is increasing and it's and the cool thing like we've we've had higher transaction fees on a daily basis that you've said ryan but i don't

think we've ever seen it this high sustained for so long it's been a very high number for like two months now where previously it was maybe just a couple blips you know a couple days of really high transaction fees this is slow steady growth in daily revenue from transaction fees which i just think is is super bullish for the long term health of ethereum because that's what blockchains need but then also we need to talk about eip1559 when we eip1559 comes in the majority of these

transaction fees are burned which means that the scarcity of ether uh is increasing because we are burning all of these transaction fees gotta plug episode seven again because that's great we go over that in episode seven every time a transaction on ethereum is used and consumes gas and consumes some fees in the future eath will actually be burnt so ether the asset will be burnt and the amount of ether in existence will actually decrease that is a scarcity mechanic that is

going to be coming to ethereum possibly this year and certainly in eth 2.0 when it ships so that sort of links all of this usage to actual scarcity of ether the asset establishing it further as a store of value so super exciting to see that now some people are concerned that the gas fees are high and transaction fees are high and they can't get their transactions through you know the gas is too damn high right uh i am concerned about that a little bit in the

short run but i think in the medium term what that's going to do is put more pressure on layer two scalability options on ethereum and get more of these transactions off-chains still secured by ethereum but push them off chain there's some roll-up technology coming down the pike for that uh even edamar our guest in the last uh the previous episode episode 13 i believe it was he talked about incorporating that in the argent wallet so i think this kind of pressure while painful a little bit

in the short run these high gas fees will actually lead to a more scalable ethereum with more transactions per second in the medium to long term so i'm bullish there but let's talk about the third fundamental indicator here and that's users so daily active users is now 300 and k wallets so 300k possibly individuals groups we don't know exactly who they are but this is close to the highest it's ever been so in this number

david hasn't been seen in over two years so we're at the highest amount of users we've been since the previous bull market what does that mean that just means that there are so there's a lot of life on ethereum right and so the ico mania was the last time that ether really experienced this bull market right so for a couple months ether was the ether price was between four hundred dollars and fourteen hundred dollars and that's the last time we had you know 380 000 daily active addresses addresses are never a perfect measure of

users but daily active addresses is actually pretty it's actually much closer than just raw aggregate addresses because you know if you're using uh ethereum you're probably using the same address in in a single day period so it's more reflective of the actual raw number of people using the ethereum blockchain on a daily basis so like the interesting thing is is that the last time we've saw this amount of daily active users ether price was you know a thousand dollars 800 somewhere around that mark and and today it's 200 and so

there's this just mitch mismatch not to say that the right price of ether was a thousand dollars back in 2017 but that's also to say that maybe the right price of ether today isn't 200 either um it's likely somewhere between those two numbers and and maybe a thousand dollars or 1400 was too high but uh if if we have the same amount of daily active users as we did when it was it was then maybe the 200 price range for ether is a little bit too low one other thing about daily actives is um

it's important to think that each ethereum address is really it's like a bank account so um you know i own multiple ether dresses i'm sure you do to david so it doesn't necessarily map one to one to a user but the sec the second thing i'd say is you know some of these addresses can actually represent entire companies entire organizations in entire capital pools so in that way it's a it's sort of a one-to-many kind of mapping so we can't tell exactly how many users are

using this but we know we've got 380k bank accounts that are active on a daily basis on the ethereum network some of these are individuals with multiple addresses but some of these are entire companies entire capital pools with just one single address so it definitely is a positive indicator and it's also worth noting that ethereum and blockchain systems care much more about capital being used more so than individuals using them like the fundamentals of blockchains depend on the total amount of capital being

pushed through their system rather than the total individual number of users and so i really like that analogy there's 380 000 individual bank accounts never mind if that's 380 000 uh bank accounts owned by one person which would be ridiculous but just for the example that i'm about to talk about like that's still three thousand eight uh 380 000 different users of ethereum like that's still kind of the metric that we're really going for yeah one of these addresses is coinbase for example right and coinbase has billions in assets

under its purview and under its care so yeah it's that's absolutely the right way to think about it and another really interesting metric here is the sheer amount of stable coins that have been issued on ethereum in the past few months really we're at seven billion in stable coins what's this about so this is definitely a function of the macro environment at large like everyone wants dollars and crypto dollars are especially uh especially sought after

because of some of their advantages like you don't need a bank account to use them there's no there's they're very easy to get a hold of they're very easy to transport uh but what this really goes towards is the narrative of ethereum as an internet settlement layer a settlement layer for value so if you have an asset you might as well put it on ethereum and you know since the world wants dollars there's a global squeeze for dollars and especially a global squeeze for dollars that are not hosted in a bank account uh ethereum is just a

great uh platform to use that for so for the for the dollar the international dollar market ethereum is being leveraged as a as a settlement layer to manage internet dollars crypto dollars and it's just a fantastic use case of ethereum so on that theme there's also an increasing amount of bitcoin getting sucked into the ethereum gravity well so that number has has drastically increased as well there's now 25 million in bitcoin now some of these are bitcoin ious basically secured by uh bitco a

custody agent the example of that is wbtc but 25 million in bitcoin on ethereum many of this amount starting to use other d5 protocols like maker it just seems like ethereum is establishing this this use case of sucking all of these other assets assets like gold assets like us dollars now assets like bitcoin into its economy what's your take on that bitcoin tokenized on ethereum yeah we've had

wbtc for a pretty long time and it's kind of just been quiet you know there's been some amount of btc issued it got integrated into compound but it really wasn't this like rocket of a product that that really launched and you know there's plenty of criticisms about wbtc because it's you know just a it's basically an erc20 token that the centralized company uh commits to redeeming for a real bitcoin if you ever use it so it's not really that crypto economic pure system that we really are looking for but it's kind of like the beta of bitcoin on ethereum in my

opinion uh it's a it's a signal of what's to come and as soon as maker dao put wbtc into ethereum we saw the amount of wbtc on ethereum just skyrocket right one one day in one single transaction the amount of wbtc doubled from like 1500 to 3500 and then and then a couple days later we saw another minting of a thousand btc on ethereum so the the gravity well of ethereum is definitely pulling in all assets and bitcoin is definitely one of the lowest hanging

fruits for assets to come to ethereum we've seen bitcoin uh have difficulties in finding utility other than just being held by uh by your people's ledgers by people's cold storage wallets and you know the lightning network really hasn't done what bitcoiners have wanted it to do and i think ethereum is offering a very compelling like alternative settlement network for bitcoin because you can do things in d5 with bitcoin uh and so the the the compromise of using wbtc apparently

isn't that big of a deal for people who are interested in getting their bitcoin inside of maker dow inside a compound you know doing a non-taxable event by minting die so you don't have to sell your bitcoin all the things that we love d5 for ether for but now you can use it for bitcoin uh and that's just wbtc right so ren protocol btc has also just launched and uh it launched a couple days ago starting with two btc and now i believe there's 35 in there today i haven't checked this morning uh tbtc is having

some uh struggles to get out the gate but when it does i suspect that people will also be minting tbtc so the race for tokenized bitcoin on ethereum is on is on yeah absolutely so so one of the big questions i think people are asking and you asked as we're going through those metrics david is all right so why the mismatch here why isn't the price of eth up right now now i think there's a really important distinction that people have to get in their minds and i

think we've talked about this in at numerous times across our previous episodes david but but that's this the asset is not the network so there are two things here two commodities within ethereum the first commodity that we talk about a lot is ether the asset so this has limited scarcity there's 110 million eath uh you know producing at about four percent per year that's going to drop to close to one percent after eth2 is deployed that's an asset with

some level of scarcity but there's also another scarce commodity within the ethereum economy and that's actual block space so block space is produced at a rate of about six six thousand per day each block has about 10 you know space for 10 million gas so those are the computational units that you can fit within block space but those are two separate commodities you've got the asset and then you've got the the network so ethereum

block space and ethereum nasa and those are two separate markets as well so people can be bullish and excited about ether the the asset independent of being bullish and excited for ethereum block space so those two markets don't have to go up in tandem that said they often have in the past so when there has been increased demand on ethereum the network that is highly correlated with increased eath price so

previously when we saw the highest gas ever consumed on the ethereum network that was back in late 2017 early 2018 we also saw the highest eth price as well so one question about eth prices well will that sort of revert to its mean and will all of this network activity start to translate into more direct short to medium term price increases of ether the asset what's your take on that so we need to remind ourselves that this is the early days of these systems right

and so you know really you only find true price discovery after a strong period period of maturity and we are simply not there yet like ethereum the fundamentals change on a whim we don't have that much historical uh comparisons to make like price discovery for not just ether but also bitcoin still hasn't taken taken hold right like that's why these systems are so volatile and it's worth reminding ourselves that bitcoin is not a store of value it is a speculative store of value people are speculating on

it becoming a store of value like gold into the future but it's not one today and the same goes true for ethereum right ethereum is a speculation on ether is a speculation that ethereum will be the internet economy platform for the whole entire world it is not that today and so i've heard people call like bitcoin is an option on a store of value and if ether is the same thing for the world economy like ether is an option for the the fundamental asset of an

internet settlement layer for value uh and we're not there yet and so when when prices change these markets are so incredibly reflexive because the value of these things are really inside of people's heads they're not on pen and paper they're not they're the the fundamentals of these things are not yet discovered price is not yet discovered and so really what dictates price is people's opinions as to what other people will value these things not necessarily by the fundamentals so over time as these systems mature i expect fundamentals to really start to

take over but i don't really expect that to happen anytime soon i'm talking like plus five ten years out before fundamentals really start to dictate the price we're going to be in this long speculative period where speculation dictates price um but at the end of the day speculation is determined by fundamentals right like i i would hate for my asset of choice to be something like eos or uh litecoin which doesn't have any meaningful like blocks based demand or utility right and so speculation does get driven by fundamentals

but it's always speculation first yeah and so i i wrote a post i posted on banklist this week about ether being potentially double undervalued so it's undervalued in two ways like the first way we talked about ethereum network is going crazy in terms of usage and etherprice really isn't following right ether ethereum network usage is all-time high but ether price is like 85 down from all-time high right so there's a delta there and that's the first sort of undervalued potentially undervalued

uh like like way the market's thinking about it right now but there's a second too and that's i don't think the market has fully priced in that ether the asset can become a a like a store a speculative store of value in the same way that that bitcoin does and everything you were saying about ether the asset being sort of the the underlying reserve asset of this whole decentralized economy i don't think that the market has fully appreciated that and priced that in and if you look at some of the charts back in 2015

they didn't really appreciate that about bitcoin either so back in the first five years of of bitcoin's existence uh the narratives were a little bit different um yeah a bitcoin as as a as a digital gold was part of it but it was a tiny part of it a lot of the narrative was around bitcoin being used as a peer-to-peer cash system so a a payment system if you will transactional system and the the value of bitcoin being used to pay for

block space was a huge part of the value proposition but that started to split off in 2017 and for the past three years we've seen a massive delta between the the market of of bitcoin uh block space use and the market of bitcoin the asset bitcoin has been has sort of blasted away from that and the asset is valued far more than the network is valued because it's established itself as a store of value asset that happened in the second five years of bitcoin's life not the first

and now we're approaching the second five years of ethereum's life and ether the assets life and it feels to me that that second narrative uh that you know second area where ether is undervalued might start to kick in people might start to see this more as a speculative non-sovereign you know store a value asset that's going to be important to the future of money i believe it was chris burniske who who said this a while ago but he talked about how ether is in its uh 2015 bear

market for bitcoin uh where in bitcoin in 2015 uh it was not certain and in the state and it was not certain that bitcoin was going to be what it is today uh there there was a lot of uncertainty there's a lot of doubts uh people were not sure about the future of bitcoin uh but at the same time there were still some believers that saw this coming right saw that the fundamentals of bitcoin uh were destined to improve and that's exactly what happened uh in the following two to three years uh you know

the the 2013 bubble popped and it was this little slow drawn out bear market uh where there were definitely some fundamentals building like companies were building on bitcoin but um it was just uncertain and ether is and he chris burniske said that ether is in that same bear market right there's this very long very slow drawn out uh brutal bear market where um people were really doubtful about the the long-term certainty of of ether and ethereum um fortunately uh things are

like we've talked about in previous episodes these fractal patterns repeat but they're not always the same and because we saw bitcoin come out of it there's a lot more indication that we're going to see ethereum come out of it and people like like me and you ryan are really beating this drum talking about how the fundamentals of ethereum are really going to carry it forward and there's really not too much to be uncertain about and so we our ethereum is in its big bear market where it's just getting hammered by bitcoin maxies telling it telling all ethereum ethe heads that it's totally worthless

but uh me and me and ryan are here to fight back and say like look at these amazing fundamentals uh and so i'm extremely optimistic about the future i wake up every single day saying like man the future of ethereum is going to be sick i can't wait for it to show up uh and i still feel that to this day yeah i agree i mean it's it's hard not to be bullish when you see data like this for sure of course this could take a long time to play out and you know it's a thesis so we could be wrong on it but take a look at the data for yourself and

and come to your own conclusions on that another thesis that we've talked about in the past that we're seeing some more evidence for is the protocol sync thesis so we went over this in episode 12 and just last week a week and a half ago crypto.com which is a non-custodial crypto bank actually took a step to to proving this thesis at least you know in my mind they rolled out a non-custodial wallet so previously crypto.com primarily

facilitates uh lending and borrowing in a in a custodial way so you have to deposit your assets whether it's ether or bitcoin or die with them you have to give up your private keys they essentially become your bank but they took their first first step in releasing a totally non-custodial non-banked app that you can deposit bitcoin and ether into so you own the private keys and it seems like they are starting the process of rolling out d5 protocols as

well on top of that so david is this the the protocol sync thesis playing out this is absolutely the protocol sync thesis with a healthy dose of settlement assurances as well non-custodianship is settlement assurances it's you get the assurances that the centralized company that you're storing your assets with can't mess with your funds you get the assurances that your funds will be available to you and to you alone which makes the crypto.com offering much more compelling it's much less of a crypto bank and much more of a

be your own bank and so crypto.com what they're doing is they're saying we are going to go with a settlement or we are going to follow along with these protocol sync thesis because we want to be dense and that makes our users and future customers able to depend on us as infrastructure into the future uh and so there's no even if crypto.com goes away you still have your assets uh and and they don't go away with crypto.com and so because of these assurances crypto.com's product is simply better uh

and then like like you said ryan they're just rolling out defy apps on top of that and the reason why they can do that is because they can depend on defy apps being there especially the ones with strong settlement assurances and that are super dense that fall to the bottom of the protocol sync anything that you can depend and rely on gets customers because you can depend and rely on it and so this is just the protocol sync thesis playing out this i'm really glad that we we put out that episode because this this it's already been super useful