What's ETH?

Happy Australia Day, Invasion Day, Friday everyone!

Australia celebrates its national day today, and debates about its meaning and the country's identity are at the forefront.

Wherever you are and wherever you're from, I hope you have a great day! ☀️ 

First of all, I must correct myself. In last week's newsletter, I wrote about the first week after the approval of the Bitcoin ETFs:

Turns out I was wrong. 😮 

Some investment platforms like Stake, Pearler, and Tiger Brokers have already listed the Bitcoin ETFs. So the Bitcoin ETFs are available in Australia! Drop me an email or DM on social if you see more platforms listing them.

(Not financial advice. I'm mentioning these platforms in no particular order and without preference. Do your own research.)

Now, while the trading volume for the Bitcoin ETFs is still pretty good, and the outflows from Grayscale are still huge, let's turn to something else: Ether aka ETH. 🧝‍♂️ 

Several of the major American asset managers have filed for Ether ETFs. So we are likely to see a similar drama play out around ETH ETFS later this year: It will start with delays from the Securities and Exchange Commission (SEC), a lot of hype, and then finally the approval. (Who knows, we may even see another SEC Twitter fiasco. 😆 )

For today’s newsletter about ETH, I spoke with Tom Mitchelhill. Tom is a crypto reporter for the media outlet Cointelegraph. He's also the host of the NGMI podcast and Chief Mid-Curve Officer at Brotato Capital, a meme crypto fund he started with friends in Melbourne.

Let's get started! 🏃‍♂️ 

Tom, what is your elevator pitch for ETH?

Ethereum is the gold standard network for building decentralized protocols and applications. I don't see that changing anytime soon.

If you like the idea of an uncensorable, decentralized network for building globally accessible applications and transferring financial assets and data, then Ethereum is for you.

Bitcoin maximalists like to call any coin or token that isn't Bitcoin a "shitcoin. Is Ether a "shitcoin"?

I'm actually kind of partial to this argument, even though I think the end conclusion is ultimately null.

If I had to bet on the one crypto asset that's guaranteed to be here in 10 years, it's - without a shadow of a doubt - Bitcoin. But to call every other crypto asset a "shitcoin" because Bitcoin is the most Lindy of all networks feels fundamentally self-sabotaging.

It would be the same as gold investors calling all other commodities "scams" - when it is readily apparent that other commodities each serve a different function in the global economy.

What problem does ETH solve?

The main problem Ethereum solves is the centralization of computing and financial operations. Instead of building financial applications and software on centralized networks owned by single entities, developers can build in the open and create applications that are accessible to anyone in the world and can't be shut down by any one person.

As we move further into the digital age, this kind of uncensorable computing network is a net good for those who believe in the sovereignty of data and assets online.

Compared to Bitcoin, which uses a Proof of Work (PoW) consensus mechanism, Ether uses Proof of Stake (PoS). In simple terms, what's the difference?

The main difference between PoW and PoS is that one relies on the energy-intensive problem-solving known as "mining" to secure and validate its network, while the other relies on the less energy-intensive "staking" model, where stakers lock up their tokens on it to accomplish the same function.

The most visible difference between the two is often boiled down to energy consumption. One of the main things touted after The Merge - when Ethereum successfully transitioned from PoW to PoS - was the 99% reduction in energy consumption.

There are some questions to be asked about what the different mechanism means for security. Ethereum's move to PoS has opened the door to risks that come with the increased popularity of liquid staking protocols, which increasingly centralize ownership of ETH in the hands of a few actors.

Unlike Bitcoin, whose creator is anonymous, we know that the Ethereum blockchain was developed by Vitalik Buterin and Gavin Wood. Is it a problem that we know who the founders of Ethereum and its currency Ether are?

From an investment perspective, Ethereum exposes you to more "founder risk". That means that while the project isn't controlled by one person, it can be shaped by the founder - in this case, Vitalik - and the community of active developers who listen to him.

Ultimately, I don't think this should be a concern. Ethereum is a network that is constantly undergoing major upgrades and has an extremely detailed roadmap for how it will be built in the long term. Having visible founders speaking out is a good thing, as it helps shape the future of the network.

ETH believers argue that ETH is decentralized, while Bitcoin maximalists deny this. Is ETH decentralized or not?

Ethereum is not as decentralized as Bitcoin, there's no point in arguing otherwise. However, to take that statement and then say that Ethereum isn't decentralized "at all" is a huge stretch. This stems from disagreements over the definition of what it means to be "decentralized".

For me, the definition of decentralization is that a single actor, or a small handful of actors, can exert complete control over the day-to-day functioning of a platform, as well as its ongoing development.

While there are some current concerns about client diversity and decentralization arising from staking, one of the main concerns about Ethereum's decentralization is the growing risk associated with liquid staking protocols like Lido. As more users stake their Ethereum with protocols like Lido, it centralizes the ownership of ETH to very specific points, meaning that hypothetically Lido could own enough ETH to exploit the network.

ETH believers argue that at some point "the flippening" will happen, meaning that ETH will overtake Bitcoin as the largest cryptocurrency by market cap. Will the "the flippening" happen?

Never underestimate the potential for wild shit to happen in crypto!

I think ETH flipping Bitcoin is very unlikely, but then again, I've been in crypto long enough to not make definitive statements about the status of any major asset.

I think it's really important to note that Ordinals and Layer2s on Bitcoin make the chances of "the flippening" less likely in the future. The market share of NFTs and DeFi protocols on Bitcoin has only been growing since November last year, and this poses a pretty significant threat to Ethereum's share of the total capturable value.

ETH has a lot of competition, think Solana. Will ETH be overtaken by a competitor?

There's this thing called the blockchain trilemma, which refers to the relationship between security, scalability, and decentralization. The general rule is that you can only really choose two of these qualities without compromising the third.

Bitcoin and Ethereum both heavily prioritize security and decentralization, and have to rely on other things like Layer2s to achieve scalability. In the case of Bitcoin, scalability doesn't matter too much, especially if you're in the more traditional Bitcoin maximalist camp, which believes that Bitcoin should remain unchanged.

Right now, there's a big narrative playing out between a "modular" thesis and a "monolithic" thesis. Ethereum is modular, in that it relies on "modules" such as rollups and other blockchain networks to achieve its desired level of scalability.

Meanwhile, Solana is a monolithic blockchain because technically it handles everything at once. However, Solana's rocky history, with multiple instances of downtime and other network issues, suggests some ongoing issues at the security level. However, an upcoming upgrade called "Firedancer" may make some of the changes necessary to fix this.

Ultimately, who comes out on top here is up for debate, and I don't think anyone can reasonably declare a winner at this point. Overall, I think Ethereum will remain the market leader for quite some time, especially with the introduction of new networks like Celestia, which help solve data availability, which is currently very expensive on Ethereum and its related chains.

ETH frequently undergoes major upgrades. In January of this year, the Dencun upgrade will take place. What's the significance?

The main purpose of the Dencun upgrade is to reduce transaction costs for Layer2 networks, such as Polygon, Optimism, etc. Ethereum's roadmap relies heavily on Layer2s to achieve scalability, so making these chains more efficient is an integral part of getting Ethereum where it needs to be in the long run.

In the US, several major asset managers, including BlackRock, Fidelity, and VanEck, have filed applications for spot ETH ETFs. The SEC must make decisions on these applications by various dates starting in May. What are the chances of ETH ETFs being approved?

If spot Bitcoin ETFs are approved, it's only a matter of time before spot ETH ETFs are approved. I expect there to be some delays on these applications as the SEC argues over the security status of Ether, but there's already been a lot of forward momentum on this from SEC Commissioner Hester Peirce, who says she won't allow the "arbitrary and capricious" precedent set by a Grayscale court ruling to affect future crypto ETF approvals. May 23 is the date to watch.

Thanks a lot, Tom! 🤜 🤛 And I love your cap in the picture above! Wu-Tang Clan Ain't Nuthing Ta F' Wit!

Have a great weekend, everyone!

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Thank you! 🤜 🤛