Introduction

One of my favorite episodes of Pokémon is EP004 where Ash is confronted by the Bug-loving Samurai who tosses out his method, and Ash (after some thought) returned the favor with his own. Through a lengthy montage both Pokémon used the move harden which raises defense stats and does no damage to the other - this battle could have literally gone on forever. 

I do not look to argue that ether is worth anything with people who have closed minds. Cryptocurrency exists to solve problems in the real world and Ethereum exists to do just that. The incessant arguing which may find its home on Crypto Twitter is not what I am looking to employ this toward. 

The purpose of this paper is to define the value proposition of Ether the asset and Ethereum the economy and to attempt to clear the mud on that value. I think there has been a lot of confusion, rightly so, about Ether’s value proposition simply because Ethereum has changed a great deal in recent years. 

I acknowledge change as apart of life and a necessary component of an economy - anything that is fixed will eventually die. However, I can also acknowledge that humans have a strong love for predictability so a financial asset that is constantly changing warrants proper skepticism. 

Sources of Value

Transaction Fees & Blockspace

Ethereum Blockspace is valuable and there is no question about that. In the last bull market this was felt by users who were paying incredibly high prices to use the blockchain. I remember waiting hours to use the blockchain at prices I could afford. I felt my ether was far more precious than the transactions I wanted, which is why I was so excited to bridge to the Arbitrum Layer 2 as soon as the door opened. 

In seeing this, Ethereum began to shift toward the what has been dubbed as the Layer 2 Thesis. The Ethereum mainnet is optimized for decentralization & security and its scalability will increase slowly over time as technological advancement allows its throughput to increase while preserving the factors for which it is optimized. For higher throughput Ethereum proposed its users move to Layer 2 blockchains which introduced new risks to Ethereum. 

In the same breath, Ethereum switched from the consensus Proof-of-Work (PoW) to the newer Proof-of-Stake (PoS) on the 15th of September 2022, which reduced energy consumption and cost of transactions. 

Shortly thereafter, Layer 2 User Operations per Second (UOPS) began to regularly eclipse mainnet UOPS and then it began to accelerate. Arbitrum and Optimism paved the way and Base, Coinbase’s Layer 2, launched on the 12th of July 2023. Market sentiment began turn around and people began discussing Ether as Ultrasound Money, with the primary reason for this being the deflation of the token supply. Since the switch to PoS and the Layer 2 Thesis, Layer 2’s began purchasing a great deal of Ethereum blockspace to post call data and this costed a lot of money paid in Ether. This increased the amount of Ether burned, but it also increased the cost of transactions on mainnet and layer 2. 

I was in love with ultrasound.money & watching ether burn. It was a beautiful site until 13 March 2024 where proto-danksharding offered blobs as an alternative market for Layer 2’s to post their data to mainnet. Since that day, Ether has been net inflationary and the community has been rife with concern as the Ultrasound Money Thesis has been threatened. Cash flowing assets are valued in accordance with the potential income it may offer in the future & that cash flow has been threatened. 

I asked myself, “As a cash flowing asset, what is the future for Ether?” My faith was shaken and that means I needed to find some information that would revitalize that faith.

The cost of computation, memory, storage, and telecommunication were once astronomical and through innovation, they have become monstrously cheaper than they were initially. Much like these markets for technology, gas fees will approach zero over time as blockspace continues to outstrip demand. To build a blockchain that was dependent on expensive gas fees would be a great folly because network effects can migrate elsewhere. 

Ethereum sacrificed the Layer 1 blockspace for Layer 2 blockspace which offers the cheap fees for users, and with properly decentralized Layer 2s, they may offer similar security guarantees. The throughput of this Layer 2 ecosystem remains constrained by technological limitations which only time will alleviate, but over time they’ve managed to offer 321 user operations per second (UOPS) compared to Ethereum Mainnet’s 13.6 UOPS on 29 October 2024, per L2 Beat. Layer 2 activity has been up and to the right but it is still dwarfed by Solana’s ~ 4500 transactions per second (TPS).  

About a week ago, the largest burner of Ether was the Ethereum Layer 2 ecosystem, by way of blobs at a measly 250 UOPS. The purpose of the Ethereum Layer 2 ecosystem is to compete with Solana and other alternative smart contract platforms which offer low transactions. Just two years ago, the collective Layer 2 Ecosystem produced 12 transactions per second, occasionally eclipsing Ethereum Mainnet & today it collectively offers 12 times mainnet. If UOPS continue to grow at the current pace, it would be more than probable that they might rival Solana’s current TPS in 3 to 4 years time. 

Yet in that time frame, where is Ether? As we’ve covered the social contract which Ether & Ethereum had established with its community and holders has changed drastically. It shifted from a token which issued 2 ether per block or 3.897% inflation compared to Bitcoin’s industry standard inflation, to an entirely new narrative of deflation of about 0.5% and jutted back to an inflation of ~0.05%. While the new inflation of ~0.05% is markedly better than the PoW 3.897%, many people have rejected the current inflation after experiencing the euphoria of deflation. Dan Ariely, behavioral economist, says that loss is relative rather than absolute, so the loss of deflation hurts more than the improvement from PoW altogether. It is no secret why the market has chosen to reject the Ethereum Thesis as it stands, although Ether has a lower inflation than any of its peers. 

In saying this, Ethereum would only have to burn 0.05% of ether annually to maintain its current near zero inflation. In a world of significant UOPS rivaling Solana and other alternative Layer 1 ecosystems, the Ethereum Layer 2 Ecosystem combined with the valuable blockspace of the Ethereum Layer 1, which is still useful contrary to popular opinion, could easily maintain this. The other model for the Ethereum Economy was unsustainable for the following reasons. 

Ethereum's Economy

What a smart contract platform offered to the world was little explained until the onset of Decentralized Finance Summer or DeFi Summer for short. In 2020, the total value locked on Ethereum skyrocketed beyond 1 billion dollars for the first time in May and never looked back, peaking in November of 2021 at 174 billion dollars. According to DeFi Llama, Ethereum DeFi dominance collapsed as other smart contract platforms were developed from 96% in December of 2020 to 49% in May of 2021. Since then, Ethereum’s dominance has risen and oscillates at around 55%. 

Why did a great portion of this economic activity leave? It can only be explained by the costs of transactions in the economy which were significantly higher than their alternatives because they were willing to compromise on Security or Decentralization to offer a more scalable experience to the users. It is just not economic to have transactions which cost more than a penny for the average financial transaction. Economic activity was left to other chains, but why did half of the activity remain? 

Ethereum’s Developers are keen on security, sovereignty, and autonomy and are unwilling to compromise on decentralization or security. When you sign a transaction how often do you fear it will not be included into a block? When you get up from your hardware wallet, how often do you fear the transaction will be reversed? The best answer is likely rarely because these are things we do not see happening too often in the space, however it is possible & merits concern. While most blockchains assume this threat is unlikely, Ethereum has built up a treasure trove of encryption technology and will eventually begin including Zero Knowledge Proofs and Trusted Execution Environments to improve security for users. These improvements will reduce Maximal Extractable Value or MEV and improved trading experiences. 

While all of this technology is nice in name it will not gain against the newer blockchains which offer much lower fees. People are not accustomed to paying for digital transactions and that is likely to remain the case. For this reason, the Ethereum Layer 2 vision was established. 

The Ethereum Layer 2 ecosystem is no longer a burgeoning extension of the Ethereum Economy, but rather a nascent Cambrian Explosion of many different minor economies and most of them revolve around Ether. Ether is the central token for most if not all financial activities & gas for transactions. These economies depend on Ethereum for several things. 

1. Security from Ethereum Mainnet to validate transactions

2. L1 Data Availability for execution

3. Fall back in the case of a dispute

4. Interoperability between chains is provided through the Layer 1

5. A final irreversible record of transactions is provided by the Layer 1

These tasks provide the Layer 2s with a way to provide a very cheap execution environment at a fraction of a cost that an alternative layer 1 might pay for security. The cost of the this security, prior to EIP 4844, was enormous & it can easily be thought of as extractive. In the month of May 2023, Arbitrum paid the Ethereum Layer 1 4,880 Ether for its security for a total of 27 million transactions, yielding 480 Ether in profit. In December 2024, Arbitrum settled 64.3 million transactions & under this older system it would have cost users 12,767.122 Ether, of which Arbitrum would profit 1,258 Ether. However, it was the implementation of EIP 4844 which reduced the total costs of transactions 929 Ether, of which Arbitrum profited 704 Ether. This shifted the incentive to innovate blockspace to attract more users on the Layer 2 as profitability skyrocketed.

Base managed to settle 260 million transactions in December of 2024 for which users paid 4,014 Ether and Base profited 3,567 Ether, after only paying Ethereum Mainnet 447 Ether. This kind of economics would not be possible if Ethereum prioritized Ether over Ethereum’s massive economy. There is a world, which isn’t too far fetched, where a single Layer 2 may settle a billion transactions in a single month for next to nothing. 

Rent Seeking Economics is not as popular as it should be but it is the practice of seeking to increase one’s profit without creating new value or contributing to economic growth. This process is usually done by monopolizing a valuable resource, in this case Ethereum Layer 1 Settlement Assurances. In effect, the Layer 1 could raise the price of this resource infinitely to increase its profits, increasing the costs of transactions in these economies and effectively stifling innovation. Rent Seeking Economic models have two characters: the incumbent and the new entrant. The Layer 2s, or new entrants, would be stomped out by the incumbent Layer 1 & this model would surely lead to irrelevance. 

Ethereum chose its economy over Ether the asset, in the short term and rightly so. In the last bull market, a great deal of price appreciation and economic activity on Ethereum was for financial purposes. As people raced to chase yield across Ethereum, gas prices skyrocketed & this too was extractive. 

Ethereum supporting a plethora of of blockchains gives Ether the opportunity to be the crucial asset in a plethora of different economies. This is very similar to how any nation state might export its fiat currency to another economy in hope that some point in the future, it may be established that currency as a key reserve currency. Ether becomes useful to more people faster (and cheaper) than it would otherwise. Through expanding its role as a crux money in economies it can increase long term demand for Ether the asset. As the utility of the asset increases among different onchain economies, the volatility mellows out and the market becomes more predictable, a feature humans love. Lastly, as more Ether is consumed by the inextinguishable hunger an economy might have, more ether is locked in smart contracts over time reducing the circulating supply. 

One thing I brushed over earlier, because most users brush over it as if it does not matter, is the credible neutrality Ethereum has created thanks to developer focus on decentralization & security over scalability. It is not to be taken lightly as Ethereum has been the subject of a great deal of geopolitical ire. Tornado Cash smart contracts were sanctioned, yet the blockchain continued to include Tornado Cash transactions as solo-validators (the backbone of Ethereum) persevered in the name of credible neutrality. Could another Blockchain offer similar benefits to their users? Unlikely as the herculean computation requirements to validate would not be possible in a home just underneath a Playstation 5. Data Centers would be far easier to sanction for processing transactions so the app would be excluded altogether at the stroke of a government’s pen. What does hardened decentralization like this signal to a market? It signals that this is a place to do business because you can trust the blockchain to maintain its neutrality regardless of external pressures.

Digital Silver? World Computer? Ultrasound Money?

It has been said that [unsecured] credit is man’s confidence in man. It is a vote of confidence that another man might be prudent with the works of your labor. But what is money? Money, in all truth, is treated as an almighty title amongst society when it is just a necessary tool of a developed society. Jean Jacques-Rousseau argued that all humans have a right to the things that they need to survive, but private property is developed as a social contract in the natural course of human society. 

Money is the representation of that social contract in the flesh. As a kid, following the plunder of Halloween I would give my brother some candies I’d deem less valuable but I knew he’d be willing to wash dishes for. He’d also give me candy to clean the bathrooms. In this instance, candy was money and it was the trust we put in those smarties that ensured we’d complete tasks for them. I find people turning to the academic reasons why money persists more often than the very human reasons it exists. It all starts as simple as two humans, a handshake & a pizza, as bitcoin taught us. 

Here recently, Mr. Jamie Dimon stated that bitcoin has no intrinsic value before stating that it is the favorite for criminals, as if JP Morgan Bank hasn’t recently settled for managing the US dollar business of a criminal enterprise. Gold, too, has no intrinsic value, but rather the collective agreement (i.e social contract) among humans to use it as a store of wealth. Bitcoin is easily digital gold because it mirrors gold as its value is heaped upon it. 

Digital social contracts are easy to establish especially today as gas fees and costs continue to decline. In late 2024, some kid created the ticker Quant and presented a token to the community and rugged (i.e reneging) to run away with about 20,000 US dollars. This happens so much in crypto, and however sad it is one of the most important functions of crypto because no other era of people could create a money (i.e social contract) separate from the approval of their nation state. While Quant is one of many sad stories there are many successful ones such as Ether. 

The creation of a social contract onchain is easy - on Farcaster you can just ask Clanker. What is more difficult is maintaining a social contract, as this requires the key element of trust. Unlike credit in which trust must be placed on a single person, in a money it must be placed in an entire society. Ethereum has built out a network which is unmatched - each layer -  and hosts the largest onchain economy. 

As we’ve covered earlier, the shape of Ether the money has changed drastically over the past few years with the shift to PoS and toward a more modular future. It has altered the predictability of Ether’s ability to deliver reliable cash flows, shaking the faith in Ether the asset - not the economy. 

The Ethereum Economy, according to DeFi Llama, dwarfs its competitors because it has trust and is looking to export that trust to layer 2. Coinbase, looking to capture some of this trust launched its layer 2 on Ethereum, and in the process has managed to gobble up 1.1 Million Ether into its nascent economy. Kraken has launched it’s Layer 2 looking to build its own onchain economy for its users. BlackRock launched its BUIDL fund on the Ethereum Layer 1, likely because the blockchain has credible neutrality. Deutsche bank will be launching it’s own Layer 2 using Zero Knowledge technology for privacy and speed. The Ethereum economy is home to the greatest amount of US Dollar stablecoins, accounting for about 0.5% of US M2 Money supply.  

The Ethereum Economy has, in its great profit, has produced an ecosystem of art which is accounted for in Ether. The market capitalization & prices of our most notable projects are denominated in ether. Many users also denominate their wealth in ether and it is a growing unit of account within the economy.

As I mentioned earlier, Ethereum app Tornado cash was sanctioned by the US government and at peak 18% of Ethereum Validators were censoring transactions on the blockchain. This increased the trust in the Ethereum Economy as its own independent force rather than an extension of any government’s decree. Ethereum has the world’s trust that it will protect the interest of its users as a decentralized platform but does Ether have trust? 

Ether is the native currency of the Ethereum Economy and it is money. The trust that is in ether is shown in the money verbs - as people lend, earn, hold, save and stake ether so too does the trust in ether rise. As I type some 34 Million Ether, or 27.85% of the supply, is staked to validate the blockchain earning 3.24%. The staked Ether offer users cashflow from the activity of the Ethereum Economy. Cashflows are entirely purposed to position the lender to beat inflation with their savings; ether, much like many other blue chip digital assets beats all fiat currencies on inflation so the yield earned from staking is just a cherry on top. 

Decentralized Finance, which was born on Ethereum, is still held primarily on Ethereum. Ether is the primary asset of all trading and liquidity provision in the economy and is an imperative asset being that it is neutral, sufficiently liquid, and malleable for all needs. Ether and its derivatives are the primary collateral asset in the ethereum economy and provide lenders with a desirable collateral asset that is sufficiently liquid to return their capital in the event of liquidation. In fact, one of the very reasons ether’s price falls so precipitously in times of great stress is because it is so widely used as collateral money and is often most liquidated in a liquidation event. 

Ether, as mentioned earlier, is a desirable money which continues to outperform fiat currency significantly more than traditional finance competitors, maintaining saver’s value over time. This has built up a community of long term holders which has recently surpassed Bitcoin’s long term holders. 

Each of these factors have increased the natural demand for the currency as a store of value, a cash flowing asset, and as a money. The Layer 2 Ecosystem (and alternative Layer 1 Ecosystems) has gobbled up 4.2 Million ether, which is a very minor portion of the supply, however it is the fastest growing portion of the economic activity due to the lower barrier of entry (the gas fee). Unlike Ethereum Layer 1 which has constraints, the Layer 2 has an opportunity to give more users access to Ether the asset within the Ethereum Economy. Since about June of 2023 the weekly active addresses on Layer 2 have eclipsed that of the Layer 1 and in December of 2024 it averaged about four times that of the Layer 1 - some 10 million addresses. 

As the surface area of the Ethereum Economy grows so too will Ether as a money. It is not difficult to proclaim that Ether is Money, because it verifiably is money to a decent segment of the blockchain users. The question which we have set out to answer is what is ether worth & that answer is simple. 

Ether is a very unique asset. It is very much like gold and bitcoin in many ways with a limited supply, negligible, issuance, decentralized control, and significant portability, especially when compared to gold. However, it is very different in that it does have intrinsic value as the cornerstone asset of the Ethereum economy. The Ethereum economy is centered much on trust and the materialization of that trust in that social contract of the economy is ether and the implied value of ether the asset is directly tethered to its position in the Ethereum economy. Much like both bitcoin and gold, ether also receives value from those who decide to use it as a store of value and it's value is heaped upon it by a social contract. Unlike bitcoin and gold, Ethereum and ether are not immutable. Ethereum & Ether have changed significantly over the recent past few years, which has predictably shaken the previous social contract. As this new contract is developed & hardened following the Merge and the Economy continues to grow at the rapid pace which it does (UOPS & Users), the value of Ether won’t be behind it for too long. Much like the United States Dollar, which has no intrinsic value beyond the expectations of economic growth & the productivity of its citizens, Ether depends on the Ethereum Economy just as much as the economy depends on it.