Comment by chrisco255 | Hacker News Reader

Comment by chrisco255 | Hacker News Reader

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Right, this would place the value of the ETH network at $8.8 million if it were processing all VISA payments. Something is wrong with the author's math or conclusions on that point. The value of processing as many transactions as VISA should be self evidently worth billions.

Another factor in crypto is that especially with proof-of-stake coins (like ETH is heading toward), part of the security of the protocol is in the expense of doing a hostile takeover of the network. A paltry $8.8 million valuation would presume that someone with as little as that could buy up all the supply (or 51%) of ETH and take effective control of the network.

You're right that attempting to do so would drive up the price, very rapidly.

Another sweeping point the author makes without backing up is the idea of "infinite competition" in the crypto space. Yes, anyone can fork BTC or ETH and make their own coin, but miners, stakers, exchanges, users, app developers, etc, won't necessarily flock to it. "Trust" is not built into the protocol.

I have no faith that someone who clicks the "Fork" button on Github necessarily has any idea how to run, maintain, secure, and grow a blockchain into doing something unique or novel. And I wouldn't stake my business or assets on it, per se, unless I was convinced that a team of people and a community was able to spring up around that blockchain.

Network effects matter, especially in crypto-assets. I trust the BTC network, because it's gone 9 years without a major exploit. I trust it because of the community, network, and ecosystem behind it. To act as if a fly-by-night crypto can swoop in and steal that crown so easily is foolish. Anyone can make a Linux fork, doesn't mean you're going to dominate the desktop market.

It's a good point that the low market cap could lead people to try to buy a controlling supply. I explain in the other comment why I think it wouldn't be profitable on a pump-and-dump basis. On the basis of control and trust, maybe there still needs to be some assumption that at least 51% is being held by various parties, enough so that the market trusts the network to not manipulate. I need to think about that more. I'm really glad you brought it up.

As for network effects, I find that to be a super interesting question. Because you're right, there are definitely certain levels of trust that existing networks have earned, and there's a good argument for why that creates friction and earns those networks the ability to charge a premium. I personally don't think that extra friction is long lasting. I'd expect that if there were indeed a new solution that accomplished the same thing at half the price, it would get attention and the market would gravitate to it fairly quickly (maybe not within weeks or months, but years? maybe it depends on the timeframe you want to consider, and the level of improvement it provides). But it's a really good point, and something I think about a lot.

If you look at it from a utility perspective and discount the network effect, at a certain point, it becomes economically incentivized sharding.

"We accept any of the 2021 or prior World Bank approved ETH forks." Your multi-wallet client automatically chooses the one with the lowest transaction fees (also economically regulated).

The author is assuming that (a) someone who's making all their ordinary purchases with ETH instead of VISA isn't holding any ETH, but making a separate buy on an exchange for each individual purchase, and (b) anyone who receives ETH immediately sells it for some other currency, despite living in a world where it's possible to use ETH for all purchases. These seem like questionable assumptions at best.

There's an underlying assumption that a cryptocurrency must be either a store of value or a medium of exchange, but not both, which is a bit odd since every fiat currency is both, and gold was both for thousands of years.

That brings up a good point I should make explicit, which is that I think those two sources of value are separate but not necessarily mutually exclusive. I think you can consider them individually and then add them up. John Pfeffer makes this argument too, that the two sources of value likely don't affect each other too much, allowing you to consider them separately.

That makes some sense, but I think there's also significant friction in the conversion. If I'm a store owner getting paid in ETH (or whatever), and I can buy a lot of my supplies with ETH, then it makes sense to just keep the ETH and buy my supplies with it, instead of paying unnecessary exchange fees. And if people do that, you don't have super-high velocity anymore. You're just an everyday currency like dollars (which are also mostly digital these days).

In fact, if people were to contact an exchange for every transaction, it's hard to see how there'd be any advantage over just using legacy financial systems.

I used to put a lot of stock in velocity of money considerations but now I'm thinking it doesn't have that much predictive value. All it's really saying is that the GDP is defined as the number of transactions, times the nominal amount of those transactions, times the real-world value of the currency unit. The currency price could be anything and the equation still holds true. If you assume a maximum achievable velocity, you can work out the minimum currency price for a given GDP, but the price could also be arbitrarily higher than that.

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