Translated by: Baihua Blockchain

1. ETH as a "fee burning Token" has never been as strong as it seems

Let's review the economic theory behind fee burning Token valuation. This is the "Net Present Value" (NPV) theory.

Formula: Market Value = Burning Fees / Discount Rate

Imagine a Token that burns 1 billion dollars steadily every year, and this is a long-term stable equilibrium state. Now, assume the discount rate is 4%; that is, people believe that having 1 billion dollars today is equivalent in value to having 1.04 billion dollars in a year.

The logic is that: 1 billion dollars / 4% = 25 billion dollars constitutes the valuation's natural "floor support": if the market value falls below this level, someone can buy an asset that is expected to pay 1 dollar annually forever for less than 25 dollars (by buying the Token, then selling >4% of their holdings each year to maintain their share in the total pool), thus buying this asset guarantees a steady outperformance against the market.

During 2021-23, Ethereum burned millions of ETH each year through this mechanism.

But the problem is: this has never been a real floor support. The reason is that most of the burning at that time came from crypto-native internal use cases. If ETH drops 10 times, the profits generated from these use cases will also plummet, as all buyers' funds have significantly shrunk. This applies not only to the infamous 180 million dollars in fees burned in a single day during the "digital monkey" sale (yes, that really happened; if you don't remember, you can check!), but also to more "normal" activities like collateral. The argument for floor support only holds when the income stream has external backing.

Today, with the growing RWA (Real World Asset) economy, Ethereum indeed has a stronger foundation for this external support; but on the other hand, perhaps because it is gradually becoming a regular, stable, and mature business, it will never again go wildly out of control to burn 180 million dollars in a single day during a digital monkey sale.

2. Optimizing ETH as a fee burning Token will have to sacrifice decentralization and resistance to censorship/capture

If we decide that we really want to optimize ETH as a fee burning Token to support its current market value of about 270 billion dollars, then Ethereum must essentially operate like a large multinational corporation on a global scale—the scale being roughly equivalent to L'Oréal (ranked about 55th globally).

So, what must a true large multinational corporation do to maintain its industry position in the long run?

1. Massive expenditures. AI estimates that L'Oréal spends about 0.58% of its market value on research and development (R&D) annually. This level of expenditure would instantly bankrupt the Ethereum Foundation (EF). Therefore, this requires an in-built funding mechanism in the protocol, spending approximately 700,000 ETH each year, along with all the political controversies it brings (validator earnings would be cut by two-thirds). And this is only for R&D costs. Multinational corporations must also invest heavily in various directions beyond continuously producing their existing products.

2. Strong governance. To survive in the wave of new technologies and cultures, one must make subjective decisions to explore new markets, develop new products with new features to cater to those with new ways of thinking utilizing the latest technologies. Ethereum must establish a highly interventionist long-term governance mechanism.

It is obvious that these two points are extremely detrimental to optimizing resistance to capture and decentralization.

Moreover, there is another hidden danger: Optimizing for fee burning means, to some extent, optimizing for high gas prices. This could drive some users away, including those who most need privacy and security. The pursuit of a pricing strategy maximizing "price × usage" results in actual usage lower than the pricing strategy that seeks to expand usage as much as possible within blockchain security resource limits.

3. Optimizing ETH for Store of Value (SoV) aligns closely with decentralization and CROPS

Whenever I ask people what they value most about Ethereum (whether compared to other public chains or any other fields outside blockchain), the most common answer is always: decentralization and CROPS (censorship resistance, capture resistance, open source, privacy, and security).

Decentralization and CROPS have immense value, even for institutions. For individuals, privacy is often seen as an abstract ideology; for institutions, it implies prudent risk management, legal compliance for data protection, and many practical considerations. The same goes for security. Running one's own node (often referred to in business jargon as "on-prem deployment") applies the same way.

But what does this mean for ETH holders? It depends on why you hold ETH. If you want ETH to chase financial trends to the fullest and extract fees from them, then you need a “fearless leader™” to rally Ethereum enthusiasm on socials for [insert specific opportunity] and pragmatically restructure the protocol to provide explicit support.

However, if your primary reason for holding ETH is to use it as a Store of Value (SoV), then you will assess ETH using indicators characteristic of SoV. What is the primary and most important characteristic indicator of SoV?

To survive.

This was indeed a core topic of discussion at the last Devcon ("Post-Quantum and Post-AI Era"). You need a chain that makes conservative trade-offs ("pure hash security, fully formal proofs, rounds exceeding the known security necessary rounds by more than 3 times"). You need a chain that pursues at least partial ossification such that once the core layer is complete, most work will move to higher tiers of the tech stack. You need a chain dedicated to minimizing protocol politics, consistently setting very high thresholds before accepting pre-compiles that might lead to protocol bloating or introducing new protocol-based rewards susceptible to capture by power.

What other indicators with SoV characteristics exist?

• The ability to easily and securely store assets (thus driving research on multi-signature wallets).

• The ability to privately store assets (thus promoting the work of kohaku).

• The ability to both privately and securely store assets (thus driving the initiated 8288 and private-account abstraction workflows).

• The guarantee of unstoppable transactions: as long as you have the coins, you can send them out; block builders cannot prevent you (FOCIL).

• Minimizing infrastructure dependency (essentially running through the entire decentralized roadmap, including how I can run a full node on this laptop, syncing in less than 6 hours, taking up only 1/8 of my hard drive space—performing even better than in 2019!).

So, is there a highly synergistic "adoption" goal with SoV?

The answer is absolutely yes.

The more assets that are natively issued on L1 (including RWA and native decentralized assets), the broader the scope of things you can do with ETH, and the healthier the ecosystem becomes. The ability to easily (including securely and trustlessly) exchange freely between ETH and other assets, use ETH as collateral to interact with other assets, etc., all constitute the core practical value of holding ETH.

While there are indeed some conflicts between supporting these use cases and maintaining decentralization (for instance, we must be wary of fast slots and their potential impacts on centralization), overall, these conflicts are far smaller than the costs brought by blindly pursuing fee maximization.

Conclusion:

From a social perspective, the best reason to focus on Ethereum is that it truly brings decentralization and CROPS characteristics to more people and applications.

From a personal perspective, the best reason to hold ETH is its Store of Value (SoV) properties, which are a direct result of decentralization and CROPS.

Article link: https://www.hellobtc.com/kp/du/11/6495.html

Source: https://x.com/VitalikButerin/status/2119401376753262713