Ethereum
Pioneering the protocol economy for digital ownership and decentralized growth
In Ask an Expert, David Lawant from FalconX answers questions about staking and other applications built on Ethereum.
Most investors are familiar with the business model of the well-established platform economy, in which a collection of powerful technology companies leverage the network effects they generate to obtain exclusive data, goods or content from users. These tech giants dictate terms that are favorable to their own companies, but often restrictive to the interests of users. One of the most exciting and perhaps underappreciated aspects of blockchain technology is that it has enabled the emergence of a new business model – what we call the protocol economy. A blockchain, in its simplest form, is a secure digital ledger that, without use or need of intermediaries, records a new activity in its ledger in exchange for fees while adhering to its protocol (rules of operation of the process). Why is this important? Blockchains enable digital property rights. Digital scarcity and ownership can now, for the first time, be enforced by software and code rather than organizations and people.
However, not all blockchains work the same. The Bitcoin network is a application specific blockchain. It basically does one thing – log wallet addresses and BTC amounts – but does it very well. It’s secure, transparent and permissionless. Ethereum, on the other hand, is a general purpose blockchain. Its programming language, along with the introduction of self-executing smart contracts, enables more complex “if-then” activities. This innovation transforms blockchains from simple distributed ledgers into powerful global virtual computers. These virtual machines allow developers to create complete applications in various fields in a secure and autonomous manner, from marketplaces and financial tools to social networks and even other blockchains.
Ethereum’s robust security layer and broader functionality have paved the way for building new digitally native economies on top of its infrastructure layer. Tokens in such ecosystems are not only currencies, but also an integral part of the network’s incentive structure, encouraging coordination and integrity within the decentralized system. Holding Ethereum’s ether token (ETH) means more than just transactional utility; it represents a stake in the Ethereum network, providing both participatory and economic benefits aligned with the growth of the ecosystem. Additionally, the fundamentals of the Ethereum network can be analyzed in the same way as those of non-digital companies, which can help determine the value of ETH (similar to a stock, although with different metrics and nuances). ).
The Ethereum protocol economy currently has over 115 million token holders, with double-digit annual growth over the past four years. Monthly active users increased 25% year-over-year last month and now amounts to 6.1 million. If Ethereum layer 2 users (blockchains built on Ethereum to help scale the ecosystem) are included, this user base exceeds 10 million. The total value locked, or the amount of capital stored in Ethereum’s DeFi smart contracts, has exceeded $50 billion. However, this figure still largely underestimates the total economic value provided by the chain, which is estimated at $740 billion. And while Number of Ethereum developers is declining year over year, most of this attrition is due to new part-time developers, while the ecosystem’s established developer base continues to increase.
Ethereum’s financial picture is also strong, with total fees and gross profits up triple-digits year-over-year year-to-date, and trailing 12 month (LTM) revenue s amounted to $2.7 billion. Additionally, the network has a gross margin of around 85% and is profitable (25% net profit margin) even when accounting for non-monetary token incentives.
So how can one gain exposure to this revolutionary technology asset and, just as importantly, the $740 billion value built at the top of the chain? Assuming that the tokenomic design of a protocol has a value accumulation mechanism that captures network value, then there is a case for holding the token. When economic activity occurs anywhere in the Ethereum ecosystem, fees (revenue) are generated. Some of these fees fund network security costs (COGS), while the rest support token value via strategic buy-and-burn mechanisms (similar to stock buybacks). This approach highlights the benefits of protocol economies over traditional platform economies. Rather than buying stock in a company that built a platform that attracted a network, investors and users can now participate directly in their network’s success.
Q. What types of applications are already available on platforms like Ethereum?
A: Ethereum’s programming language is designed for high expressiveness, allowing the creation of various applications. While we are still in its infancy and innovative entrepreneurs are likely to create revolutionary applications that we cannot imagine today, the potential impact of crypto on many major industries is already evident.
Take the example of decentralized finance (DeFi); it offers a new approach to developing and using financial services with minimal dependence on central intermediaries. DeFi platforms can provide extensive services, including trading, lending, borrowing, and even rudimentary asset management functions. Additionally, evolving digital property rights have given rise to a vibrant non-fungible token (NFT) ecosystem in recent years. This ecosystem allows tokens representing ownership – from works of art to concert tickets – to be more seamlessly integrated into our digital existence.
Other important sectors gaining traction include decentralized social networks, where users can exert greater influence than conventional models, and games, which can significantly expand their design possibilities by incorporating cryptographic elements. Additionally, artificial intelligence may soon require the secure and verifiable logging of human-generated content in a transparent and immutable ledger, a function particularly suited to blockchain technology.
Q. What is staking and how does it work?
A: Staking is an integral process in networks like Ethereum, which rely on proof of stake (PoS) to support network operation. This involves participants locking up a certain amount of their cryptocurrency holdings to support network operations, including transaction validation and security. This contrasts with networks like Bitcoin, which operate under a proof-of-work (PoW) system and use energy-intensive calculations to secure the network.
Ethereum moved from proof-of-work to proof-of-stake in September 2022 and, as a result, allowed ETH holders who want to contribute to the security of the network to earn native yield in exchange for this additional work. This process is called staking.
The interest rate that ETH holders can provide is called the staking rate and depends on various factors such as the number of validators participating in the staking and the network transaction fees. Over the last six months, this rate has mainly fluctuated between 3% and 4%, depending on the CESRa standardized Ethereum benchmark staking rate.
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