I've been happily on my journey down the crypto rabbit hole over the last few months of quarantine. I've personally bought into the narrative that Bitcoin excels as a digital store of value, and as such its price is driven by the human need for a stable, tamperproof, fixed supply asset in order to preserve value as well as measure value consistently over time. In this function, Bitcoin is compared to digital gold.

I've recently begun looking into Ethereum. I've listened to several talks now where they've said something like, "Bitcoin is digital gold, Ethereum is digital oil." Now, obviously digital oil is valuable. I've learned that the Ethereum network is a distributed os capable of running distributed applications. Its scripting language is Turing complete, and the development community is thriving and likely the most active within the smart-contract-crypto universe. What I fundamentally do not understand is how purchasing and holding ETH is an investment in that growing network.

The gold vs oil analogy seems rather apt. In the case of Bitcoin, since the lifetime supply of Bitcoin is capped, as Bitcoin realizes its store of value function, the value of a Bitcoin should approximately be equal to all the value that humans are trying to store in Bitcoin divided by the number of Bitcoins.

In the case of Ethereum, ETH is used to pay the network to run applications. Each operation has a fixed cost expressed in Gas, and there is a changing exchange rate to convert between ETH in Gas. Furthermore, the supply of ETH is not fixed, and is subject to change. Given these facts, I do not understand how purchasing ETH is an investment in the future of Ethereum. It seems to me that over time, the price of an ETH will approach the real world cost of executing the number of operations you can run on the Ethereum network as determined by the Gas - ETH exchange rate. Even if we assume that Ethereum will grow and establish itself as the dominant distributed processor blockchain, why would the price of ETH ever go above the price of the function the network is providing? AKA, why would it go above the cost of the electricity that is being consumed plus the hardware cost to run whatever application you're running via ETH?


If we turn to your analogy with oil, then its value is determined not by the cost of production and transportation, but by demand as a source of energy resources. In the same way, the market value of ether is determined not by the cost of its "production" and the direct cost of resources to execute smart contracts, but by the demand for the corresponding service.

If the implementation of a smart contract or an operation with tokens brings you a certain profit, then the cost of the "gas" required for this will be determined for you by this profit, and not by the cost of producing "gas" by miners.

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