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How is the value of the Ethereum determined?


As an investor in Blockchain projects, how do we know we have made a good deal? How do we understand the value of a platform and how do we compare it to other platforms? Sir John Hargrave, a prominent Blockchain investor and author of four books, in an article Which he published on his blog, tries to answer these questions by examining the value of the Ethereum. You can read this article below.

I am convinced that Ethereum will become more valuable in the long run: Ethereum is the “infinite machine” on which new blockchain applications are built. Like Windows and Android, Ethereum is the operating system for the new monetary world. This really makes the Ethereum very valuable.

How is the value of the Ethereum determined?

The CoinDesk website, one of the most popular websites in the field of digital currency, Collection of webinars To answer the question of how the value of the Ethereum is determined. Since you do not have time to spend two hours watching these videos, I have summarized them in this article and explained the important points to you (if your head is busy, just read the sections that are highlighted).

Criterion 1: ‌ Total locked value

This index is the headline of all news. This is somewhat influenced by the DeFi Pulse website chart, which has been exaggerated.

Total value locked (USD)
Total value locked in defense: does not prove anything by itself.

Total Value Locked is multiplied by the sum of digital assets held in Default-wise smart contracts (DIFA) at the current dollar value of those assets.

For example, if you spend $ 100 on the ion-swap platform to provide liquidity and benefit from trading fees, you are in fact locked in $ 100 in the defa area.

DappRadar’s Ilya Abugov’s webinar describes the value of the locked total as a “marketing indicator”, which I agree with. He meant that the total value of the lock helps to understand the hype (high and exaggerated advertising) around the industry, but it does not serve as a measure of value.

This is because the total value is defined in US dollars; Therefore, as the price of Ethereum increases, the locked value increases, even if its applications do not increase as much and correspondingly.

Real users are the real value in the Blockchain. The locked value index confuses real users with price fluctuations.

(To solve this problem, the DappRadar website also calculates a modified total locked value and tries to smooth prices using a 30-day moving average. This is an improved version of the locked total value, but still a long way from the ideal sample. has it.)

A better indicator of the number of real users is the unique active wallets, which are also explained in the webinar. This index is similar to the index of monthly active users in a traditional technology company such as Facebook; A valuable indicator to show how much people are dealing with Facebook (for example, do they log in to their account once a month?)

The Unique Active Money Quality Index sounds simple but complex. During what period do we measure the activity of the wallet? Daily? monthly? yearly? If someone has a wallet and uses it only for long-term storage of the Ethereum, should not it be counted?

It is very difficult to find suitable and useful data on a unique active wallet. The DappRadar website lists unique active wallets on its defa page, but it is hard to believe the figures provided. DappRadar, for example, reports that there have been only 931 unique active wallets in the last 24 hours for Compound digital currency, compared to more than 250,000 for Dune Analytics, according to the Dune Analytics website. has it.

So we leave out the issue of the unique active wallet for now, although we know it’s worth studying further.

Criterion 2: Number of accounts

In the webinar, Joanes Espanol of Amberdata spoke about measuring the number of Ethereum accounts as a way to determine the value of Ethereum.

Let’s imagine that Ethereum is a world bank. If we count the number of customer accounts that use this bank every month, does it not give us any idea about the value of the bank?

The first problem is that bank accounts can hold very little or too much money; So if a bank has 100 very wealthy customers, they are potentially worth more than the 1,000 customers who constantly have returned checks; So the number of accounts is not very useful to show us the absolute value.

The second problem is that some accounts are maintained by humans and some accounts by smart contracts. When people enter into a smart contract (which is the basis of the Blockchain), sometimes these smart contracts themselves create their own accounts.

In other words, if you and I each have an account and enter into a smart contract that creates a third account, we will somehow double our accounts. However, if you and I each have a traditional bank account and put some money in the trust account, no one will count this trust as a new customer.

How is the value of the Ethereum determined?
Two but three accounts; One person may have multiple accounts.

Indicator 3: Transaction volume

Liquidity is good. Nature rewards fluidity, whether in a clear mountain river or in the circulatory system of a healthy human body. The same is true of money (and digital money).

The volume of transactions is an indicator for measuring liquidityThe more transactions flow in the Ethereum network, the more liquidity there will be. Here, too, we can use the analogy we had with the bank: if we look at the number of transactions made in a bank, we have a better indicator of the health of the bank than we want to count the number of accounts, because accounts may be stagnant.

To understand how the value of Ethereum transactions is growing, here is a chart that compares Ethereum and Bitcoin trading volumes by the end of 2020:

Ethereum vs Bitcoin
Gold Column: Bitcoin, Blue Column: Ethereum

The important point of this webinar is that Ethereum breaks down Bitcoin in the volume of transactions. At this rate, Ethereum will reach more than $ 1 trillion in annual trading volume by the end of 2020 (December 2020 article): the first digital asset to reach such a record.

Remember that Ethereum and Bitcoin are two different things. Bitcoin is just an asset like gold. Ethereum is a complete asset class. Ethereum is the first operating system option for [یک پروژه] The block is China; Where all activities take place. This is why the blue column in the chart above surpasses the gold column: Ethereum is much more practical in terms of transactions.

Why invest in Ethereum? Because money is flowing in it.

Indicator 4: Gas costs (fuel)

In this webinar, Fredrik Haga from Dune Analytics talks about a topic that I have mentioned as the most important feature so far.

Also read: What is an Ethereum?

Like many other cases in the Blockchain, “gas” is a confusing term (the developers of the Blockchain are great at math but terrible at naming concepts).

The easiest way to understand the term gass is the transaction fee for using Ethereum.

The main idea was that it was the fuel gas that started the Ethereum car. To start the car, you have to pay for gas using fuel. This is the transaction fee. If someone wants to use the car immediately, the price of the gas (transaction fee) will increase and you will have to pay more for the fee. If you do not pay enough fees, your transaction will run out of fuel.

Remember: Gas = transaction fees. This is exactly like paying a fee to withdraw money from an ATM. If the ATM normally charges you $ 2, and when a large number of people ask you to withdraw money from the ATM, it charges you $ 10, it does exactly the Ethereum mechanism.

For the shrewd investors of the Blockchain, gas is a warning mechanism. When the price of gas is high, it is a sign that you have invested in emotions.

Note that this is not always true: If all the rats jump off a cliff and you are running in the opposite direction, this can be a good sign, but you usually try to reach the tokens that everyone has reached at the same time. , Therefore transaction fees are very high.

If you make a profit, the high transaction fee will benefit you, and if you make a loss, the high transaction fee will increase your loss. Because transaction fees are set with gwei (do not ask), it is difficult to calculate in dollars. Avoid investing when transaction fees are high.

As Christine Kim stated in her remarkable research note, Total gas consumption is a very useful indicator:

How is the value of the Ethereum determined?
Total gas consumed per day on the Ethereum

Note that this is not the total gas commission, but the total gas consumption; In other words, price is removed from this equation; So we remove all FUD (fear, uncertainty and doubt) and FUMO (fear of losing) from the chart.

For comparison, imagine that we are measuring the demand for cars at the beginning of the formation of the automotive industry. We do not calculate the cost of gasoline for cars (because it is unstable), but the total mileage is important to us. More distance = more use of cars = more demand for cars.

In general, more demand means more value. The chart above shows the growing demand for Ethereum. This means that Ethereum is increasingly being used to run valuable applications. In this sense, it is similar to measuring the demand for oil and gasoline (they may have used it for naming).

Total gas consumption can measure the demand for unique defaults. Although I do not know of any source that provides such data in a user-friendly diagram (a great project for a creative programmer).

Summary

  • Although Bitcoin continues to be the market leader in digital currencies, Ethereum is potentially the most valuable digital asset on the market.
  • This is because Ethereum is being used as a new operating system for Diffy applications; Where Bitcoin is merely a bystander and has no role in this.
  • This means that Ethereum is probably undervalued and traded below its true value. But no one knows how to measure its true value. There is a lot of information that is often of little value.
  • The total value of the lock is a useless indicator (remember the value of the total lock); This indicator is useful for viewing hype around Ethereum projects, but avoid considering it for investment decisions.
  • The number of people using blockchain is the most important value factor (blockchain is about people).
  • That’s why total users is a good indicator, because it shows the actual users of a blockchain. But this indicator does not tell you how many people are actively using it.
  • Unique active wallets show the number of people actively using a blockchain, but it is difficult to calculate. Because there are different interpretations of what features an “active” user should have.
  • Total gas consumption is a great indicator, as it shows the amount of “fuel” consumed to power the Ethereum (or any other dip) and removes the price from the equation. But it is difficult to calculate.

As of today, I personally use the Total User Index as my rule for investing in Defai. I know this is not a great indicator, but there is no perfect benchmark for money.

In the end, the Blockchain is about the people. If the actual number of people using the Blockchain is growing rapidly and they receive real value from the Blockchain, we can consider it a good investment.

More value = more value. This is an equation that we can all agree on.

This article reflects the views only of the author, and should not be construed as an investment proposal.

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