ETH is a unique, and differentiated, digital store of value from BTC. ETH has lower net issuance, a native staking yield (uncorrelated with TradFi), and a value capture mechanism from activity in the Ethereum economy.
Introduction
The Ethereum network creates a value proposition that is differentiated from (and potentially superior to) many traditional investment assets:
Ethereum offers a way for a global audience - from individuals to financial institutions to nation-states - to own and participate in the growing digital economy.
The Internet was the last platform that had such potential for societal impact. Today, the Internet is ubiquitous: it is integrated into most devices around us - from phones to laptops to watches to cars - and provides a global platform for creating and consuming digital content.
Ethereum represents a digital platform with the potential scope of the Internet itself, with two improvements: (1) it embeds a digital asset (ETH) as a store of value and money into the network, and (2) it provides a tokenization platform for creating and consuming digital content, as well as allowing users to own their digital assets on the Ethereum blockchain.
As our lives become increasingly digital and more commerce takes place online, the Ethereum ecosystem is providing a digital substrate to facilitate this transition.
Ether (ETH), the native currency of the Ethereum ecosystem, creates a way to both transact in this digital economy and capture the upside in its network growth.
There was no way to “invest” in the early infrastructure growth of the Internet (until the app layer, e.g., FAANG stocks, flourished). That opportunity now exists today: owning ETH provides investors a way to share in the upside of the entire Ethereum network - its infrastructure, apps, and user growth.
Bitcoin revolutionized the financial world by creating a digital, globally accessible version of gold. Bitcoin’s functionality ends there - it is simplistic by design.
Ethereum extended Bitcoin’s technology to create a digital economy - a globally accessible App Store. Moreover, ETH, as the underlying currency for the Ethereum economy, captures value as the Ethereum network grows - giving ETH a unique store of value and monetary proposition that is differentiated from BTC.
Where Bitcoin is easily understood due to its simplicity, Ethereum is more multi-faceted. However, Ethereum’s value proposition is much broader than that of Bitcoin, and ETH as an allocation could complement BTC as part of a balanced digital asset portfolio.
Three key properties give Ethereum superior store of value and monetary properties:
Ethereum has a more sustainable monetary policy and much greater security under Proof of Stake.
Both Ethereum and Bitcoin started as Proof of Work networks. There is an underlying benefit to Proof of Work: due to the high cost of running a mining operation, miners typically need to sell more of the underlying block rewards than stakers, since stakers have near-zero operational costs and therefore less need to sell. As a result, Proof of Work can lead to broader distribution of tokens, while Proof of Stake can lead to a concentration of holdings.
Ethereum had the benefit of starting as a Proof of Work network, which allowed it to achieve a wide distribution of tokens, and then switch to a Proof of Stake mechanism after ~8 years. Bitcoin will likely remain the only major Proof of Work crypto asset going forward and has a robust mining ecosystem securing the network. However, it is worth noting why Proof of Stake is more economical and sustainable over the long-term and institutions may want diversified exposure to both types of crypto assets.
The advantages of Proof of Stake are (1) lower cost, which leads to (2) lower issuance. The costs of Proof of Work are the cost to acquire mining equipment, the associated infrastructure (land, buildings, cooling, security, etc.), and the electricity required to power the mining operation. These costs are non-trivial, requiring substantial block rewards to fund operations. Conversely, an Ethereum Proof of Stake validator requires a consumer laptop and an Internet connection, which is operationally trivial. While the barrier of entry to be a validator used to be 32 ETH, staking is now possible in smaller denominations via liquid staking.
This allows Ethereum’s monetary policy to have “minimum viable issuance,” or an issuance of the minimum amount of ETH needed to provide validators with an acceptable yield (the yield matrix is below). When minimum viable issuance is coupled with the fee burn (via EIP-1559 which distributes ~20% of fees to validators while burning the rest), this results in a net deflationary pressure to counteract issuance inflation.
What does this mean? When Ethereum switched from Proof of Work to Proof of Stake, the amount of ETH that needed to be issued dropped significantly, creating a far more sustainable monetary policy:
A common criticism of Ethereum is that the monetary policy looks malleable vs Bitcoin’s simpler monetary policy of issuance halvings every four years, which results in declining inflation and an ultimate supply cap of 21 million. This is a flawed argument.
First, it is important to note that the governance of Bitcoin and Ethereum operate similarly. Just like software upgrades accepted by the network’s nodes can change the Ethereum blockchain, the exact same governance and upgrade process exists for Bitcoin (and we have seen many key upgrades - like SegWit and Taproot - showing that Bitcoin is indeed malleable). If needed, Bitcoin can change its monetary policy and introduce tail inflation, although this would likely fracture Bitcoin’s community quite dramatically. Nevertheless, although Ethereum has changed monetary policy to introduce a fee burn, to reduce block rewards, and to transition from Proof of Work to Proof of Stake, each of these changes has resulted in a reduction in inflation and an ultimate path toward monetary policy ossification, like Bitcoin has achieved. It’s also important to note that Ethereum’s monetary policy changes have been monotonically decreasing, and this will almost certainly remain the case.
Second, even in a “worst case” monetary policy situation for ETH (80+% of the network staked and zero transaction fees, both of which are extreme assumptions), ETH's issuance is relatively low. The net issuance table below shows that with 100 million staked ETH and zero fees, inflation would be ~1.5%. As ETH fees increase, net issuance drops and ultimately becomes deflationary.
Another key upgrade enabled by proof of stake is massively increased economic security. As of November 2024, 34M ETH is staked, providing $124B of geographically diverse security to the Ethereum network. Bitcoin, by contrast, has a network of hardware miners collectively worth just under $9B at current ASIC market prices. Additionally, most of of these ASICs are produced in China.
A native crypto asset is essential to a robust blockchain (to pay validators / miners for their security). If the underlying crypto asset has a minimal yet secure token issuance schedule, it can achieve store of value status. Bitcoin has become institutional grade and will remain a core asset. Ethereum’s lower issuance (and potential for organic deflation) should arguably position ETH as the premier Proof of Stake asset and a diversified complement to BTC.
To summarize: running Ethereum’s Proof of Stake network is relatively economical due to lower issuance and lower operating costs - with the benefit of higher economic security as well.
One final note: because Ethereum’s Proof of Stake is designed so validators can run on consumer grade laptops, Ethereum has a lower environmental / electricity footprint. This is not meant to be an outright criticism of Bitcoin’s Proof of Work; in fact, many argue that BTC mining is arguably accretive to the environment as much of the BTC mining infrastructure relies on green energy. However, the argument comes back to security. A BTC miner with a power, infrastructure, and real estate footprint has more of an attack surface than an ETH validator, and over time, ETH validators can be more geographically decentralized (and therefore offer differentiated security) from BTC miners.
Ethereum’s native staking yield makes it a differentiated store of value.
With the spectacular launch of the BTC ETFs, Bitcoin has arguably crossed the rubicon into an institutional-grade store of value. Bitcoin has carved out its spot in the crypto space as “digital gold.”
Ethereum has a more sustainable and (in most cases) less inflationary monetary policy than BTC. However, after the transition to Proof of Stake, ETH also has a native staking yield, making ETH a differentiated “digital gold”: a store of value with cash flow.
While the benefits of Proof of Stake are numerous (discussed in the previous section), one key result is that ETH validators receive issuance from the Ethereum protocol in the form of a “staking yield.” In exchange for “pledging” 32 ETH as collateral (or fractions of that if using a liquid staking mechanism), each validator receives cash flows from issuance (and transaction fees). This is a potential reason to hold ETH as part of a portfolio in addition to BTC; ETH holders can stake (with virtually zero operational costs) and receive a staking yield, while BTC requires an expensive mining infrastructure setup (with high fixed and variable costs) to receive block rewards.
The ETH staking yield is a function of two main variables. The first is the total amount of ETH staked; more staked ETH means lower yield for each staker, so that the entire network is not incentivized to stake. The second is the fee revenue from transaction activity on the Ethereum network. Even after EIP-1559, which resulted in ~80% of transaction fees being burned, the remaining ~20% bolsters the ETH staking yield for validators.
The figure below depicts approximate ETH staking yields across different amounts of ETH staked and different annualized fees. The addition of underlying cash flow (without compromising the integrity of ETH’s monetary policy and maintaining low-to-deflationary issuance) bolsters the case for ETH as a store of value asset that is differentiated from BTC.
Over the past year, the ETH staking yield has hovered between 2.5% and 3.5%, since transactions fees have been lower during the bear market (before the institutional adoption Renaissance we think is coming), and ETH scaling with L2s has lowered L1 fees (which is a good thing). A common rebuttal is that the risk free rate for US Treasuries has been higher than the ETH staking yield, and that the ETH staking yield is therefore uninteresting. There are two issues with that criticism:
ETH’s staking yield offers a source of cash flow as well as underlying exposure to the Ethereum ecosystem - making it a unique and attractive store of value asset.
ETH captures value from the entire Ethereum ecosystem - all roads flow through ETH!
All roads flow through the store-of-value asset, ETH. To understand why, we will revisit why ETH has the one of the strongest monetary policies in crypto:
For both BTC and ETH, in addition to the block issuance, the aggregate transaction fees from users using the chain are also paid to miners/validators. Unlike Bitcoin, whose primary use case is to act as a stagnant “digital gold”, the Ethereum network is flourishing as a hub for digital economic activity. Tokenization, decentralized finance, prediction markets, social media, gaming ecosystems, and more all have emerged as use cases for Ethereum. As a result, ETH fees skyrocketed from 2020 onward, resulting in miners earning very high rewards.
In August 2021, the Ethereum network upgraded to enact EIP-1559 (Ethereum Improvement Proposal #1559). This upgrade enabled a change in which ~80% of Ethereum fees would be “burned,” or programmatically destroyed from circulation, rather than going to miners/validators. While the primary benefit was to ensure that transactions in the Ethereum ecosystem would be smooth and predictable, an ancillary benefit is that increased economic activity resulted in a deflationary force on ETH.
EIP-1559 resulted in a much more robust and self-correcting monetary policy: when economic activity is high, the fee burn would be high, potentially resulting in more ETH burned than issued (deflation). When economic activity is low, the fee burn would be low, resulting in inflation.
Note: this mechanism is ironically similar to a “programmatic Federal Reserve,” which raises rates (resulting in deflationary pressure) during strong economic times and lowers rates (resulting in inflationary pressure) during weak economic times to encourage velocity of money.
EIP-1559 ultimately ties the monetary policy of ETH to the underlying economic activity on the Ethereum blockchain. More activity in the Ethereum ecosystem would directly translate to more ETH burned, adding deflationary pressure that could support ETH’s value.
As a result, all roads flow through ETH. When users transact on Ethereum, transaction fees are burned to accrue value to ETH. When apps are used, ETH accrues value. When Layer 2 scaling networks publish their transactions on Ethereum Layer 1, ETH benefits, not only from the deflation and transaction fees, but from the growth of ETH’s network effect and monetary premium.
ETH is a store of value with cash flow - with the added benefit of upside exposure from growth of the Ethereum economy. ETH has the best monetary policy of any crypto asset; ETH has a native staking yield; and ETH’s value is directly tied to activity on Ethereum.
If an institutional investor wants macro exposure to the entire blockchain space - ETH is arguably one of the best ways to capture that growth as part of a balanced digital asset portfolio.
Published 1/21/2025
This article is for informational purposes only and should not be considered as financial, investment, or trading advice. Etherealize does not guarantee the accuracy or completeness of the information provided. Investing in commodities carries risks, and readers should seek the advice of a qualified financial advisor before making investment decisions. Etherealize may have financial interests in the commodities discussed in this article.
