By Ian Love, Founder & CEO, Blockchain Assets Pty Ltd
The metaverse has its own forms of money and of course its own version of a central bank. In this article I look at the Ethereum project through the lens of a traditional central bank.
The Ethereum network is a ledger which records asset ownership and transfers in the metaverse economy. Ether, the currency used within the Ethereum network, is used to pay for the recording of such transactions and for buying assets within the economy. Here are some characteristics of the ethereum economy:
- Key economic data in this economy is captured and publicly published in real time automatically;
- There is not a GDP number per sei but instead there are three ‘health of the economy’ metrics:
- the ‘Total Value Secured’ is total value of all assets in the economy;
- the ‘Burn Rate’ is a measure of how many transactions are being processed; and
- the ‘Annual Profit’ of the system is the total fee income of Ethereum.
- There is a concept of overall money supply that is similarly to the tradition definition M1, M2 and M3 money supply :
- M1 is referred to as ‘in accounts’
- M2 is ‘in contracts’; and
- M3 is ‘in validators’.
(a difference here is they are measured separately).
- Money supply is a function of:
- QE referred to as ‘new issuance’; and
- QT which is referred to as ‘burnt’.
- New issuance is fixed by mathematics, an algorithm. The Burn Rate depends on the level of economic activity, the higher the activity the higher the Burn Rate.
- The long term forecast for the Ether money supply is a steady reduction to a point of equilibrium at a very distant point in the future.
- The equivalent of the ‘risk free rate’ in the metaverse is referred to as ‘Validator Rewards Rate’.
- The rate is set automatically based on the Total Fee Income of the Network divided by the amount Ether ‘staked’ to secure the network.
The central bank in the metaverse is autonomous. The system collects economic data and calculates the base yield rate payable to those who record and maintain the integrity/security of ledgers.
The system also determines the money supply based on the same economic data. This is done 24/7/365 with no human intervention. The dashboard where readers can views this data and system can be found at https://ultrasound.money/
Why is this interesting for investment advisors?
At present the Ethereum economy is almost entirely made up of projects that started their life in the metaverse. We are however seeing some ‘real world’ projects participate in the Ethereum economy. In 2022, the Australian Open built a virtual Melbourne Park in Decentraland, this adds to Ethereum economy. Many more will follow.
As more projects join the Ethereum economy there are a number of drivers which should see the value of Ether grow.
- The fee ‘Burn’ (QT) rate will increase as the number of transactions increase;
- The ‘Validator Rewards Rate’ will increase as the ‘Total Fee Income’ increases; and
- As the Validator Reward Rate increases more people will choose to Stake their Ether, this pinches liquidity (increases the ‘in validators’ M3 element) and acts as a stimulus for higher monetary value.
At this stage, the eight year-old Ethereum economy is tiny compared to nation state economies.
The Total Value Secured is AUD 620 billion, the Total Annualised Revenue is AUD 6.2 billion. Ether has a market cap of AUD 300 billion with daily volumes of AUD 16 billion. The current Validator Rewards Rate is 7.2%pa.
In terms of valuing Ether the asset itself, because it has a revenue stream, it is possible to use a discounted cash flow model to arrive at an intrinsic value. Many of these valuations have been done by traditional finance people and made public. One great reference here is Ryan Allis – he can be found on linkedin.
Triple Point Asset?
Ether has some characteristics of a Capital Asset, because it has a yield, some characteristics of a Store of Value Asset, because of its decreasing supply, and some characteristics of a Consumable Asset, because of the burning of fees (some part of the fees get burnt).
Is it possible that Ether is the first asset to have all three characteristics? Some people think so. In any event it is certainly an interesting asset and one which seems to have a decent yield and a reasonable chance of solid capital growth.
But it’s not real!
Ether is not physical in the same sense that email is not physical. The metaverse is not real in the same way that a computer game is not real. Ether is ethereal but this does not mean it is not valuable. Some of the most valuable things we have in the world are ethereal. Music is ethereal in that its full beauty is accessible mainly through the sense of hearing.
In our view there is a strong possibility that the Ethereum blockchain will become the most utilised piece of software in history. Ether, the asset powering the Ethereum blockchain, is a Capital Asset, a Consumable Asset and a Store of Value Asset. It has the possibility of becoming more valuable as adoption increases.
Ian Love is the Founder and CEO of the Blockchain Early Opportunities Fund – a Cryptoasset Fund.