Date: August 13th, 2020 12:52 PM
Author: greedy area
network effects
i honestly don’t keep up with this shit much anymore. im just fucking around.i don’t know what a fair valuation would be and I don’t think anyone else does either
this guy thinks it could go to $1trillion per token: https://bankless.substack.com/p/the-trillion-dollar-case-for-eth-eb6
Let’s Talk Real Numbers
Ethereum is aiming to become the infrastructure for permissionless finance. An entirely new, alternative, digitally-native, financial system fueled by a trustless asset. Since Dai is stable Ether and is seen as the primary medium of exchange for permissionless finance, we can essentially view Dai’s addressable market as the market for fiat currencies and its encompassing money supply.
What if Dai served Argentina?
Now, let’s assume Conti’s home country of Argentina begins to adopt Dai as the primary currency for commerce as the appetite for the Argentine Peso dwindles. Argentina’s M1 money supply was reported at $26.64 billion USD in October 2019. For those unfamiliar, M1 includes all assets and funds in a national economy that are readily accessible for spending, including physical currency and coin, demand deposits, travelers’ checks and other deposits.
Given the current climate with Argentina’s financial system, let’s say Dai is widely successful and captures 51% of the Argentine M1 supply, resulting in a circulating supply of 13.58B DAI.
Assuming the above collateralization ratio and the current price of ETH at ~$150, the MakerDAO system would need 226.4M ETH locked (208.4% of the total liquid supply) in order to supply the 13.58B Dai.
Obviously this is impossible given Ether’s issuance schedule, but it does begin to show the importance of economic bandwidth.
The only realistic way for MakerDAO to supply that much Dai is for the economic bandwidth of ETH to increase by a few orders of magnitude. (Or, for Dai to become more premissioned by using larger portions of trusted assets as collateral).
Therefore, in order to provide a sustainable amount of economic bandwidth to become the primary MoE in Argentina, the price of ETH would need to reach anywhere between $2,500 (12.50% of liquid ETH supply locked) to $10,000 (3.13%).
(Above) Necessary ETH locked to reach 51% of Argentina’s M1 Supply ($13.58B) given the respective ETH price and collateralization ratio
And that’s just for Argentina
While 13.58B in circulating Dai seems like a moonshot today, it’s actually just a tiny slice of a potential future for a global, permissionless financial system when you consider traditional capital markets aggregate hundreds of trillions in value.
Let’s take it a step further and theorize that Dai starts competing with the all-mighty US Dollar as a form of money in global commerce. There’s $4.034T in US dollar M1 money supply and let’s say Dai captures 10% of it, creating a circulating supply of 403.4B Dai.
How much economic bandwidth would Ether need to provide to successfully mint this much Dai assuming a collateralization ratio of ~250%?
Even at ATH prices of $1,400/ETH, 663.1% of the total liquid supply would need to be locked in order to supply enough bandwidth for the 403B in circulating Dai.
We’d need more economic bandwidth.
With a hypothetical 46.42% of total liquid supply locked in MakerDAO, over 3.5x higher than the DAO peak in 2016, the price of ETH would have to reach $20,000 to supply enough economic bandwidth to fuel hundreds of billions in circulating Dai.
At 18.57% of liquid ETH supply locked, we’re looking at an ETH price of $50,000.
Lastly, to bring the required ETH locked into the ballpark of today’s consumption rate, let’s say ~3.7% of total bandwidth, the price of ETH would have to surpass $250,000 with total trustless economic bandwidth (i.e. liquid market cap) reaching $27T.
That’s a 1,665x increase from today’s ~$16.2B market cap.
Necessary ETH locked to reach 10% of the United States’ M1 Supply ($403.4B) given the respective ETH prices and collateralization ratios
But Wait, There’s More…
We only outlined MakerDAO, one specific money protocol for permissionless, trustless stable value. However, there’s dozens of emerging money protocols all competing for economic bandwidth, and all tackling different addressable markets.
Bandwidth needs of Derivatives
The biggest capital market in existence today is the derivatives market, comprising of $640 trillion in notional contract value as of June 2019.
With that, let’s start off by assuming 0.1% of global derivatives is absorbed by Ethereum’s permissionless finance in the future, or $640B in notional contract value.
As collateralization ratios for ETH-based derivatives are largely untested so far, we’ll also have to assume our collateralization ratios rather than relying on circulating market data. With that in mind, we can make some relatively fair assumptions based on the ratios from different money protocols on the market today. MakerDAO has an average collateralization ratio of 250% and Synthetix, a derivatives issuance protocol, averages an active collateralization ratio of 714% with its native asset, SNX.
Given that derivatives are substantially more volatile than MakerDAO’s system for stable, permissionless value and ETH is a substantially more liquid asset than SNX, we can assume that collateralization ratios for tokenized derivatives will lie somewhere between 250-750%.
Therefore, let’s assume a base collateralization ratio of 350% for derivatives contracts collateralized by a liquid, trustless asset such as ETH.
If we wanted to hit $640 billion in tokenized derivatives collateralized by Ether, at around ~18.67% of liquid ETH supply locked, it would require Ethereum to provide $12T in total economic bandwidth and a price of ETH at $100,000.
Taking this one step further, let’s imagine Ethereum captures 1% of the $640T in existing derivatives. At our collateralization ratio of 350% and locking up the same 18.67% in liquid supply, Ether would ultimately have to hit $1,000,000 in order to supply enough economic bandwidth to power the $6.4T in derivatives.
Bandwidth Needs of Synthetix
Looking at the numbers today, we can imagine it will be nearly impossible for Synthetix to successfully capture enough value to provide sufficient economic bandwidth for existing capital markets solely through its native token, SNX.
The protocol will have to add additional liquid collateral types in order to expand its economic bandwidth.
The protocol is beginning to reach its capacity as over 86% of the circulating tokens are currently being used to collateralize synthetic assets. There’s little room for additional tokens to be staked and therefore, the protocol must rely on a price increase in SNX to expand its potential economic bandwidth. However, by adding ETH as a trustless collateral type, it expands its total bandwidth by over 100x, allowing for an entirely new range of assets to be minted.
In September 2019, the Synthetix community opened up discussions about adding ETH as a potential collateral type for the protocol. Generally speaking, this should be a no brainer given the above graph and the implications it has on economic bandwidth for the protocol. (RSA note—appears Snythetix is planning to add ETH by January 30th)
Simply put, Synthetix can issue substantially more assets once they add more liquid, trustless collateral types like ETH.
To make this a reality, the biggest thing the Synthetix community will have to figure out is solidifying the economic model for new collateral types and ensuring value accrues to SNX when synthetic assets are issued through its protocol with different collateral types.
Conclusion
If Ethereum is going to create a new, alternative, permissionless, trustless financial system, then there’s no shortage of future demand for ETH as economic bandwidth.
If you have a low time preference, the next two decades for the proliferation of DeFi and permissionless finance at large is nothing short of exciting. There’s billions of individuals across the globe who could massively benefit from the future financial system being built today.
Hopefully this article serves as a thought exercise on the implications of trustless economic bandwidth and its importance within a trustless economy. Naturally, like any thought exercise, the exact numbers should be taken with a grain of salt.
The driving takeaway here is that in order for a decentralized smart contract platform with a native, permissionless, trustless asset to successfully provide the world with a permissionless, trustless economy, it will require its native asset to supply trillions in economic bandwidth. No crypto asset in existence today (not even all of them in aggregate) provides enough economic bandwidth to achieve this challenge.
With that in mind, there’s a long road ahead before we can make any meaningful strides towards creating a bankless future. A long but exciting one.
(http://www.autoadmit.com/thread.php?thread_id=4603016&forum_id=2#40750272)