Buyers of ethereum-based ERC-20 altcoins helped to drive the price of the second-largest cryptocurrency in the world up to an astonishing $1,400 per token in mid-January. After this, interest in the initial coin offering industry has waned considerably.
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Ethereum’s price is correlated with the ICO boom-and-bust trend, according to investors. During this time, ether’s price has declined to a fraction of what it once was, and investors who purchased ETH have been left with nothing.
Investors are still trying to figure out how digital tokens are connected to blockchain, according to a report by CoinDesk. Nevertheless, it appears that the correlation between the price of an ether token and its utility as a fuel for a blockchain ecosystem is not particularly strong. Therefore, Ethereum as a blockchain can still be a robust and vital network even if ether as a token is not particularly well-valued compared to prior prices.
A Thesis on the Fat Protocol
Former Union Square Ventures partner Albert Wenger famously proposed the “fat protocol thesis” earlier in the history of digital currencies. The hypothesis argues that rising prices for utility tokens like ether allow developers of open-access software platforms to earn a profit even if the underlying protocol is free. Blockchain-based applications would charge users for their services, while open-access protocols like HTTP were required to be free.
Analysts wonder, however, whether utility tokens may be limited in terms of total fiat-currency monetary power because their price may be antithetical to their utility.
The report states Gresham’s Law as a relevant consideration. If a token is to operate as a fluid means of transactions within a blockchain network, it should not be attractive as an investment or a store of value. Tokens that are seen as good stores of value, however, aren’t designed for use.
Gresham’s Law proponents believe there is a sweet spot for a cryptocurrency community. The token powering the blockchain is perceived as a bit “bad,” meaning there is little expectation of depreciation or inflation. Critics of bitcoin say it lacks these qualities; because of its scarcity and incorruptibility, it is seen as a store of value more than a means of transacting.
Ethereum relies on its users and transactions to serve as the “gas” behind the ethereum network. This requires smart contracts to be a vital component of the protocol. This was in contrast with the practice during the ICO craze, where users held onto ether tokens while new offerings sprang up.
In recent years, however, ICOs have declined in popularity. ICO issuers holding ether want to dump the tokens to free up cash for their operations in many cases. Should this happen, the price of ether could fall even further, despite its continued use as a functional part of the ethereum blockchain.