What gives Ether token its value?

Bitcoin holds the top spot as the world’s first and largest cryptocurrency. The coin carries worth based on its position as a store of value capable of transacting value globally and comparatively easier than other similar assets, such as gold. Ethereum’s asset, Ether (ETH), has a different value proposition, arguably valuable for a number of reasons. 

“Ethereum derives its value from a number of different factors, including gas fees, its usage as collateral, its ability to be lent and borrowed, its use as a medium of exchange for trading and NFTs [nonfungible tokens], and the fact that it can be staked for interest,” Scott Melker, a crypto trader and the host of The Wolf Of All Streets podcast, told Cointelegraph, adding: “It also has speculative value and is gaining increased attention and interest from institutional investors.”

The backstory behind Ethereum

Ethereum is the network on which its tradable coin, ETH, runs. Ethereum launched in 2015 based on a concept from a programmer named Vitalik Buterin roughly two years prior. In short, Ethereum acts as a platform on which developers can build projects or solutions.

The Ethereum network has become a staple in the crypto space over the years, with many projects based on it. A large number of initial coin offerings used Ethereum in 2017 as a funding vehicle. Crypto assets based on Ethereum’s blockchain are called ERC-20 tokens, although ERC-721 tokens also exist as nonfungible tokens built on the network.

When a project builds on Ethereum, it may come with an asset for use within that ecosystem. That asset would likely be an ERC-20 token. It is not uncommon, however, for projects to switch over to their own mainnet blockchain after launching initially on Ethereum’s blockchain.

Much of the decentralized finance sector of crypto also began on Ethereum, with decentralized exchanges based on Ethereum’s blockchain hosting trading for numerous tokens associated with the niche. DeFi lets participants borrow and lend crypto assets, among other capabilities. As noted by Melker, ETH can play a part in this ecosystem.

Ethereum transaction costs called gas fees

Part of ETH’s value relates to gas fees. Whenever a person sends ETH, they must pay a certain amount of the coin to pay for the transaction — a similar concept to the fees users pay when sending Bitcoin (BTC).

A big difference with ETH, however, is that sending ERC-20 tokens incurs gas fees. To send an ERC-20 token, the transactor must also hold ETH in the same wallet to pay for the transaction. Trading on DEXs also comes with gas fees. Someone might buy and hold ETH for gas fees, giving the coin a base level of demand in the market.

During the DeFi boom of 2020, Ethereum’s network saw high traffic, spiking gas fees to exorbitant levels. High transaction fees continued into 2021. Based on data from YCharts, an average ETH transaction cost $39.49 in February 2021 — significantly higher than levels recorded in years prior. A fee of around $1–$2 would be considered normal. “Ethereum Average Transaction Fee measures the average fee in USD when an Ethereum transaction is processed by a miner and confirmed,” YCharts notes on its site.

The asset’s possible speculatory value

Speculation may have its part in ETH’s value as an asset. Investors may buy ETH coins as a bet on the Ethereum network’s possible future success and adoption into the mainstream world. ETH’s price could possibly also represent speculation on the success or failure of a portion of the crypto industry, given the number of projects built on the network.

Tyler Winklevoss, co-founder and CEO of the Gemini crypto exchange, expressed this thought process in an interview with Casey Adams, an entrepreneur and podcaster, in December 2020. Winklevoss compared crypto industry innovation to that of the internet, although investing in a small portion of the internet during its early years, other than through roundabout methods, would have proven difficult.

Buying ETH arguably offers that type of fractional investment of a broader developing sector. Winklevoss explained by comparing such a purchase to hypothetical partial race track ownership, which would profit more on activity rather than on individual race results.

“Ether is the same thing for indexing a piece of the Ethereum network, which is a [...] decentralized global computer,” he said. “A lot of people equate Ether to digital oil,” he added. “If you want to get into the crypto game, my suggestion is own some Bitcoin, digital gold, and own some Ether, digital oil, and with those, you have most of your bases covered.”

Value in Ethereum 2.0

Ethereum’s scaling has been an issue, as seen with the CryptoKitties fad in 2017, and with the DeFi craze that began in 2020. Ethereum 2.0 aims toward a faster experience, but the upgrade is a process and has seen delays.

Eth2 includes the network’s transition to proof-of-stake technology, which hinges on ETH holding at least some level of price value, according to Aditya Asgaonkar, a researcher at the Ethereum Foundation.

“Proof-of-stake operates on the premise that if validators do something bad — if they are trying to attack the system or misbehaving in some way — then they’ll be penalized,” he said during an LA Blockchain Summit panel. “These penalties apply to their stake, which is in the coin ETH, so ETH price has to be, like, greater than zero for the penalties to have any kind of effect in terms of incentive,” he added.

Therefore, validators need a 32-Ether stake to take part in backing the network. Validators that help run the blockchain in a PoS system are paid out for the amount of contribution to the network provided by them. Demand generated by validators accumulating Ether in batches of 32 and the desire to earn yields from staking creates market demand for the coin.

Rising competitors

In light of the competitive crypto market, Binance Smart Chain has surfaced as one of the alternatives. The network acts similarly to Ethereum, except BSC uses Binance’s BNB coin for transaction costs instead of ETH, according to Binance Academy’s explanation of BSC.

Other network competitors include Cardano, Neo and many others. Over the years, the prospect of usurping Ethereum’s network has been a hot topic. Surpassing Ethereum in prevalence would be significant, given Ethereum’s wide usage.

Due to the large number of applications, products and services built on Ethereum, it also benefits from something called the network effect. “The network effect is a phenomenon whereby increased numbers of people or participants improve the value of a good or service,” Investopedia explains, adding: “The Internet is an example of the network effect. Initially, there were few users on the Internet since it was of little value to anyone outside of the military and some research scientists.”

“However, as more users gained access to the Internet, they produced more content, information, and services. The development and improvement of websites attracted more users to connect and do business with each other. As the Internet experienced increases in traffic, it offered more value, leading to a network effect.”

Essentially, the more something is used and built on, the more prevalent it becomes, similar to a wave, gaining momentum as it goes. In the case of Ethereum, the network effect means added trust as the platform is well known and prominent.

In the ever-changing world of crypto, assets rise and fall in popularity and price. Over the years, ETH has shown price strength as well as dominance as a platform on which developers can build. Time will tell, however, if a faster and cheaper network will usurp Ethereum in the long run, or if Ethereum 2.0 will scale the blockchain to meet market demand.