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Ethereum: There’s a smart contract for that, aka Why Warren Buffett is wrong

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The Future Focussed Portfolio – Part VI

Ethereum: There’s a smart contract for that, aka Why Warren Buffett is wrong

Warren Buffett hates Bitcoin because it is a non-productive asset. He also argues that all cryptocurrencies fall in the same category. And while Bitcoin – like gold – is a non-productive asset, he is most definitely wrong painting many other cryptocurrencies with the same brush.

Many cryptocurrencies are real products or services that generate real income streams and return cashflows back to the holders of the coin.

In this Part VI of the Future Focussed Portfolio series, we explore Ethereum, and why it is most definitely a productive asset that investors and advisors should be across and exploring.

Figure 1: Traditional vs. Smart

Source: Adobe stock

ETHEREUM’S KEY INNOVATION

Most advisors/investors know that Bitcoin has unlocked the ability to govern and transfer money directly in a peer-to-peer fashion. But fewer probably know that Ethereum has unlocked the same for computation (think cloud computing).

Smart contracts are Ethereum’s key innovation.

Smart contracts (Figure 1, above) are computer programs that verifiably execute correctly across a decentralized network where there is no single trusted computer or intermediary required. This opens the use cases for blockchain far beyond what Bitcoin allows.

“Smart contracts

Are Ethereum’s

key innovation.”

—-

Ethereum opens the possibility of new ways to run organisations, and for new products and services.

If you can understand how Amazon’s Web Services (AWS) creates value for developers, you can understand how Ethereum creates value too.

Figure 2: Comparing technology stacks

Source: Holon

Ethereum, like AWS, can be thought of as digital infrastructure. It provides the building blocks for developers to build decentralised applications for users (Figure 2, above).

Ethereum based applications will be useful for end users – and there will be a lot of them. Like websites, not all will be valuable but as the smartphone proliferated and the conversations turned into, “There’s an app for that”, so too will be, “There’s a smart contract for that.”

“Ethereum, like AWS

can be thought of as

digital infrastructure.”

—–

Setting up a company? A digital artwork? Releasing an album and want to collect royalty payments? You guessed it, there’s a smart contract for that – and the speed of which these applications can be adopted is also fascinating.

DECENTRALISED EXCHANGE, AS A CONTRACT

Let’s look at an example of the power of Ethereum by comparing two companies: Coinbase and Uniswap.

Coinbase is a Nasdaq-listed company founded in 2012. It has taken Coinbase ten years and over half-a-billion dollars in funding to establish itself as a premium and trusted exchange in the crypto space. Today it is worth US$15 billion, trading several billion dollars per week and has over 3,500 employees supporting its operation.

Figure 3: Uniswap vs. Coinbase Trade Volume (7DMA)

Source: CoinGecko

Uniswap is a decentralized exchange built on Ethereum, it uses a mechanism known as “Automated market makers” as a replacement for an order book. Leaving the detail aside allows a user to retain ownership of their digital assets and swap between other assets on the Ethereum network.

Today, Uniswap does a similar volume to Coinbase (Figure 3, above). But what’s amazing is that Uniswap was a contract built in a year by a first-time Ethereum coder with a small grant. Such is the trust in Uniswap that more than $4 billion is locked as liquidity from users.

Uniswap has less than 60 people working for it and it has more than $2 billion in treasury in the form of their own token (UNI). This token gives governance rights to holders, allowing them to vote on proposals or decide what should happen with those funds (like a special dividend).

In effect, Uniswap has achieved similar heights to Coinbase, but on a shoestring budget, and with no human interaction needed on the exchange. All open source, and every transaction is verifiable.

This is the power of smart contracts.

“In effect, Uniswap has

achieved similar

heights to Coinbase.”

—-

VALUE CREATION – A PRODUCTIVE ASSET

We can also understand the value Ethereum creates by comparing it with Amazon.

Amazon sells products and services to generate income. It pays for its expenses and with excess money, it will purchase shares back from the market which in effect distributes the value to existing shareholders.

Ethereum has a similar model. Instead of users purchasing goods or services, the Ethereum network is the service. To use the service one requires ETH tokens, and when a transaction is made on the Ethereum network a small proportion of the ETH fee is burned – i.e., the more Ethereum is used the more ETH is burned. This burning of ETH creates scarcity for the holders, driving value into the coin over time, so long as demand continues. In the last 30 days, approximately US$430 million ETH has been burned. For contexts the Ethereum market cap is approximately US$250 billion.

Figure 4: Total Revenue and PE ratio of Ethereum

Source: Token Terminal – (Past performance is not a reliable indicator of future performance)

SO WHY NOW?

As of May 2022, Ethereum is going through some major upgrades. It will become an asset that shares revenue with its holders, whilst also burning excess fees to the benefit of all holders. A truly productive asset.

So as an investor – an intelligent investor maybe – how should you be thinking about Ethereum?

Ethereum is an essential building block of the decentralised future. It has a business model (token model) where it is driving real value back to token holders, all of which is underpinned by the economic activity on the Ethereum network.

For Ethereum to succeed long term it must win the hearts and the minds of the development community. That much must be understood. Figure 5 below is an excellent visual for what is actually occurring in the digital asset space.

Figure 5: Ethereum and Solana outpace other Layer 1 platforms in growth

Source: Electric Capital

Investors can be forgiven for seeing all cryptocurrencies as essentially the same. They can also be forgiven for the feelings of annoyance and frustration associated with market understanding and early price discovery.

Ethereum, with its genuine function, value, and general usefulness in a digital future, goes a long way to helping us all with some crypto clarity, and assurance. Take Mr Buffett with a grain of salt. The opportunity is exponential.

The use-cases for ETH are being proven and as adoption escalates it will fast emerge as a key building block of a future focussed portfolio.

Looking for some more information on how to build a future focused portfolio? Click here.

 

This article has been prepared by Holon Investments Australia Limited ACN 648 884 164, AFS Licence 532669 (Holon). The information provided in this article is general in nature and does not constitute investment advice or personal financial product advice. This information has not taken into account your investment objectives, particular needs or financial situation. Before acting on any information contained in this article, each person should obtain independent taxation, financial and legal advice relating to this information and consider it carefully before making any decision on recommendations.

Any opinions or forecasts reflect the judgment and assumptions of Holon on the basis of information at the date of publication and may later change without notice. Any projections contained in this communication are estimates only and may not be realised in the future. Returns from investments may fluctuate. Past performance is not a reliable indicator of future performance. All investments carry risks, including that the value of investments may vary and that your capital is not guaranteed.

Whilst all care has been taken in preparation of this article, Holon gives no representation or warranty as to the reliability, completeness or accuracy of the information contained in this article. Holon accepts no liability for any inaccurate, incomplete or omitted information of any kind or any losses caused by using this information. To the maximum extent permitted by law, Holon will not be liable in any way for any loss or damage suffered by you through use or reliance on this information. Holon’s liability for negligence, breach of contract or contravention of any law, which cannot be lawfully excluded, is limited.

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