Will Ethereum last long?
A Debate Documentary
Disclaimer: This article is a final deliverable from the course activities in Econ 101: Economics Principal instructed by Prof. Luyao Zhang at Duke Kunshan University [1], Autumn 2021. Prof. Campbell Harvey at Fuqua School of Business, Duke University [2] gave a guest lecture entitled “DeFi and the Future of Finance” as a distinguished and invited speaker for this course. Xinyu Tian, majoring in Data Science, and Tianyu Wu, majoring in Applied Mathematics and Computational Sciences/Math from the class of 2023 are the Teaching Assistants for this course.
Instructor highlights: Jingxi Cui stands out in providing concrete case studies with numbers and details for each of the arguments. Moreover, Jingxi brought our attention to reflecting on the sustainability of DeFi rather than short-term costs and benefits.
https://whimsical.com/getting-started-3SnvSYaPjRuxqUAPB9ahxE
“Soon, the bank won’t be dealing with money anymore. Money, at least money in its current form, will have disappeared, replaced with data. Again, I’ve said this for a while, but if money completely disappears and is replaced with digital central bank currencies, then the world is moving to a different place for definite” (Skinner 2020).
— — Chris Skinner
Opening Remarks
Peter:
Could you picture how our society will be in 30 years with no paper money in circulation and just cryptocurrencies and the DeFi Ethereum blockchain?
Before we proceed with our debate, let us first define a few key terms.
What is a blockchain, and how does it work? A blockchain is a distributed database that is updated and shared across a network of computers. Ethereum is a network powered by the Ethereum Virtual Machine (EVM), where network members check, confirm, and “execute” the computation whenever a request is broadcast. Ethereum’s native cryptocurrency is Ether (ETH). Users pay other users in Ether to have their code execution requests completed. “Smart contract” is software that runs on Ethereum’s blockchain. It is a collection of code (its functions) and data (its state) that lives on the Ethereum blockchain at a single address.
Our debate will examine Ethereum from three perspectives: applications, economics, and legislation. Our debaters will begin by discussing technological advancements that will make Ethereum easier, safer, and more private, as well as the concerns associated with its composability characteristic. Our debate teams will then address economic considerations such as the cost of the bug and transaction fees, which might harm ETH profits. It is a debate over whether the benefits of Ethereum will outweigh the risks that will determine Ethereum’s long-term viability. Finally, our debaters will debate the government’s regulatory policies and potential conflicts with Ethereum firms during Ethereum’s development to evaluate if Ethereum will endure.
Debating Session 1: Thesis
— DeFi Ethereum will last long
Perspective 1 (Applications)
Figure 1: The difference between apps and DApps
Figure 2: DApp market transactions
Pro: Annie:
DApps’ broad application is the best support for Ethereum’s long-term growth since, like apps need the Internet, DApps rely on the Ethereum blockchain to function. DApps could increase transaction security by accessing the Ethereum blockchain. Backend code (smart contracts) for decentralized applications or “DApps” is operated on a decentralized network rather than a centralized server, as Figure 1 shows. It has no downtime, which means that once the smart contract is implemented on the blockchain, the network will always be available to clients that want to interact with it. This transaction order would execute code immediately, preventing hackers from launching denial-of-service attacks against DApps. Smart contracts can be evaluated and guaranteed to operate in predictable ways throughout DApps’ applications without relying on a central authority like the traditional banking system. In this case, DApps are a more straightforward, safer, and private Ethereum area that will gain consumers’ trust in utilizing the blockchain in the future. From Figure 2, we can tell millions of active users using DApps with hundreds of millions of transactions every month (Wright 2020). Maintaining this volume, Ethereum will become prosperous.
Con: Bill:
We need a super high level of technology to provide a more straightforward, safer, and more privatized Ethereum environment to protect our peer-to-peer transactions, which is a huge performance overhead. Ethereum has to perform and store every transaction to achieve the security, integrity, transparency, and dependability that it aims to, which becomes a challenge as the scope of Ethereum’s business grows. Furthermore, proof-of-work requires time to achieve. According to a back-of-the-envelope estimate, the overhead is presently 1,000,000x that of normal computing, which is unlikely to be completed shortly (“Introduction to DApps” 2021). Besides, Ethereum may end up appearing like centralized services anyhow. For example, before publishing to the blockchain, Ethereum may store keys or other sensitive information on a centralized server, provide a frontend using a centralized server, or perform essential business logic on a centralized server. Many (if not all) of the advantages of blockchain over the traditional model are lost due to centralized control.
Perspective 2 (Economics）
Figure 3: Price performance of Bitcoin and Ethereum compared with other coins
Pro: Cathy
The fast growth and dissemination of Ethereum applications are due to enormous financial gains. Based on the Ethereum blockchain, Ether is valued more than ten times at the bottom of the COVID market panic in March 2020. The cryptocurrency has barely been around for five years! Figure 3 displays the rising price performance of ETH, excelling from Bitcoins and the average. Because of ETH’s remarkable surge in value, excess money from agencies and corporations is now viewed as a reasonably safe store-of-value asset and suitable speculative investment.
Figure 4: Stimulus check investment of Bitcoin, Ethereum, S&P, and Gold
Ethereum beats Bitcoin and other cryptos, becoming where most cryptocurrency activity takes place (Figure 4) (Spilotro 2020). DeFi, as the application of Ethereum blockchain, eliminates the intermediary, which saves procedures and time cost doing transactions. Users can use the Compound and Yearn Finance protocols to borrow, trade, lend, and invest via autonomous smart contracts. Currently, over US$24 billion is invested in various DeFi initiatives (Sandner 2020). DeFi, in particular, allows users to profit from their cryptocurrency holdings, particularly ether tokens. More investment in the Ethereum blockchain will result in more profit for the investing firms. For the betterment of Ethereum, the virtuous loop continues to spin.
Con: Dorothy
Figure 5: Ethereum price analysis
High risks usually accompany high rewards, and high risks carry a more considerable danger of loss. Every seasoned cryptocurrency user understands that Bitcoin or Ether is highly volatile and is just as likely to collapse as it is to rise (Chavez-dreyfuss 2021). After the last bull market in 2017, Bitcoin’s price has dropped by 85% this year, while Ether’s price has dropped by 95% from its previous high of US$1,428 (Kavanagh and Dylan-Ennis 2021). This data indicates that there is a significant chance of incurring a possible expense in an Ether investment. Like the broken line in Figure 5, once you gain from the top-up price of ETH and the next second, you may find a roller coaster to the bottom down with a significant loss (Sheikh 2020).
Meanwhile, Ethereum network problems cost money. Rival blockchains called “Ethereum killers” exploit Ethereum’s flaws, which will almost certainly cost investors money (Newbery 2021). After someone exploited a defect in the software that most users use to connect to the blockchain, Ethereum split into two different chains in late August 2021. It was unclear for a while whether the split would result in a “double-spend attack,” in which the same token might be spent several times and transactions reversed (Comben 2019). Because flaws are unavoidable, when the dangers outweigh the benefits of the Ethereum blockchain, users will migrate to alternative platforms, resulting in Ethereum’s demise.
Perspective 3 (Regulations)
Pro: Eve
Regulations for the Ethereum market may help to reduce the market’s instability and unpredictability. While long-time cryptocurrency investors bemoan the prospect of regulation restricting the market’s present independence, significant investors and corporations see the inevitable implementation of such regulations as a source of stability that may lead to widespread adoption. Our governments’ actions have already been taken. A congressional committee in the United States has been formed to look into digital currencies. Banks are asked to give paperwork on how to use them and examine guidelines on cryptocurrencies. The Securities and Exchange Commission chairman in the United States has warned undesirable actors about enforcement and regulation (Falach 2018). The Ethereum system will endure a long time with sustainable development thanks to Ethereum firms and our government laws.
Con: Fairy
Though governments tend to regulate the Ethereum blockchain, which department should oversee both cryptocurrencies and the Ethereum platform is debatable because it is unclear what Ether counts. Two federal regulatory authorities in the United States have different definitions of what a cryptocurrency is. ETH has been classified as commodities by the Commodity Futures Trading Commission, so they’re not regulated by the SEC (Rooney 2018). In contrast, the Securities and Exchange Commission (SEC) has the authority to regulate ETH and other cryptocurrencies, and the first U.S. bitcoin futures exchange-traded funds are expected to begin trading soon. The new Ethereum blockchain has a bright future for trade, thus new regulations are required, and the market would be chaotic without them.
Debating Session 2: Antithesis
— Ethereum network will not last long
Perspective 1 (Applications)
Pro: Bill:
We have debated about Ethereum’s significant risks in terms of application technologies and market transaction costs. Hacks and the volatility of Ethereum’s price highlight how non-linear all major public blockchains are, implying that they are managed by an open-source community that must be majority aligned in principle and techniques to maintain chain performance (Richter, 2021). Decentralization which does not have a central authority comes with all of its costs and risks. As a result, adopting the Central Bank Digital Currencies (CBDC) (https://cbdctracker.org/), which has already been a new form of using the network that makes our lives easier, is the most credible method to ensure transaction safety. As we can tell, the proportion of CBDC activity increases in Figure 6. Why use Ethereum, which is considerably riskier?
Figure 6: Share of respondents conducting work on CBDCs %
Con: Annie:
I do not entirely agree with Bill’s assertion. We cannot stop innovating because the risk is too high. Because of Ethereum, we continue to update when bugs are discovered and our techniques improve. Ethereum has survived a software glitch that led the world’s most popular blockchain to split, indicating that it can withstand and flourish in the face of adversity (Sigalos 2021). “Users reduced the harm by quickly upgrading a key software, and the deviant fork should be gone,” Ethereum co-founder Joseph Lubin stated. Attempts to exploit the bug were made, and the developers immediately updated the software. It’s also that Ethereum yields far more money than CBDC, which may explain why individuals are eager to enhance this new technology. We need the process of experiencing and resolving issues towards innovation. That is the test that any new technology must pass to proceed in the long run.
Perspective 2 (Economics)
Pro: Dorothy:
Figure 7: Bitcoin vs. Ethereum daily transaction fees
In the Ethereum blockchain application, high transaction costs are one of the primary reasons why investors are hesitant to use the Ethereum network. The number paid in Ethereum transaction fees outstripped the amount paid in top one bitcoin transaction costs, totaling $298,000. Nonetheless, as seen in Figure 7, ETH fees have been sharply increasing. According to data provided by The Block, the number of Compound liquidations peaked on March 12, 2020, with the bulk of those liquidations taking the form of ETH. Twenty-four hours prior to data collection, $4.19 million in ETH and about $120,000 in USDC stablecoin had been liquidated. Furthermore, according to Dune Analytics, Ethereum blockchain failure caused 2% to 5% of transactions on Ethereum-based decentralized exchanges to fail. That failure is so costly. On October 13, 2021, an Ethereum user attempting to engage in an activity called Strips MISO token auction in Ethereum blockchain paid $430,000 in fees for a failed transaction. They also spent $105,000 to cancel a second transaction after the first one failed (Copeland 2021).
Con: Cathy:
As the Ethereum network matures, the cost of rejected transactions could be reduced via innovation. In 2016, a collection of smart contracts known as “The DAO” earned a record US$150 million in a public sale, but one-third of the assets were stolen by a hacker (Kavanagh and Dylan-Ennis 2021). The loss has allowed the Ethereum ecosystem to grow significantly since then. While hacking and frauds are still prevalent, the general degree of professionalism appears to have much improved. I agree with Annie, who stated in the previous debate that risks should not be used as an excuse to stop innovating. It is acceptable for Ethereum blockchain to have risks as a newborn innovation; as long as the technology improves from the vulnerabilities, allowing the advantages to outweigh the costs, its future would be bright.
Perspective 3 (Regulations)
Pro: Fairy
The Ethereum blockchain businesses cannot expand and scale to their full potential without clear regulations and laws because no one dares to move without understanding the boundaries of restriction and legality. Ether classified as commodities or securities is under different apartments’ custody, as noted in the earlier argument over the ambiguous custody from the Commodity Futures Trading Commission and SEC department. The Ethereum industry has been at a standstill since the Securities and Exchange Commission (SEC) decided that neither Bitcoin (BTC) nor Ethereum (ETH) was securities in 2019. According to this declaration, cryptocurrencies should be seen as commodities, although the Ethereum blockchain has more potential applications than a limited-use product. Although the market is considerably broader, blockchain innovation will be limited to only the development of currencies in this circumstance. The Ethereum market’s potential to make additional derivatives in the application is limited within the categorization to fit regulation.
Con: Eve:
Rather than fighting endlessly over Ethereum’s custodial rights, we should first discuss whether or not we want regulation and, if so, in what form. Government regulation of the Ethereum blockchain might improve transactions, although it is not required at this time since the government’s ability in a decentralized society is restricted. Only two areas of regulation are more urgently needed: tax reporting to balance profits obtained and regulating initial coin offers (ICOs) to prevent fraud during transactions (Edmondson 2018). The regulation could focus on these two areas to accelerate the release of the policy. As a result, whether or not the cryptocurrency market is regulated will remain highly speculative. Before entering a cryptocurrency position, investors should consider their investment goals and risk tolerance. Companies should continue to collaborate with the government, regardless of how legislators and regulators handle the challenges. The objective is to ensure that the rapidly expanding number of individuals who utilize fintech and Ethereum blockchain technologies continue to receive best-in-class solutions with enough consumer and market protections.
Conclusion: Synthesis
— how could we utilize the Pros and overcome the Cons?
Perspective 1 (Applications)
Pro: Annie:
My main point is that innovations allow firms to take the chance to be the first to enter the Ethereum market, bringing “new blood” to Ethereum applications. Because anyone could build applications on the network, Microsoft, Imogen Heap, and Deloitte have all expressed interest in the ecosystem. To build up their blockchain, Microsoft created the Ethereum Consortium Blockchain Network on Azure in 2016. But it wasn’t Ethereum’s only activity in 2016. The DAO, which crowdfunded a $150 million investment fund earlier this year, was one of the most well-known programs built on the network (“Ethereum: Most Innovative Company” 2017). That investment was dogged by a hacker, causing the platform to split multiple times to limit the bad actor’s ability to steal funds. As innovation goes on with more investments from influential firms, Ethereum’s future is bright, and all the risks problems shall be fixed up.
Con: Bill:
More firms investing in Ethereum blockchain, or “fresh blood,” as Annie puts it, is a positive sign for Ethereum, but it also causes technical issues that may bring the system down. Scalability is currently a significant issue with the Ethereum network. The popularity of the Ethereum-based game CryptoKitties, for example, caused the network to become highly congested in 2017, considerably delaying trading. Due to congestion on the Ethereum network, an online casino had to lock its doors earlier this year briefly. The news broke when KingTiger Casino’s official website announced the company’s temporary shutdown of services on February 26. With more examples of closure in the Ethereum company, the cryptocurrency will undoubtedly gain a poor image, causing investors to be skeptical of the new technology.
Perspective 2 (Economics)
Pro: Cathy
Ethereum will endure as long as the benefits of Ethereum outweigh the costs of risks since everyone wants to make more money. Despite the significant risk associated with Ethereum, this does not stop investors from investing. Since December 2020, the number of unique Ethereum users has tripled. According to statistics from Dune Analytics, the total number of unique addresses interacting with DeFi Ethereum has surpassed 3 million. As of July 13, the analytics tool has discovered 3,004,620 addresses utilizing at least one of the platform’s 24 applications. With over 2.3 million unique addresses, Ethereum’s largest decentralized exchange, Uniswap, was by far the most popular DeFi protocol. Despite a market-wide sell-off in May, DeFi Ethereum usage has continued to skyrocket. The number of unique addresses increased from 100,000 to one million in around 11 months, but continuing growth is occurring quicker. According to Messari Research Analyst Mason Nystrom on Twitter, the transition from 1 to 2 million took 142 days, whereas the change from 2 to 3 million took only 78 days (Craig 2021). High risks may deter investors, but if they see the potential beneath Ethereum’s present unsteady shield and win more than they lose, this system will endure for a long time.
Con: Dorothy
Earning profit is a need for attracting new investors into Ethereum, but high transaction costs reduce earnings. High transaction costs are unavoidable, even though technology fosters innovation and reduces the danger of decentralization. A transaction fee, sometimes known as a “network fee,” is charged every time you move crypto assets from your wallet to another receiving wallet address. The precise amount you pay for each ETH transaction is determined by the network’s consensus protocol and the traffic volume on that network. Ethereum, as the most widely utilized network, will continue to suffer network cost issues. Even while Cryption Network is already working on a platform that enables DeFi users to trade without paying gas costs for the first time, we cannot give any assurances until it is officially launched. High charges will exist for a long time because this is a new technology. As a result, we’ll have to wait and see if Ethereum will survive in the long run.
Perspective 3 (Regulations)
Pro: Eve
The Ethereum blockchain should not be viewed as merely a product, a network, or a currency. It is an advanced decentralized idea. This Ethereum blockchain contains implications that might be a game-changer in terms of integrating high-tech into our daily lives. As a result, debating whether current departments should govern Ethereum is pointless. We could let the tax department write new regulations if we notice taxes that require policies to balance profits.
When well-designed, ETH’s Initial coin offerings (ICOs) can offer greater security, liquidity, and transparency than traditional finance mechanisms. These qualities have the potential to reduce the costs of asymmetric information and agency difficulties, which could save some conventional regulation. Also, because we want this system to be distinct from the old centralized one with more transaction independence, decentralization should not intervene significantly.
Con: Fairy
Even if agencies exist to provide clear regulatory principles, the level of regulation will be a source of debate between governments and companies. Despite the fact that many businesses recognize the necessity for external influence, tech corporations would negotiate with the government to establish less strict regulations when it comes to profit. Negotiation takes time, which may cause Ethereum’s progress to be delayed because the system’s operation is debatable when various parties are involved. Many agencies have acknowledged the dangers of overregulation and warned lawmakers against enacting legislation encouraging foreign investment in the technology. How much should our government interfere to preserve the benefits of decentralization? Is it feasible for the capital of Ethereum enterprises to influence market policy? Ethereum might perish amid a standoff about who and how to regulate with the government and society.
Let me ask you, the readers:
Do we want to retain Ethereum the way it is and rely on developers to make the final decision? Or do we want to use decentralized, rule-based, and automated voting methods to return power to all stakeholders on the blockchain? Do you believe Ethereum will be around for a long time?
Author:
Figure 8: Jingxi Cui
Author: Jingxi Cui is a sophomore student pursuing psychology in Behavioral Science at Duke Kunshan University. With intense enthusiasm and interest in Economic Behavior, she is devoted to doing further interdisciplinary research projects with the knowledge of both economics and behavioral science.
Relevant Materials:
[1]: Duke Kunshan University is a Sino-US university established as a partnership between Duke University in the United States and China’s Wuhan University. It is committed to building a world-class liberal arts university that offers a broad range of high-quality, innovative academic programs.
[2]: Duke University is a private research university founded in 1838 in Durham, North Carolina. It is ranked among the top universities in the United States.
Acknowledgments:
Design: Austen Li
Executive Editors: Xinyu Tian
Supervisor and Chief Editor: Prof. Luyao Zhang