Michael J. Casey is the chairman of the CoinDesk advisory committee and a senior blockchain research consultant at MIT's Digital Currency Initiative.
The following article originally appeared in CoinDesk Weekly, a personalized newsletter delivered every Sunday exclusively to our subscribers.
The virtuous circle that saw ethereum's ERC-20 tokens buyers pushed the price of ether over $ 1,400 in mid-January turned into its diametrically opposite.
The initial boom in coin bids has faded and the price has declined just above $ 200.
This new phase, a collapse of the vicious cycle that exposed the intrinsic connection of the etheric market to the boom and the ICO collapse, is obviously painful for anyone who has purchased ether in the last 12 months.
But in the spirit of encouraging the crypted community to embrace failure as a true source of learning and growth, the experience is also incredibly informative to understand how value is formed and lost in the cryptographic resources associated with blockchain platforms. .
This dynamic is still being defined. However, a strong assumption is emerging that the correlation between the price of a token such as ether and its actual or predicted network utility – that is, its value as "fuel" in a blockchain ecosystem – may not be very strong.  This is a challenge for anyone, like me, to be initially enthusiastic about the "fat protocol thesis". As a summary, this idea, convincingly made by Union Square Ventures partner Albert Wenger, believed that the utility price increase perspective would allow developers of open access software platforms to extract value for their work even when the underlying protocol is open and free.
He argued that cryptographic resources and blockchains would revise the prevailing Internet paradigm where value could only be extracted by application developers who could charge users their services while open access protocols developers such as SMTP and HTTP they were condemned by the requirement that they be free.
But now we are wondering if the tokens, these units of value / means of exchange – call them what you want – could have their monetizing power with a limited uptrival fiat currency because the price could be antithetical to utility (which we could define "transactability".)
In Money, Bad Trumps Good
In essence, the problem has to do with Gresham "Law that" bad money drives out well "- the idea is that if you want that a currency, or any token used for economic exchange, functions as a fluid transaction facilitator within your community, you do not want it to be overly attractive as an investment or reserve of value
If a currency has that "good" quality – that is to say it is lasting, fungible, scarce and can not be devalued by some centralized broadcaster – it will appeal more as something to keep rather than to use.
This has nourished the idea among economists mainstream isti that there is a weakness in which the interests of a community – but not necessarily those of the individual – are best served by the fact that their money is only a little "bad". There must be a modest expectation of depreciation or inflation if a currency is to be traded. Communities need people to be willing to discharge their currency rather than accumulate it.
Milton Friedman, the father of the monetarist economy, has said so much, arguing that a very modest amount of expected and inflationary monetary expansion is desirable. It is by no means an argument for the devaluation of money and the unbridled abuse of fiat power. It is about optimizing the interchangeability with respect to the investment prospects.
I have argued elsewhere that this could be a problem for bitcoins, not for HODLing investors per se, but for the fact that it can never challenge the dominant fiat currencies as a medium of exchange. Bitcoin is a very "good" currency in terms of scarcity and incorruptibility, which means that its valuable assets outweigh its transactional utility.
Many bitcoin enthusiasts challenge this point of view, arguing that once consolidated as a solid value, a currency can then become useful as a transactional unit. Time will tell if they are right, but for now I think the bitcoin's value reserve is winning.
Despite the huge price declines since December, anyone who bought bitcoins in the eight years prior to his fall last fall quite pleased with the returns they simply had by holding it. On the contrary, transactions in the real world and not in capital are few and far between. Layer Two solutions like Lightning will make transactions easier, but I'm not convinced that this poor "good" currency will be widely dealt with.
Ether can request a reservation?
What does all this have to do with ether?
Well, as Vijay Boyapati exposed in a provocative tweetstorm the intelligent functionality of the ethereum contract depends on the people who use and make transactions in ether. This is the metaphorical identity of ether as "gas" of ethereum. But Boyapati said it is antithetical to the concept of "reserve demand", a measure of how long people hold a currency and the main engine of the price of a monetary unit.
For the brief ICO mania period last year, Boyaparti claimed, ether suddenly attracted the booking request because investors needed to acquire and hold an Aether deposit to participate in the ongoing flow of offers of ERC-20 tokens.
But now the flow has stopped. The issuers of those tokens that only really want dollars to finance their operations – not an ether deposit with which to conduct smart contracts – are now facing an existential threat if they do not throw away the ethereum tokens that fall quickly. Hence the conversion of a virtuous circle into a vicious circle.
Jeremy Rubin, a stellar developer and former MIT colleague, claimed in a piece of TechCrunch that these and other aspects of the ethereum ecosystem could bring the price of mining to zero
A key point of Rubin was that the token issuers that exchange on ethereum can and will be incentivized to build models in which their network of smart contracts is not managed by transactions in the underlying "gas" of the ether, but by the cooked incentives to trade in their own token.
The piece elicited many emotions, including a refutation of this argument of "economic abstraction" from the founder of ethereum Vitalik Buterin.
Where does the price find value?
I am not convinced of Rubin's argument that the price is set to zero even if, as he assumes, ethereum ends up being successful as a platform of ubiquitous smart contracts that allows things to be changed everywhere.
Basically, I think there is s At the natural basis of the reservation request there will always be an exchange unit that makes a strong tick blockchain. And it is hard not to imagine that this level of demand increases if and when ethereum moves towards a proof-of-stake consensus mechanism. At some point, the value of utility is related to price, simply not with the same direct relationship that people have taken.
This debate is very important. If a disconnection between utility value and price is established, this will greatly affect the way in which the token market participants generally deal with the activities they are trading. It should be noted, however, that it could actually encourage the development of functionality-related prompts and not just the fronts for the quick-setting efforts of the founders of Crypto Start.
The jury is still out on se etheruem, or any blockchain platform, it even succeeds. But I look at the incredibly creative community of the developers of ethereum who have fun with new wonderful ideas for a better world and find it very difficult not to conclude that, somehow not yet defined, they are creating great value.
It is just that, sadly for those who thought otherwise, that concept of value could be intrinsically disagreeing with the concept of price – at least as defined in the fiat currencies. And this is a topic for another day …
Image of ether and gold through Shutterstock