It’s no secret that the network effects around Bitcoin as the first successful crypto money are a key aspect of its overall value proposition. And while many claim that Ethereum has enjoyed a similar phenomenon around the popularity of its blockchain focused on more expressive smart contracts, the reality is that the network effects built around these two cryptocurrency networks are not at all similar. While the bitcoin asset has been growing as an increasingly trusted store of value over the past decade, the growth in Ethereum has mostly been about the use of blockchain technology to create decentralized applications (dapps) rather than the network’s underlying ETH token.
Bitcoin’s Network Effects as Money
Bitcoin is still developing as a global, apolitical store of value. But the fact of the matter is the crypto asset is much further down this path than any other crypto token on the market. In the eyes of many, the race to become digital gold has already been won by bitcoin, and other crypto assets need to find their own niches.
When you look at all of the recent excitement around crypto from larger, institutional players, it has been almost entirely focused on bitcoin as digital gold. Publicly-traded companies like Microstrategy, Square, and Tesla are only holding bitcoin (and no other crypto assets) in their reserves at this time, as the digital gold is the most credible digital hedge against a potential devaluation of the U.S. dollar this decade.
Bitcoin’s dominance as a trusted store of value comes from the view that the rules of the system are effectively set in stone, and there will be no changes to the cryptocurrency’s monetary policy. Other chains can focus on new bells and whistles to attract investors, but moving fast and breaking things means the underlying crypto monetary system is more malleable by definition. Bitcoin is often criticized for its slow pace of development, but this is actually the key selling point for the underlying bitcoin asset.
Ethereum’s Network Effects as a Technology
The network effects around Ethereum as a technology are very different compared to what’s happening with Bitcoin’s development as digital gold.
With Ethereum, the network effects that have developed are focused around how the platform can be used for the deployment of dapps, with decentralized finance (DeFi) being the latest iteration of this sort of software. Up to this point, Ethereum has effectively been the default option for anyone interested in building a dapp due to the strong network effects that have been built around the Ethereum Virtual Machine (EVM). The network effects around ETH as an investable asset are much less prevalent.
As examples of the strong network effects around the bitcoin asset and Ethereum as a technology, you can look at the large demand for BTC on the Ethereum blockchain and the fact that many Ethereum alternatives (e.g. Binance Smart Chain and Tron) are directly compatible with the EVM.
What Does This Mean for Ethereum?
With Ethereum’s network effects being more about the technology than money, it’s clear that ETH itself does not necessarily absorb all of the potential value created via the activity that takes place on Ethereum and other compatible networks. After all, the ability to use many different types of tokens, even assets that compete directly with ETH as money, means that ETH is more of a token that is simply necessary to run smart contracts on the platform than anything else. And it’s no secret that much of the Ethereum economy today is built around various centralized stablecoins in terms of both simple value transfer and decentralized exchange volume.
While Ethereum has been the most popular platform for all kinds of dapps in the past, there is no reason these applications, and their corresponding wallets, cannot be altered to operate on other or multiple chains in the background. This is especially true of dapps that are targeted at users who do not have much interest in ETH at all, such as Badger DAO, which is focused on bringing BTC to many chains and not necessarily just Ethereum. In the eyes of a bitcoin holder who is moving some coins to an alternative chain in order to use a DeFi application, that alternative chain is basically a Bitcoin sidechain. While explicit sidechains like RSK and Liquid already exist for Bitcoin, other chains, such as Nomic and Stacks, use a hybrid model that treats the bitcoin asset as a first class citizen. The line between a sidechain and an alternative blockchain powered by an altcoin may become increasingly blurred in the coming years.
For bitcoin users, the underlying token of a particular blockchain for more expressive smart contracts is uninteresting, as they still want to use bitcoin as money and store their value there. A similar phenomenon has already been seen with stablecoin users, as transfers of the Tether stablecoin have moved to networks with lower transaction fees over time (Omni to Ethereum to Tron). More recently, those interested in some of the more Ponzi-esque use cases of DeFi have been fine with moving over to Binance Smart Chain.
Indeed, this is a point similar to one that the Ethereum creator, Vitalik Buterin made in the past when he tweeted, “[Blockchains] are a friggin [sic] database technology; 5 years down I doubt any users will care what the underlying network token is[.]”