Gas Ain't Gold: Why Ether's Price Could Tank Even If Ethereum Succeeds

The virtuous circle that saw buyers of ethereum-based ERC-20 tokens drive ether's price above $1,400 mid-January has morphed into its diametric opposite.

The initial coin offering boom has fizzled and the price has sunk to just above $200. This new phase, a vicious cycle downturn that has exposed the ether market's intrinsic connection to the ICO boom and bust, is of course painful for anyone who bought ether in the last 12 months.

A strong hypothesis is emerging that the correlation between the price of a token such as ether and its actual or expected network utility -that's is, its value as the "Fuel" in a blockchain ecosystem - might not be very strong.

Now we're left wondering whether tokens, these units of value/mediums of exchange - call them what you will - might have their upside fiat-currency monetization power capped because price could be antithetical to utility.

Boyapati said that's antithetical to the concept of "Reservation demand," a measure of how long people hold a currency and the core driver of the price of a monetary unit.

For the brief period of ICO mania last year, Boyaparti argued, ether suddenly attracted reservation demand because investors needed to acquire and hold a store of ether to participate in the ongoing flow of ERC-20 token offerings.

The issuers of those tokens who really just wanted dollars to fund their operations - not a store of ether with which to conduct smart contracts - are now faced with an existential threat if they don't dump the rapidly falling ethereum tokens they hold.

Jeremy Rubin, a Stellar developer and former MIT colleague of mine, argued in a TechCrunch piece that these and other aspects of the ethereum ecosystem could drive the price of ether to zero.

A key point of Rubin's was that issuers of tokens that trade on top of ethereum can and will be incentivized to build models in which their smart contract network is managed not by transactions in the underlying "Gas" of ether but by the incentives baked into trading in their own token.

I'm not convinced of Rubin's argument that the price is destined for zero even if, as he assumes, ethereum ends up succeeding as a ubiquitous smart contracts platform that enables world-changing dapps.