ETH is Pivoting from Digital Oil to Digital Money, But Is It Working?

By Kyle Torpey

There's no question that Ether (ETH) is king of the altcoins. The Ethereum blockchain sees far more use than any of the other non-Bitcoin crypto assets, and its focus on expressive smart contracts has been emulated by many other projects.

Bitcoin (BTC) has often been called "digital gold," and those who make the investment case for ETH have often referred to it as "digital oil." However, there is an increasingly prevalent view among Ethereum users that ETH should be seen not as oil but as money.

This push for ETH to be viewed as money has become more popular as more decentralized finance (DeFi) applications have launched on Ethereum over the past year.

But is ETH becoming more widely used as money? Let's take a look at the data.

Transfer of Non-Ether Tokens on the Rise

One key data point that can be useful when tracking the use of ETH as money is the percentage of transactions on the Ethereum network that involve transfers of the native ETH token.

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As the above chart indicates, transfers of various ERC-20 tokens that have been issued on top of the base Ethereum blockchain are becoming more prevalent than transfers of ETH. Transfers of ERC-20 tokens have basically been at least as common as transfers of ETH since the summer of 2018, and on many days they’re more common.

Obviously, nearly all transactions before the ERC-20 token standard was developed only involved ETH, because it was not particularly easy to issue new tokens on top of the Ethereum platform at the time. While 2017 was clearly the beginning of the explosion in activity around ERC-20 tokens, there was also an earlier spike in ERC-20 token transfers on May 28, 2016 — the first day The DAO tokens could be traded on exchanges.

Over the past few months, Tether USD (USDT) has become the most popular non-native token transacted on the Ethereum blockchain, according to Ethplorer. USDT previously accounted for roughly 5% of daily Bitcoin transactions, but an increasing number of USDT transfers are now taking place on Ethereum rather than the Omni protocol, which is built on top of the Bitcoin blockchain.

Ethereum has also seen some other major stablecoin launches over the last few years. Circle and Coinbase launched their USDC stablecoin, Gemini launched GUSD, TrustToken launched TUSD, and Paxos launched PAX, just to name a few.

Additionally, there is the DAI stablecoin, which is intended to function as a stable cryptocurrency with a higher degree of decentralization. That said, it's questionable as to whether DAI has achieved a level of decentralization that is sufficient enough to avoid the same issues that are associated with traditional stablecoins that are backed by fiat currency in a bank account.

In the not-too-distant future, it's possible that Ethereum will be processing more stablecoin transfers per day than transfers of the native ETH token. According to Coin Metrics, the Ethereum network processed 271,805 ETH transfers and 178,046 USDT transfers on September 9th. In terms of on-chain adjusted transaction volume, USDT is already nearly doubling ETH's numbers.

DCS Token is another major actor on the Ethereum network at the time of this writing, accounting for roughly 20,000 blockchain operations over the past 24 hours, according to Ethplorer.

Transaction Volume, Trading Activity, and Volatility

Of course, just because ERC-20 tokens are active on Ethereum does not mean ETH is not also being transferred back and forth or used as money. That said, the number of ETH transfers per day are currently roughly where they were in August 2017.

In terms of acting as money, USD-denominated adjusted transaction volume is more interesting than the simple transaction count. On that front, things don't look much better. ETH is roughly where it was in May 2017 in terms of transfer volume.

It should be remembered that the vast majority of on-chain transaction volume with any cryptocurrency in these early days is associated with trading activity on exchanges. According to Chainalysis, even 90% of the activity on the Bitcoin network involves transfers to and from exchanges.

The correlation between ETH price moves (when volume tends to spike) and on-chain transaction volume can be seen clearly on Coin Metrics.

Perhaps the best metric to use when measuring the utility of a particular cryptocurrency as money is price volatility, as I've written in the past. Data from Coin Metrics indicates that ETH has seen a gradual drop in volatility from over 10% to under 5% throughout the duration of the Ethereum network's existence.

Bitcoin is the Standard

When compared against the rest of the altcoin market, it's clear that ETH is by far the most successful alternative to Bitcoin. But if ETH is going to be money, that means it must compete favorably against BTC as well.

The success of various ERC-20 tokens has helped Ethereum pass Bitcoin in terms of on-chain transactions per day, but that metric is mostly meaningless when it comes to comparing cryptocurrencies as money (read more on the issues with the transactions per day metric in this previous article).

The fact that Ethereum has recently been generating more transaction fees per day (denominated in USD) than Bitcoin has also received plenty of attention lately, but this data point speaks more to the demand for access to the Ethereum network more generally than the potential use for ETH as money. Users paying fees to move their USDT or Chainlink (LINK) tokens doesn't have much to do with the utility of ETH has a store of value or medium of exchange.

Better metrics for comparing cryptocurrencies as money are on-chain adjusted transaction volume, trading volume, and price volatility. ETH still has plenty of work to do if it wants to compete with BTC on these fronts, although it's notable that ETH was less volatile than BTC for most of the 2019 summer.

While price stability is preferable over the short term, monies also compete on their ability to store or increase in value over the long term. Perhaps the most damning evidence against ETH's utility as money is the fact that ETH's BTC-denominated price is currently lower than it was in March of 2016, less than a year after the initial launch of the Ethereum network. That said, September was kind to ETH this year, as the altcoin experienced one of its best ever days against BTC.

According to Castle Island Ventures Partner Nic Carter, altcoins like ETH, which have tended to avoid a focus on becoming money, miss the point of why Bitcoin was created in the first place.

When ETH's usefulness as money is compared to BTC, it's not clear if the altcoin will be able to overcome Bitcoin's first mover advantage, network effects, and relative stability as a store of value.

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