Ethereum in 2022: what is money in the meta-universe?

Ethereum is a smart contract blockchain focused on creating a secure, decentralized environment to host applications of all types. Last year, decentralized finance (DeFi) and non-functional tokens (NFT) burst onto the scene to show the world the opportunities that can arise from blockchain technology. However, scaling products that can increase performance in response to changes in processing requirements are beginning to unlock the vast potential of Ethereum, and its co-creator Vitalik Buterin is looking to decentralize social media, gaming, governance, and more.

In its infancy, Ethereum has largely become the home of trading platforms for trading and lending cryptoassets (Uniswap and Aave) and buying or selling digital art (OpenSea). The introduction of second-tier platforms built on top of Ethereum, such as Arbitrum and Optimism, and technology solutions such as ZK rollups, will reduce transaction fees and open up Ethereum to decentralized social media platforms such as Reddit.

A common theme across all use cases will be the need for users to own and spend Ethereum's own asset, ether.

Ether is the key to unlocking blockchain space on the Ethereum network, whether deploying new applications, using existing applications, or transferring tokens between different wallets. Ether is as much an asset to the network as gasoline is to a car. Since the release of EIP 1559, consumers in the blockchain space have been buying and burning this asset to participate in the digital economy. In the near future, ether will also be used to place bets and secure the network.

Будучи полезным в качестве газа, эфир стал расчетной единицей и наиболее распространенной парой на децентрализованных биржах (DEX).

What is money in the meta-universe?

If Ethereum, alternative base-level protocols (e.g. Solana and Avalanche) and the "meta-universe" are ultimately successful, the definition of money will become much broader than its current limitation to fiat. We are already seeing protocols raising capital and investors valuing their portfolios in ether instead of dollars or even stablecoins (tokens tied to the value of fiat currency). However, using ether as money doesn't discredit fiat, stablecoins, or other stores of value. It's simply an add-on - and an add-on that could potentially become the currency of the meta-universe.

Cryptoassets, including ether, are still much more demand-reflective than stablecoins and dollars, making them a better investment than currency (for now). However, the larger the Ethereum ecosystem gets, the better the ether currency becomes.

Currently, speculators vastly outnumber actual blockchain users, but the blossoming ecosystem is changing that as ether can be used for DeFi, NFT, validation, social media and more. In fact, in Coinbase's third quarter earnings report, the company emphasized that there is a significant shift towards people actually using blockchain technology by withdrawing their tokens from exchanges.

The graph below shows how the number of users on the network is growing with new Coinbase accounts, suggesting that users are indeed interested in interacting with applications on Ethereum. Cheaper alternatives to the main Ethereum network, or live versions, have become even more prevalent, with Polygon surpassing the main network in the number of active users in a single day in early October. Arbitrum has also attracted 275,000 users looking for cheaper ways to interact with the blockchain.

Coinbase verified users and active users on the blockchain grow simultaneously. (Coinbase)

Asset tokenization and interoperability between DeFi applications are just beginning to create open, tradable markets for assets that were previously illiquid. Assets that can be traded with each other, used as collateral, or instantly shipped anywhere in the world are starting to behave much more like money than property or stores of value.

According to Julien Bouteloup, founder of Stake Capital and principal developer of the decentralized exchange Curve, Web 3 employees have shown significant interest in being paid in tokens rather than stackablecoins. While this may be a side effect of the bull market and rising valuations, employees are likely genuinely interested in becoming owners of the projects they work on.

What's next for the value of ether?

The play-to-earn game has likely just begun, and the Ronin-based NFT game Axie Infinity is already generating billions of dollars in annual revenue. Users around the world are living off the game's revenue, and revenue from the game makes up a notable portion of the Philippines' gross domestic product. The link between gaming and finance is growing ever closer, highlighting just one aspect of a more digitalized world.

If today's trends translate into tomorrow, the world will be more financial than ever. It's too early to tell if this will be a net positive for humanity, but cryptocurrencies and DeFi have given a glimpse of the good and bad that comes with tokenization.

Airdrops and equity allocation (if done right) distribute wealth much more freely and fairly than corporations have historically done. However, the other side is just as fair, as fraud and exploitation show how greed can be increased through tokenization and an anonymous economy.

For better or worse, as the digital economy evolves, the definition of money will become increasingly murky, as it has with the creation of credit cards and online payments, and the move away from paper money. This fits nicely into the meta-universe narrative, where the line between the digital world and real life is getting thinner and thinner.