Will Scalability Suppress The Price Of Ethereum?
In my previous posts, I discussed Ethereum Sharding & Scalability. Several of you have been following the series and have asked me some intriguing questions.
A question that has come up multiple times is:
“Will Ethereum’s Scalability lead to a reduced “scarcity” and thus suppress the price of Ether?”
It’s a fair question, since scalability will lead to reduced operations/transaction costs. And that’s precisely what creates the demand for Ether. But the answer isn’t as intuitive as most would think.
Ether’s Scalability, Scarcity & Price
On one hand you’d think that Ethereum scaling should increase the price. After all, scalability is a good thing, right?
But on the other hand, scalability will lead to lower transaction fees. Since transaction costs are paid for in Ether – wouldn’t Ether be consumed less? And hence needed less? Therefore, is it fair to assume that the demand for Ether will decline because we’d need less of it?
Finally, if less Ether is needed for operation costs on the network, would the “scarcity” of Ether reduce? (leading to price suppression)
So which is it? Will scalability lead to a price up or price down?
Jevon’s Paradox - Coal & Steam, Ether & Gas
English Economist William Jevons observed this paradox during the era of coal-fired steam engines.
"It is a confusion of ideas to suppose that the economical use of fuel is equivalent to diminished consumption. The very contrary is the truth"
He’s essentially saying: People assume that technological improvements that lead to efficient usage of fuel will in turn lead to reduced usage of fuel. But the opposite is true
Ether & Jevon’s Paradox: The Rebound
Yes, transaction fees will decrease as the Ethereum network achieves scalability. However, this does not mean that the price of Ether will decrease as well.
As we scale into mass adoption, Ether will be used for various operations across a wide range of diverse industries. With this, the consumption of Ether will rise in response to lower prices. Eventually, we will reach a point of “rebound” where the gains in efficiency are overcome by the rise in consumption.
There are several examples of technological advances increasing the efficiency and availability while prices have still gone up.
A perfect example is the price of fuel for your car (gas)
Technology has made fuel far more efficient. We consume it more efficiently, and we find it more efficiently too. But the demand for fuel has only gone up with time.
Ether & Scarcity: To Infinity And Beyond
Finally, let’s understand what Scarcity really is - People tend to believe that scarcity is defined by the item/resource, but in truth, it’s defined by us humans and our needs.
And we live in a digital age where the “want” to conduct transactions/operations as efficiently as possible is fast approaching “infinite”.
As the cost of each operation on the Ethereum network reduces, humans will “want” to use the network more and more. But, Ethereum at any given point of time, is finite in number. (setting aside the minor inflation, of course)
Note: There’s a difference between a “shortage” and “scarcity”. Shortages are caused by rising prices, while scarcity results from falling prices.
As the cost of operations & transactions approach zero, our need to conduct those transactions will approach infinity. Hence, demand should go up, not down.
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