Ethereum is Not Money: Arthur Hayes

Former BitMEX CEO Arthur Hayes recently explained why he believes Ethereum does not qualify as money – whereas Bitcoin does.  

He touched on the deflationary economics surrounding the upcoming Ethereum Merge, and why there’s more to the story when designing an effective monetary instrument. 

Gas, or Money?

In an interview with the Unchained podcast on Tuesday, Hayes argued that Ethereum can’t be money if it also serves other purposes.

“Ethereum has use – you use it to power the applications on its network,” he argued. Besides serving as its own cryptocurrency, Ether functions as gas for powering smart contracts on Ethereum, while also being used to pay network fees on transactions with other tokens. 

Hayes contrasted this with Bitcoin – which is supported by a network without tokenization, and very few smart contract capabilities. “That’s why it’s a good form of money,” he said, “because its value cannot be conflated with the actual utility of other stuff.”

Bitcoin has long been known for boasting a fixed supply issuance schedule that cannot be altered. Its supply is programmed to cap at 21 million coins while inflating at a very slow rate over the coming decades before it reaches that point. It is therefore resistant to monetary debasement/ inflation, earning it the moniker of “sound money” in some circles. 

Other cryptocurrencies, however – including BNB – have adopted a token-burning model using network transaction fees. This makes such cryptos not only fixed in supply, but net-deflationary – which is theoretically bullish for holders. 

Ethereum is expected to become a net-deflationary cryptocurrency after the merge, after adopting a similar model. Hayes predicts this could take the asset to $5000 by March 2023. 

However, he also claims that this model plays against Ether’s use case as gas. 

“Let’s say the deflation gets so severe that it becomes so expensive that nobody uses it… well, guess what’s going to happen? They’re going to change the inflation rate,” he said. “It contradicts the goal of Ethereum being a decentralized computer that average people can actually use.”

Ethereum’s DAO Incident

The former CEO also brought up Ethereum’s 2016 DAO hack incident – a major smart contract hack that inspired Ethereum’s leaders to hard fork the chain and reverse its damages. The fixed network is known as the canonical Ethereum today, whereas the harmed network left behind is called “Ethereum Classic.”

Hayes said that this “rollback” incident proves that Ethereum’s priority is not to be sound money, but rather “allowing the average person to use this network and feel some sense of security.”

Bitcoin also experienced a blockchain rollback in its very early history – but only after a fatal bug was exploited that caused 100 billion Bitcoin to be artificially created. By contrast, Ethereum’s reversal was intended to make some of its users whole after they fell prey to a smart contract exploit. 

“That’s really fine because they didn’t advertise Ethereum as being the digital gold of the internet,” said Hayes. “That’s Bitcoin.”