Vitalik Buterin says ETH should be valued as a store of value, not a fee-burning token

Ethereum co-founder Vitalik Buterin said he believes ether Ethereum (ETH) should be treated primarily as a store of value, arguing that the case for valuing it as a fee-burning token was weaker than it appeared during the last market cycle.

In an X thread on Sunday morning, Buterin said "ETH as store of value" makes "much more sense to focus on" than "ETH as fee-burning token." He said EIP-1559, the 2021 upgrade that burns part of every transaction fee, "is fine and good," and the network should keep the mechanism and its burn, even if the burn only partially offsets the issuance of new ETH. "But we should not feel sad if fee burn is < 10% of breakeven indefinitely; the value of ETH comes from elsewhere," he wrote.

Buterin argued instead that the main thing users appreciate about Ethereum is its decentralization and efforts toward censorship resistance, privacy, and security, and that the network's main practical benefit to the financial ecosystem is its stability. "In the era of AI disruption, stability will be highly valued," he wrote.

The burn 'floor'

The fee burn was the basis of the "ultrasound money" thesis that gained traction among ETH holders during the 2021 bull market. Buterin, in his thread, laid out the valuation model behind fee-burning tokens, in which a token's market cap would equal the annual burn divided by a discount rate. Under that model, a token burning $1 billion a year at a 4% discount rate would have a natural valuation floor of $25 billion, he wrote.

"But here's the problem: this was never a true floor," Buterin wrote. He said most of the ETH burned in 2021 through 2023 came from "crypto-internal use cases" whose revenue would have fallen alongside ETH's price, citing the network "randomly [going] crazy" for a "digital monkey sale" that burned $180 million in fees in a single day. "The floor argument only works if the backing of the revenue stream is external," he wrote.

(Actually, the sale Buterin referenced was for digital land in the Otherside metaverse from Yuga Labs, the creators of the Bored Ape Yacht Club NFT collection. The sale saw users paying up to $10,000 in transaction fees for Otherdeed NFTs that currently sell for around $150.) 

Buterin said Ethereum now has a "better claim to this external backing" because of the growing market for tokenized real-world assets. But as a "normal stable mature business," that activity is unlikely to produce the same fee spikes, he added.

The amount of ETH burned each day has fallen sharply since then, according to The Block's data. Ethereum burned about 1.48 million ETH in 2022, worth roughly $3.6 billion, compared with about 19,200 ETH, or $43 million, so far this year.

The corporate comparison

Buterin said that justifying ETH's market cap, which he put at about $270 billion, through fee burn alone would make Ethereum comparable to a company like L'Oreal. Ether's market cap stood at $273.3 billion on Sunday morning, according to The Block's ETH price page.

Companies of that size spend heavily to keep their positions, Buterin wrote. Citing an AI estimate that L’Oreal spends about 0.58% of its market cap on research and development each year, he said matching that rate would “bankrupt the [Ethereum Foundation] almost immediately,” so it would instead require in-protocol funding of about 700,000 ETH a year, cutting validator revenue by two-thirds.

What Buterin left unstated: the level of funding received by the Ethereum Foundation (EF) is already somewhat controversial in the crypto community.

The EF's ETH sales have regularly drawn criticism from holders, including after it sold 20,000 ETH worth about $47 million to Bitmine over two weeks in April and May. Buterin said in May that he regularly hears from community members who feel the EF's actions don't match its public commitments.

The EF began staking part of its treasury earlier this year to generate yield, and in March it published a mandate describing itself as "one of many stewards" of the network. Amid a wave of senior staff departures in May, Buterin said the foundation would become "a smaller ship" that sells less ETH and focuses on work that "would not happen otherwise."

Buterin also said that an Ethereum optimizing for token burn would need "highly interventionist governance, for the long term," and that neither requirement is compatible with his goals for the network of capture resistance and decentralization. Buterin added that optimizing for fee burn means optimizing for higher gas prices to some degree, which "may price out users, including some users who may need privacy and security the most."

Survival as a metric

Buterin said that when he asks people what they value most about Ethereum, they most often cite decentralization and what he calls CROPS (censorship and capture resistance, open source, privacy and security). For an investor holding ETH as a store of value (SoV), "the first and most important SoV-ish metric" is "to survive," he wrote.

He tied that goal to themes from the most recent of the network's developer conferences, including post-quantum security, partial ossification of the base layer and a high bar for adding new precompiles or in-protocol rewards. Buterin listed work on multisig wallets, the Kohaku privacy project, the FOCIL censorship-resistance proposal and lightweight nodes as examples, noting that he runs a node on his laptop that synced in under six hours and takes up "only 1/8 of my hard drive."

Buterin said growth in assets issued natively on Ethereum's base layer, including real-world assets, is "highly synergistic" with the store-of-value case because it expands what holders can do with ETH, such as using it as collateral.

Buterin views Ethereum as "really not just a blockchain anymore," but rather "a hybrid architecture that combines together blockchains and modern cryptography." In September, he mapped out Ethereum's roadmap through 2030 and said the upcoming Hegota upgrade is likely to be the network's last "normal" fork. 

Industry reactions

Buterin's post garnered support from other influential figures in crypto. Solana co-founder Anatoly Yakovenko said Buterin "is absolutely right that you can't focus on fees as the product." Attorney Gabriel Shapiro of MetaLeX called the thread "a 'nature is healing' moment," while Moonrock Capital founder Simon Dedic argued that ETH as a store of value would be "the biggest bull case for Ethereum. And at the same time the easiest story to sell to institutional capital."

The thread comes about five weeks after the co-authors of controversial proposal EIP-8363 withdrew it from consideration for the network's forthcoming Hegota upgrade, which will follow the behind-schedule Glamsterdam hard fork. The proposal, which would have burned a rising share of validator rewards as more ETH is staked, cited the risk a high staking ratio poses to "ETH's role as money" and drew opposition from SharpLink CEO Joseph Chalom and Aave founder Stani Kulechov. Its authors plan to hold a separate issuance process that runs through EthCC in April.

ETH traded at $2,236 as of 9:23 a.m. ET, down 0.3% on the day, according to The Block's price page.