Is ETH really transitioning from digital oil to digital currency?

Without a doubt, Ethereum (ETH) is the "king" of altcoins. The use of the Ethereum blockchain far surpasses that of other non-Bitcoin cryptocurrencies, and its focus on expressive smart contracts has been emulated by many other projects. Bitcoin (BTC) is often referred to as "digital gold," while those who invest in ETH typically refer to it as "digital oil." However, an increasing number of Ethereum users believe that Ethereum should not be seen as oil, but rather as a currency.

Last year, more and more decentralized finance (DeFi) applications were launched on Ethereum, leading to increasing calls for Ethereum to be considered as a currency.

However, will ETH be widely used as a currency? Let's take a look at the data.

Increasing Non-Ethereum Token Transfers

One useful data point to track Ethereum's use as a currency is the percentage of transaction volume on the Ethereum network involving transfers of the native ETH token.

As shown in the chart above, transfers of ERC-20 tokens issued on the Ethereum blockchain are more common than transfers of ETH. Since the summer of 2018, transfers of ERC-20 tokens have been almost as common as ETH transfers (at least), with some periods where ERC-20 token transfers were even more prevalent.

Clearly, before the ERC-20 token standard was established, almost all transactions involved only ETH because issuing new tokens on the Ethereum platform was not particularly easy at the time. Although 2017 was the year when ERC-20 token-related activities started to surge, a wave of growth in ERC-20 token transfers had already emerged as early as May 28, 2016 (the first day DAO tokens could be traded on exchanges).

According to Ethplorer, in the past few months, Tether USD (USDT) has become the most popular non-native token on the Ethereum blockchain. Previously, USDT accounted for only about 5% of the daily trading volume of Bitcoin, but now, more and more USDT transfers are no longer based on the Omni protocol on the Bitcoin blockchain but are on Ethereum.

In recent years, Ethereum has also witnessed the launch of other major stablecoins. Examples include Circle and Coinbase launching USDC stablecoin; Gemini launching GUSD; TrustToken launching TUSD; Paxos launching PAX.

Additionally, there is the DAI stablecoin, which has highly decentralized attributes. However, whether DAI has a sufficient level of decentralization to avoid the same issues as traditional stablecoins, which are backed by fiat currency in bank accounts, remains to be seen.

Soon, Ethereum may handle more stablecoin transfers daily compared to native ETH token transfers. According to Coin Metrics data, on September 9th, the Ethereum network processed 271,805 ETH transfers and 178,046 USDT transfers. In terms of adjusted on-chain transaction volume, USDT's volume is almost double that of ETH.

According to Ethplorer data, at the time of writing this text, the DCS token is another major player on the Ethereum network, with around 20,000 blockchain transactions in the past 24 hours.

Transaction Volume, Activity, Volatility

Of course, just because ERC-20 tokens are active on Ethereum does not necessarily mean that ETH cannot be used for transfers or as a currency. In other words, the current daily number of ETH transfers is comparable to the levels in August 2017.

Regarding ETH as a currency, adjusted trading volume in USD often provides more interesting insights than simple transaction numbers. In this aspect, the situation does not seem very optimistic. In terms of transfer transaction volume, ETH's current transfer volume is roughly equivalent to the levels in May 2017.

It should be noted that early on, the on-chain transaction volume of most cryptocurrencies was largely related to exchange trading activities. According to Chainalysis analysis, 90% of activities on the Bitcoin network involve transfers between various exchanges.

From Coin Metrics, the correlation between ETH price movements (when transaction volume tends to rise) and on-chain transaction volume is clear.

As I have written before, when a specific cryptocurrency is used as a currency, the best standard to measure is price volatility. Coin Metrics data shows that during the existence of the Ethereum network, ETH price volatility has been significant, ranging from over 10% to below 5%.

Bitcoin as the Standard

Compared to other altcoin markets, it is clear that so far, ETH is the best choice after Bitcoin. However, for ETH to become a currency, it means it must compete fiercely with BTC.

The success of ERC-20 tokens has led to the Ethereum chain's daily transaction volume surpassing Bitcoin, but when comparing it as a currency with other cryptocurrencies, this indicator is almost meaningless (for more information on the daily transaction volume indicator, please refer to the previous article).

Recently, Ethereum's daily transaction fees (in USD) have exceeded Bitcoin, which has attracted widespread attention. However, this data is more about the demand to access the Ethereum network than explaining the potential use value of ETH as a currency. While ETH serves as a medium for value storage or exchange, users paying fees to transfer USDT or Chainlink (LINK) tokens do not necessarily correlate with the practicality of ETH.

When comparing cryptocurrencies as currencies, a better standard is to look at adjusted on-chain transaction volume, transaction volume, and price volatility. Although for most of the summer of 2019, ETH's price volatility was lower than BTC, if ETH wants to compete with BTC in other aspects, it still needs to work twice as hard.

While prices may stabilize in the short term, in the long run, currencies also compete in terms of value storage or appreciation. One of the most frustrating points in the argument against using ETH as a currency may be that, priced in BTC, ETH's price is currently lower than its price in March 2016, less than a year after the Ethereum network first launched. However, September has been relatively kind to ETH this year, as it is the best-performing period for this altcoin against BTC in history.

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