Ethereum co-founder Vitalik Buterin said in a post that Ethereum should be viewed primarily as a store of value rather than as a token whose worth depends on fee burning. He argued that the store-of-value model better reflects the network’s decentralization, resistance to censorship and capture, open-source code, privacy and security, collectively described as CROPS.

Buterin said Ethereum should retain EIP-1559, which burns the base transaction fee, but should not make the mechanism the foundation of its economic model. He said users should not be concerned if fee burning remains below 10% of the break-even level for a long period because Ethereum’s value does not depend solely on burned fees.

Limits of the fee-burning model

Buterin questioned the argument that token burning creates a natural floor for market valuation. Under a net present value model, an asset’s market capitalization would equal the annual amount burned divided by the discount rate.

He gave the example of a token that burns $1 billion annually, with the amount remaining stable over the long term. At a 4% discount rate, the model would imply a valuation of $25 billion. If the market capitalization fell below that level, an investor could theoretically buy the asset for less than its calculated value and sell part of the holding each year while maintaining the same share of total supply.

Ethereum burned millions of ETH annually from 2021 through 2023. Buterin said that activity did not establish a reliable price floor because much of the blockchain’s demand came from uses within the crypto economy.

If Ethereum’s price fell tenfold, revenue from those uses could also decline because users would have less money available to pay fees, he said. Buterin cited a sale of digital apes that burned $180 million in fees in one day, along with more routine activity such as lending.

He said the minimum-valuation argument works only when revenue has external backing. The expansion of the real-world asset market gives Ethereum more support for such a model, but Buterin said he did not expect a mature Ethereum economy to produce regular activity spikes comparable to the digital-ape sale.

Decentralization risks

Buterin also argued that supporting Ethereum’s roughly $270 billion market capitalization through fee burning would require the network to operate more like a large corporation.

He cited L’Oréal, which ranks about 55th globally by market capitalization and, by his estimate, spends around 0.58% of its market value annually on research and development. If Ethereum adopted a comparable approach, the Ethereum Foundation could not fund that level of spending by itself, he said.

The network would instead require about 700,000 ETH in annual in-protocol funding, according to Buterin. He said that would prompt political disputes and reduce validator revenue by roughly two-thirds, while research and development would represent only one part of the budget.

Corporations must also make subjective management decisions as they respond to technological change, enter markets and develop products for different audiences. Buterin said Ethereum would consequently need substantially more centralized governance, conflicting with its core principles.

Maximizing fee burning could also create incentives for higher gas costs and exclude some users, particularly those who most need privacy and security, he said. The price that maximizes fee value multiplied by usage would produce less activity than a model designed to maximize accessible use of network resources within safe limits, according to Buterin.

Store-of-value priorities

Buterin said decentralization and CROPS distinguish Ethereum from other blockchains and traditional financial systems and provide practical benefits to individuals and institutions. For companies, he said, privacy supports risk management and compliance with data-protection requirements, while security and the ability to operate an independent node also have business value.

Holders who treat ETH as a store of value will assess it mainly by its ability to preserve value over time, he said. Buterin identified survival as the most important property of such an asset and outlined several areas of network development:

• Post-quantum security based on conservative methods, formal security proofs and more protective rounds than the minimum required.
• Protocol ossification, with development gradually moving to higher layers of the technology stack after work on the core network is completed.
• Multisignature systems that make ETH easier to store securely.
• Privacy work involving Kohaku, EIP-8288 and private account abstraction.
• The FOCIL mechanism, intended to let holders send transactions even when block producers try to censor them.
• Reduced reliance on third-party infrastructure and the ability to operate a node on affordable hardware.

Buterin said a store-of-value focus should not restrict ecosystem development. Issuing more assets directly on Ethereum, including real-world assets and decentralized tokens, increases ETH’s usefulness by giving holders more ways to exchange it, use it as collateral and transact without intermediaries.

He acknowledged that some developments, including faster slots, could create tension with decentralization. However, he considered those trade-offs less significant than the risks associated with maximizing fees.

Source: Incrypted