What is ultra sound money?

Trust in money is the basis of any successful economy—it’s what keeps investors and businesses alike, confident in their financial decisions. With recent technological advances, digital currencies, like Ethereum, are becoming more popular as an alternative to traditional investments. But why exactly is Ethereum called “ultra sound money”?

Ethereum Ultra Sound Money

In this blog post, we’ll dive into what makes Ethereum potentially “Ultra Sound Money” but first of all we must understand what “sound money” means. The term “sound money” describes a type of money that is stable in value (due to limited/controlled supply), durable, and widely accepted as a medium of exchange. Gold and silver are the most well-known examples of sound money, having been used as forms of currency for centuries.

People often contrast the concept of sound money with fiat money (such as USD, EUR, or GBP), which is a type of currency issued by a government and not backed by a physical commodity.Instead, the value of fiat money is based on the trust and belief of the people who use it. One of the main criticisms of fiat money, is that it is prone to inflation, which can erode the purchasing power of the currency over time and that has been particularly true as of late.

Some people argue that sound money is a better form of currency because it is not subject to the same level of manipulation and control by governments and central banks.

Ethereum Salability

So how would Ethereum compare to this definition? Let’s start with durability and acceptance (or salability). Because ETH (the currency of the Ethereum network), is based on the blockchain technology, its lifespan is basically infinite as long as the network runs. Could the network stop one day? Absolutely! The network has however proven to be very robust over the years so its “longevity” relies more on usage than the technology.  Metcalfe’s law, states that the value of a network is proportional to the square of the number of connected users of the system and so this law certainly would appear to be relevant here as we start to look at the number of users who are connecting to the network.

Adoption and usage

With blockchain technology, it’s quite easy for the public to check adoption and usage of a given network and in the case of Ethereum, if we look, for example, at the number of wallets created that hold some ETH, we can see over the years a very positive trend. (source http://intothecryptoverse.com).

Put differently, this means the “acceptance” and usage of Ethereum is growing. You can also read our post on the Ethereum Iceberg to understand what are the use cases for Ethereum. On top of that, the Ethereum network has recently made an important upgrade to how it operates by shifting from POW (Proof of Work) to POS (Proof of Stake) and in the process, reduced its energy consumption by 99% or more making it more environmentally friendly and sustainable. More on that topic here.

So we know that the ETH currency is becoming more and more salable, with more and more people using it to pay for service on the Ethereum network or to store it in wallets and we also know that the network adoption (and value) is increasing ensuring its durability. But what about the stability in value?

ETH, like many cryptocurrencies is very volatile but we can observe that over time with each crypto cycle and adoption the drawdowns (market bottoms) have less amplitude. One could assume therefore, that with continuous adoption volatility would continue to come down.

Ethereum v Fiat Currency

If we compare it to fiat money (such as the USD), what makes money stable over time is its issuance or how much of it is created. Looking at the USD, we know that the FED (US Central Bank) can create an infinite amount of it and has proven it more than ever during the COVID crisis, where it printed (issued) more than 50% of the entire volume of USD in existence in less than 2 years. This has debased the holdings of anyone that has USD and caused the high levels of inflation that the FED is now trying to get under control.

Ethereum Issuance

In contrast, ETH launched (about four months ago) a mathematical issuance and burn mechanism that ensure its supply remains stable and this makes out of ETH “sound money”. The reason it is called “ultra sound money” is that this same mechanism can cause the total volume of ETH to decrease when the network usage increases.

Since the Ethereum Network made this change about 4 months ago, the issuance of ETH has dropped by about 99%, adding to its supply only 3,750 ETH (at the time of this post) instead of 1,372,000 ETH. This supply figure could become negative over time with high usage before finding a volume balance around 50 million (currently around 120m) and that is what makes of ETH “ultra sound money”.

You can monitor the issuance of ETH in real-time at this link: https://ultrasound.money.

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