I keep following the story of Ethereum’s two chains with growing excitement. In my previous post I wrote about how these chains represent two different views of what Ethereum could or should be. What I’m trying to analyse in this post is the economic side of the story.

I believe the fundamentals behind the price of Ether are future expectations. Right now it’s still a toy (at least compared to what it could turn into). Smart contracts need to be made a lot safer. Real-world applications should be able to cooperate with existing legal frameworks. It’s unclear what the real “killer apps” will be. Still, we believe in its future potential. We believe it has some amount of chance to reach mainstream adoption, in which case Ether would also be a lot more valuable. In a really simplified formula, current price equals potential value in case of mainstream success, multiplied by the chance of success. There’s no way to reliably predict either the chance or the potential future value, but this is what markets are for. Those who make better predictions have more money to influence prices.

The situation got even more interesting now that we have two Ethereum chains with a different community consensus, a different perception of values attached to them. Actually, I think this difference in perception is the only important distinction between the two. For some strange reason, many people believe that these two versions of Ethereum now have two different development teams. Which would be a possible scenario if the disagreement that left us with two chains would be about technical issues, with different views about the preferred direction of future development. Currently this is clearly not the case, all updates and technical upgrade forks released by Foundation developers will be applicable (and probably applied) to both chains, they will simply evolve side by side.

This means that if we try to apply our simple formula to ETH and ETC prices, the future potential of the technology of ETH and ETC is the same because it is exactly the same technology. The difference is in the perceived chance of mainstream adoption. Which leads us to a really interesting conclusion: the ETH/ETC market is basically a prediction market.

Probably one of these currencies is going to be considerably more valuable than the other in the future too, but as long as there are believers of both on the market, it’s never over. The majority does not win over the minority. It’s a free market, not a democracy. The smaller the minority side becomes, the bigger the potential market gains. What’s really cool about this is that a short burst of enthusiasm towards one side will not make final decisions. Long-term market response is a lot better than emotionally driven short term decisions. There is time for correction, and those who decide with a cool head will be rewarded. Community sentiment can be driven by emotions but in the long run, the ecosystem is self-healing.

My preferences and beliefs about the current issue are no secret, I think this whole fork was an absolutely irrational panic reaction. I never pushed this view strongly on forums and message boards because I don’t think that childish shouting war is useful for anyone. What I’m really curious about is long-term market action. I’m not saying that ETC will surely take over, but I think it has a chance to do so because it is at least based on more solid principles. And if it did, that would mean that Ethereum can basically fix itself. It is so resilient to changes that even a 99% “majority attack” coordinated by the Foundation itself failed eventually. Not sure if it’s going to happen but if it did, that would be the one of the coolest stories in the crypto world so far.