Ethereum is a “world computer”: It lets people build apps & products with money baked into the code. If you believe that web3 is going to continue to grow, then you likely believe that over time,Ethereum will become the “settlement layer” of the internet: All sorts of transactions (whether on-chain or even Visa) will turn to Ethereum to exchange funds and keep secure, immutable records.Owning ETH is like owning shares on the internet. Demand for ETH will go up with increased web3 adoption, while upcoming changes will decrease the supply of ETH and let more value accrue to holders.

A world computer & a settlement layer

Money & Investments

Bitcoin is a database that does only 1 thing: track ownership of coins.  Ethereum adds the computational capabilities that makes Excel more than a database: <ul><li>Turing Completeness. It means that it can solve any computational problem. With the introduction of formulas, Excel became Turing complete. With Ethereum's smart contracts you can solve any reasonable problem. </li><li>Composability. In Excel, “You can chain functions, passing the output of one function as the input to another, allowing for an enormous number of potential computational pipelines.” This is very similar to the idea of “Legos.”</li></ul>

Ethereum is the Excel of Blockchains

Robert Greer says that there are three asset superclasses: <ol><li>Capital Assets are productive & generate value or cash-flow: equities, bonds, or rentable real estate. </li><li>Transformable/Consumable Assets: can be consumed one time, transformed into another asset, and their consumption produces economic yield: energy or commodities. </li><li>Store-of-Value Assets are scarce, cannot be consumed, just transferred, and their value persists over time and space: gold, currencies, art, or bitcoin. </li></ol>

Tripple point money

How does more activity on top of Ethereum translate into a higher price for ETH?Today, when you want to transact on Ethereum, you need to use ETH. There are currently around 116 million ETH. More transactions on Ethereum means more demand for ETH which means a higher price.The Future will see Ether become triple-point money, which means it will be a combination of:<ol><li>Store of Value</li><li>Consumable Asset: Any time something happens on Ethereum, gas needs to be burned, decreasing the overall supply.</li><li>Capital Asset. Owning ETH represents a share of the Ethereum network, like owning equity in a company.</li></ol>

Why is Eth valuable?

A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it. Then it’s a platform.

Apple's AppStore fees can be seen as rent-seeking and the same can be said about all incumbent-run platforms. Ethereum is a true platform: projects that build on top of it are actually financially incentivised to support the value of the underlying tech in order to secure their project.

Ethereum is more of a platform than the Internet giants

Crypto

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Happy Monday! Sometimes, it’s better to be lucky than good.

I was actually planning to write this piece last Monday, before <a dir="ltr" href="https://twitter.com/mbrennanchina">Matthew Brennan </a>reached out to me to collaborate on SHEIN. While this is *NEVER* investment advice, and you need to do your own research, and you should know by now never to listen to me, some of you would have learned about ETH, started doing your research, and decided to invest. It would have been rough timing.

Last week, the price of bitcoin crashed almost precisely 50%, from a May 10th price of $59.6k to a momentary May 19th low of $30,000.00. ETH fell even harder, dropping 60% from a May 12th high of $4,384 to a low of $1,728 yesterday. If you do your own diligence and decide to invest in ETH today , you’re doing it at about a third lower than you would have if I’d sent this last Monday. Phew.

On the other hand, I was a little unlucky, too. Smart people put out great content on ETH last week, in line with the thesis I was going to write.

Patrick O’Shaughnessy had Justin Drake on <a dir="ltr" href="https://open.spotify.com/episode/5ZXzLELW1489aCjUPHjTO4?si=dfb260e689cd4a6e">Business Breakdowns </a>to discuss Ethereum. James Wang wrote a great post on <a dir="ltr" href="https://draecomino.substack.com/p/ethereum-q1-2021-results?token=eyJ1c2VyX2lkIjoyNDE3ODEyLCJwb3N0X2lkIjozNjQ5NTU5OCwiXyI6ImpSbXJBIiwiaWF0IjoxNjIxMjQ4OTA1LCJleHAiOjE2MjEyNTI1MDUsImlzcyI6InB1Yi0zMTQ0MDQiLCJzdWIiOiJwb3N0LXJlYWN0aW9uIn0.o5U_ekN2jxy7JRJXtSwxLFhlMZe8Bq113kapI7himAI">Ethereum’s Q1 Results </a>. Bloomberg’s Joe Weisenthal wrote a post about <a dir="ltr" href="https://www.bloomberg.com/news/articles/2021-05-20/more-and-more-normies-of-finance-are-getting-eth-pilled?sref=vuYGislZ">finance normies getting ETH-pilled </a>. Generally, a lot of the smartest people I know are getting very excited about Ethereum. Writing this week, I’m a little less ahead of the curve.

At first, I was a little bummed. I had this whole angle ready to write up, and it got scooped. But the more I thought about it, the more I realized that the fact that all of these people are spreading the word about Ethereum is part of the analysis itself. It’s shifting the narrative.

Before we get started, some important things:

Disclosure: I am long ETH and plan to get longer. This is not investment advice.

Caveats: There are much smarter people than me on all of this. I recommend that you read and listen to their work, much of which I link to in this piece. This is mainly a bull case. There are obvious risks, many of which I’ll address, but for ones I miss, I asked Twitter for the downsides. Their replies in all their glory:

“The most bullish thing for Ether is to be understood.”

What if I told you about a business with strong network effects and 200x YoY revenue growth that was preparing to offer a 25% dividend and implement a permanent share buyback program? Is that something you might be interested in?

That’s pretty much Ethereum. It’s one of the most fascinating and compelling assets in the world, but its story is obfuscated by complexity and the specter of crypto.

Ethereum is so many things at once, all of which feed off of each other. Ethereum , the blockchain, is a world computer, the backbone of a decentralized internet (web3), and the settlement layer for web3. Its cryptocurrency, Ether (ETH) , is a bunch of things, too:

<ul><li>Internet money.  </li><li>Ownership of the Ethereum network.  </li><li>The most commonly-used token in the <a dir="ltr" href="https://www.notboring.co/p/the-great-online-game">Great Online Game </a> .  </li><li>Yield-generating.  </li><li>A Store of Value (SoV).  </li><li>A bet on more on-chain activity, or the web3 future.  </li> </ul>

Because Ethereum is so much at once, it’s hard to understand. This post is an attempt to help Ethereum be understood. To a group like us, people interested in technology businesses, finance, and strategy, it’s much more fascinating than bitcoin, but that comes with a tradeoff. It’s much harder to grok than bitcoin, and because of that, it hasn’t gotten the mainstream or institutional attention that bitcoin has.

Bitcoin is easy. It’s digital gold. It’s a Store of Value (SoV). It just kind of sits there.

That’s its value prop. It’s immutable and the most decentralized asset in the world. It’s the OG and the hardest to attack. At this point, your bitcoin will not disappear overnight (although <a dir="ltr" href="https://crypto-anonymous-2021.medium.com/the-bit-short-inside-cryptos-doomsday-machine-f8dcf78a64d3">this post on Tether </a>is illuminating with regards to ways it, and other cryptos including ETH, can be manipulated nonetheless). As long as other people believe in its value, it will continue to be valuable. Technically, upper-case-B-Bitcoin is the blockchain and lower-case-b-bitcoin is the cryptocurrency, but for all intents and purposes, they’re the same. Bitcoin exists to make and track bitcoin. It’s very good at what it does.

Ethereum is so much more than a cryptocurrency. It’s a “world computer,” and the “value layer” of the internet. It lets people build apps and products with money baked into the code. If you believe that web3 is going to continue to grow, then you likely believe that over time, Ethereum will become the settlement layer of a new internet. All sorts of transactions, whether they happen on Ethereum, another blockchain, or even <a dir="ltr" href="https://www.theblockcrypto.com/post/99639/visa-now-settles-payments-in-usdc-stablecoin-ethereum">Visa </a>, will turn to Ethereum to exchange funds and keep secure, immutable records. A year ago, I wouldn’t have said that.

Until the past year, a lot of Ethereum’s value existed in a theoretical state, in the ideas of what might be possible on a decentralized global internet. Personally, I viewed it as a kind of more interesting thing that was kind of like Bitcoin but smaller and maybe higher upside? As a result, after buying ETH for fun in the 2017 run-up, I sold all 15 of my remaining ETH in June 2020 once I broke even. Lack of understanding = weak hands.

As you know, I’m an idiot. Even after the recent drop, those 15 ETH are worth over $30,000. I missed ~10x upside. Not as painful as my $2 million <a dir="ltr" href="https://www.notboring.co/p/is-blockfi-future-of-finance-2">bitcoin mistake </a>, but still dumb. To be fair, though, you shouldn’t invest in this stuff unless you understand it, and I didn’t. I’m starting to.

Between then and now, a few things have happened that flipped me from moderately curious to both very curious and very bullish:

<ul><li>Use Case Explosion . DeFi, NFTs, and DAOs have emerged as real use cases for crypto, and have grown spectacularly over the past year. </li><li>Ultra Sound Money. With the upcoming implementation of EIP 1559, Ethereum will likely become deflationary, knocking out its biggest monetary weakness.  </li><li>Eth2. Ethereum is currently running a test chain that will merge with the main Ethereum chain in about six months. When it does, Ethereum will switch from Proof of Work (PoW) to Proof of Stake (PoS), and more value will accrue to ETH holders. </li><li>Narrative. The narrative around Ethereum is gaining steam and jumping from crypto people to the mainstream. Last week’s releases from Patrick O’Shaughnessy, James Wang, and Joe Weisenthal came in hot. This essay is one small additional push.  </li> </ul>

Right now, Ethereum is at a narrative inflection point, and narrative reflexivity is more important for blockchains than for almost any other company or asset.

I’m increasingly convinced that ETH will be one of the best assets to own over the next five years. Here’s the bull case in a nutshell:

Owning ETH is like owning shares in the internet. Demand for ETH will go up with increased web3 adoption, while upcoming changes will decrease the supply of ETH and let more value accrue to holders. It’s like a tech stock, a bond, a ticket to web3, and money, rolled into one.

To make the bull case clear, we’ll need to understand why Ethereum will survive and adoption will grow, how it actually makes money, and the differences between ETH and a tech stock. We’ll cover:

<ul><li>Ethereum is the Excel of Blockchains </li><li>How Ethereum Makes Money </li><li>Legitimacy and Lindy </li><li>L1 Ecosystem  </li><li>The Bull Case for Ethereum </li><li>Threats, More Caveats, and a Conclusion </li> </ul>

For ETH to be worth something, and for the bull case to matter, Ethereum needs to survive and grow. It has faced early challenges and competition from purpose-built blockchains, and this past week was scary. Nothing’s guaranteed.

To understand why Ethereum isn’t going to die, let’s start with an analogy.

If you’re going to be bullish on Ethereum, the first thing you’ll need to believe is that it will be around for a long time, and that more and more people will continue to use it, and that other people also believe those things to be true.

You’ll be comforted to know, then, that Ethereum is the Excel of blockchains .

That’s not exactly right. The analogy breaks down in places. But for our purposes, it’s good enough. Start by comparing it to Bitcoin.

Bitcoin is like a database. That’s what a blockchain is -- a distributed ledger of transactions. The Bitcoin blockchain lets people send each other bitcoin (BTC) and tracks who owns which bitcoin at any given time. It can also reward people for securing the database by giving them BTC for turning electricity into solutions to math problems (Proof of Work or PoW). It does one thing really well: track ownership of bitcoin.

Bitcoin is kind of like a spreadsheet, and many people compare blockchains to spreadsheets, but that’s not what I mean when I say that Ethereum is like Excel. I mean that the same elements that have propelled Excel for nearly four decades are present in Ethereum, too.

It starts with flexibility. Ethereum is a Turing complete, programmable blockchain that lets anyone build full-blown applications using smart contracts. People can build all sorts of decentralized apps (dApps) on top of Ethereum, plugging into the blockchain and the surrounding ecosystem to provide everything from security to identity to payments. Decentralized Finance (DeFi) apps, NFT marketplaces, Decentralized Autonomous Organizations (DAOs), and games and virtual worlds can all be built on top of Ethereum, all fueled by the native currency, ETH.

That flexibility is really hard to do.

In <a dir="ltr" href="https://www.notboring.co/p/excel-never-dies">Excel Never Dies </a>, <a dir="ltr" href="https://twitter.com/benrollert">Ben Rollert </a>and I wrote about Excel’s staying power in a technology landscape that typically sees new products replace old ones every few years. We wrote:

If there is a core product design lesson to learn from Excel, it’s that combining usability with flexibility is both incredibly difficult and incredibly rewarding….

A design principle for developers is to make any one piece of software really good at one specific thing, deliberately constraining its capabilities to a specific domain. Excel is a truly remarkable exception to this rule - it is something of a choose-a-phone, and clearly hundreds of millions of people do want to compose for it.

You could replace “Excel” with “Ethereum” and it works perfectly. Ethereum’s early usability challenges are a function of its flexibility. Ethereum is something of a choose-a-phone, and clearly millions of people do want to compose for it.

Beyond the product philosophy, there are some specific similarities between the two:

<ul><li>Turing Completeness . If something is Turing complete, it means that it can solve any reasonable computational problem. With the introduction of Lambda, which lets users create their own formulas, Excel became Turing complete. With Ethereum, you can write smart contracts that can solve any reasonable problem.  </li><li>Composability. In Excel, “You can chain functions, passing the output of one function as the input to another, allowing for an enormous number of potential computational pipelines. Each time Excel adds a function, the power and flexibility of Excel is multiplied, since that new function can be chained to a large number of existing functions.” This is very similar to the idea of composability, or “X Legos,” on Ethereum.  </li> </ul>

Together, Turing completeness and composability mean that you can build smart contracts to compute anything, and then chain them together to build increasingly complex things, more quickly. It takes time to get the engine revving, but it should move quickly once it’s moving.

That’s exactly what’s happening. After years of building in relative obscurity through the crypto winter, facing doubt that there was any actual use for any of this stuff, 2020 and early 2021 saw an explosion of real use cases for the Ethereum ecosystem. In <a dir="ltr" href="https://draecomino.substack.com/p/ethereum-q1-2021-results?token=eyJ1c2VyX2lkIjoyNDE3ODEyLCJwb3N0X2lkIjozNjQ5NTU5OCwiXyI6ImpSbXJBIiwiaWF0IjoxNjIxMjQ4OTA1LCJleHAiOjE2MjEyNTI1MDUsImlzcyI6InB1Yi0zMTQ0MDQiLCJzdWIiOiJwb3N0LXJlYWN0aW9uIn0.o5U_ekN2jxy7JRJXtSwxLFhlMZe8Bq113kapI7himAI">Ethereum Announces First Quarter 2021 Results </a> , <a dir="ltr" href="https://twitter.com/draecomino">James Wang </a>included a Results Table highlighting the year’s progress:

Those are just absolutely massive numbers across a wide range of use cases. This is not one thing. It’s not just “price go up.” It’s a sign of the momentum and composability in the space, where improvements in one area feed directly into improvements in another:

<ul><li>Volume traded on Decentralized Exchanges (DEX) like Uniswap increased 76x to from $2.3 billion in Q1 2020 to $177 billion in Q1 2021.  </li><li>Total Value Locked, or the amount of ETH staked in DeFi, increased 64x from $800 million to $52 billion.  </li><li>Beyond finance, NFT art sales increased 562x from $700k to $396 million.  </li> </ul>

Ethereum usage exploded in Q1, and while NFT sales have slowed, partially as a result of high gas fees and partially because the initial euphoria has died down, DeFi is still going strong:

Source: <a dir="ltr" href="https://defiprime.com/dex-volume">DeFi Prime </a>

From May 1st through May 22nd, just Uniswap and Sushiswap, the two largest Ethereum-based DEXes, handled $78 billion in transaction volume . Q2 will blow Q1 out of the water.

Despite the explosion in activity and transaction volume, though, the question remains: what does that mean for ETH?

I’ve been aware of Ethereum for a long time. I first bought (then sold) ETH in 2017, but it was speculative and I didn’t get it. The big question mark I had with Ethereum was how it made money. How does more activity on top of Ethereum translate into a higher price for ETH?

In the near future, the answer will be that more transactions mean higher yields for ETH holders and a decreasing supply of ETH. But that’s not how it works, yet.

Let’s start with how it works today, look at the challenges of the current model, the proposed solutions, and what it will look like in the future.

(Note: For a more in-depth explanation, listen to <a dir="ltr" href="https://open.spotify.com/episode/5ZXzLELW1489aCjUPHjTO4?si=2d3df8b0977f4d9d">Justin Drake on Business Breakdowns </a>)

Today, when you want to transact on Ethereum, you need to use ETH. There are currently around 116 million ETH, and the price is loosely governed by supply and demand. More transactions on Ethereum means more demand for ETH which means higher price, all else equal.

When you transact, say if you send another person ETH, a few things happen:

<ul><li>You send 1 ETH and the other person receives 1 ETH </li><li>You pay gas fees, say .01 ETH </li><li>Your account balance on the chain goes down by 1.01 ETH, theirs goes up by 1 ETH </li> </ul>

To keep Ethereum running, it uses a <a dir="ltr" href="https://ethereum.org/en/developers/docs/consensus-mechanisms/pow/#:~:text=Ethereum%2C%20like%20Bitcoin%2C%20currently%20uses,certain%20kinds%20of%20economic%20attacks.&amp;text=This%20will%20also%20phase%20out%20mining%20from%20Ethereum.">Proof of Work consensus mechanism </a>to trustlessly agree on the state of the blockchain. Bitcoin also uses Proof of Work, that’s where Ethereum got it from, although Bitcoin mining is able to be run on cheaper hardware and has 20x more miners than Ethereum, and is therefore more decentralized.

PoW achieves the same thing as your bank account balance going up and someone else’s going down when they send you money, except in the place of a centralized bank, there is a distributed network of miners who agree that these transactions occurred and that all balances are updated.

To do it, miners around the world race to solve increasingly difficult cryptographic problems in order to create a new block on the blockchain containing the new transactions. These problems are typically hard to solve -- read: require a lot of energy -- but <a dir="ltr" href="https://mathoverflow.net/questions/269786/what-computational-problems-would-be-good-proof-of-work-problems-for-cryptocurre">easy to verify </a>. When a block is entered into the blockchain, the transactions in it officially become part of the record. Miners who successfully create a block are rewarded with 2 freshly-minted ETH (down from 5 in the beginning) and all the transaction fees within the block.

Those transaction fees, called gas , are what people pay to submit transactions to be included in the block. When a user sends someone ETH on Ethereum, or mints an NFT, or does any number of things that need to be validated on-chain, they have to pay a gas fee. That gas fee goes towards incentivizing miners to spend the money required, in the form of hardware and electricity, to solve the puzzle and create the block.

So currently, the price of Ethereum is based on a combination of supply and demand, and the price it costs miners to secure the blockchain. To participate, you need ETH, and you need to pay the gas. Miners receive ETH in the form of newly-minted supply and your fees. Miners pay for hardware and electricity and taxes, and keep ~5% of their earnings. Today, most of the value accrues to GPU makers, electric utilities, and the government, with the miner’s portion competed down to close to 0.

There are a bunch of challenges with this system.

<ol><li>It’s Slow . The Ethereum blockchain currently does somewhere around 19 transactions per second. Visa, for comparison, does about 1,700.  </li><li>It’s Expensive. The simplest transaction costs about $5 in gas fees, and when I minted <a dir="ltr" href="https://notboring.mirror.xyz/tw9hW87Sd1YXz_IqcvJXIS9pCxSSYBFVtZ2umBOdng0">The Great Online Game as an NFT </a>with <a dir="ltr" href="https://twitter.com/jackbutcher">Jack Butcher </a>a couple weeks ago, it cost nearly $1k to mint and auction it.  </li><li>It’s Volatile . Gas fees are based on auction, and change all of the time based on demand. That makes it hard to transact with confidence or predictability.  </li><li>It’s Inflationary. Unlike Bitcoin, there’s no hard cap on the number of ETH that could theoretically be minted, and Proof of Work requires minting a bunch of new ETH, which means growth leads to dilution for existing ETH holders.  </li><li>It’s Environmentally Unfriendly. Mining means using a lot of electricity.  </li><li>It’s Inefficient. Most of the money spent on transaction fees leaves the system -- miners are forced to sell the ETH they earn to pay for electricity, hardware, and taxes.  </li> </ol>

The fact that Ethereum has seen the adoption it has despite all of those challenges is impressive, but they remain real challenges. When I tweeted that ill-fated tweet asking for reasons not to buy ETH, many of the answers centered around one of the above, most commonly the cost of gas and inflation.

Plus, increased demand for Ethereum-based dApps -- more DeFi, more NFTs, more DAOs, more games -- means more transaction fees, but those fees don’t really accrue to ETH holders. They leak out of the system to cover miners’ real-world, fiat costs in the Proof of Work process.

So today, ETH’s price is based on demand for more ETH, like Bitcoin’s is, and like the dollar’s is. It isn’t tied to revenue, like a company’s is, but it will be soon.

Proposed Solutions: EIP 1559 and Eth2

One of the things that Bitcoin Maximalists like the most about bitcoin is that you can’t really change it. One of the things they don’t like about Ethereum is that you can change it. It’s not easy, but it’s possible.

Two changes are coming to the Ethereum blockchain that aim to fix the challenges mentioned above.

<a dir="ltr" href="https://notes.ethereum.org/@vbuterin/eip-1559-faq">EIP-1559 </a> is a proposal that changes how gas fees work by splitting them into two parts -- a base fee and a tip. With EIP 1559, the base fee is burned on each transaction and the miner (and soon validator) keeps the tip. It sounds dull, but it’s huge, because burning will likely make ETH deflationary . Plus, the tip allows people who value better block positions to pay more. That might be important for DeFi participants trying to execute an arbitrage, for example. The proposal was approved in March and will go into effect in July (as part of the <a dir="ltr" href="https://cointelegraph.com/news/a-london-tour-guide-what-the-eip-1559-hard-fork-promises-for-ethereum">London hard fork </a>).

<a dir="ltr" href="https://ethereum.org/en/eth2/">Eth2 </a> is an upgrade to the Ethereum blockchain itself that will shift consensus from Proof of Work to Proof of Stake and introduce sharding. Eth2 is expected to make Ethereum more scalable, more secure, and more sustainable. The PoS chain, or Beacon Chain, is already live, and is expected to merge with the main chain some time in late 2021 or early 2022.

Proof of Stake is a shift in how the network is secured, and who earns rewards. It means that instead of anyone in the world solving math problems to mine blocks, ETH holders can validate block transactions according to how many ETH they hold. Validators secure the network in exchange for yield in the form of tips and newly minted ETH. Ethereum claims that PoS will be more secure because validators will have ETH at stake, which can be destroyed if they try to cheat. Critics claim that staking puts more power into the hands of the people who hold the most ETH, making it less decentralized and therefore less secure.

On the scalability side, sharding aims to increase throughput, or transactions per second, by 100x by creating 64 shard chains which validate transactions in parallel. Each shard will only need to validate a fraction of the total chain, instead of every miner needing to validate the entire chain today.

Additionally, third-party Layer 2 solutions, like <a dir="ltr" href="https://polygon.technology/">Polygon </a>and <a dir="ltr" href="https://optimism.io/">Optimism </a>, are already working to speed up transactions and lower fees by essentially batching transactions off-chain and settling on-chain in one transaction instead of many (there are intricacies, but this is close enough). L2 solutions could increase throughput another 100x, and combining Eth2 and L2 solutions could lead to a 10,000x improvement if the theory plays out in practice.

Taken together, EIP 1559 and Eth2 could be revolutionary for ETH holders because they improve performance while dramatically altering where value accrues in the Ethereum ecosystem.

The Future: Triple-Point, Ultra Sound Money

In 2019, David Hoffman wrote an essay called <a dir="ltr" href="https://medium.com/pov-crypto/ether-a-new-model-for-money-17365b5535ba">Ether: A New Model for Money </a> . If you want to go deeper, you should read it. In it, he cites a 1997 Journal of Portfolio Management paper by Robert Greer, <a dir="ltr" href="https://jpm.pm-research.com/content/23/2/86">What is an Asset Class Anyway? </a>, which says that there are three asset superclasses:

Bite-sized knowledge
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Ethereum is the future of our economics

A world computer & a settlement layer

Ethereum is the Excel of Blockchains

Tripple point money

Why is Eth valuable?

BILL GATES

Ethereum is more of a platform than the Internet giants

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Ethereum is the future of our economics

A world computer & a settlement layer

Ethereum is the Excel of Blockchains

Tripple point money

Why is Eth valuable?

BILL GATES

Ethereum is more of a platform than the Internet giants

IDEAS ABOUT

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What is Ethereum Gas? [The Most Comprehensive Step-By-Step Guide Ever!]

Ethereum upgrades: A beginner’s guide to ETH 2.0

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A PRO!

Bite-sized knowledge
to upgrade
your career