Back in mid-January of this year, buyers of ethereum-based ERC-20 altcoins helped to drive the price of the second-largest cryptocurrency in the world up to an astonishing $1,400 per token. Now, with interest in the initial coin offering industry having waned considerably, the price of ether is just a fraction of that; as of this writing, it is just over $226 per token. Over the past several months, investors have recognized the link between the price of ether and the ICO boom-and-bust tendency. In the process, the price of ether has collapsed to a small portion of what it once was, and investors who stocked up on ETH in the past year have been left hurting.

According to a recent report by CoinDesk, investors everywhere are still figuring out the links between the value of a digital token and its blockchain. Still, as time goes on, it appears that the correlation between the price of a token like ether and its utility as a fuel for a blockchain ecosystem may not be particularly strong. That is, ethereum as a blockchain can still be a robust, important network, even if ether as a token is not particularly well-valued in comparison with prior price points.

The Fat Protocol Thesis

Union Square Ventures partner Albert Wenger famously proposed what he termed the "fat protocol thesis" earlier in the history of digital currencies. This hypothesis argues that rising prices for utility tokens like ether foster the ability of developers of open-access software platforms to generate value for their work, even if the underlying protocol is free. The idea is that app developers on the blockchain would be able to charge users for their services, while those working on open-access protocols like HTTP were resigned to a requirement that they be free.

At this point, though, analysts are wondering if utility tokens could, in fact, be limited in terms of total fiat-currency monetary power because its price may be antithetical to its utility.

Gresham's Law

According to the report, a relevant consideration is Gresham's Law, which states that "bad money drives out good." In other words, if a token is to function as a fluid enabler of transactions within a blockchain network, it should not be overly attractive as a store of value or an investment. If it's a good store of value, the thinking goes, that token will be seen as something to hold instead of something to use.

Followers of Gresham's Law tend to believe that there is a sweet spot for a cryptocurrency community in which the token powering the blockchain is seen as a bit "bad," meaning that there is a small expectation of depreciation or inflation. This is incentive for users to transact in the currency, rather than to hold onto it. Critics of bitcoin have suggested that it doesn't have enough of these qualities; because of its scarcity and incorruptibility, it is seen as more of a store of value than as a tool for transacting.

The Future of Ether

When it comes to ether, smart contracts are a crucial component. In order to serve as the "gas" behind the ethereum network, ether relies on individuals using and transacting with the token. This was in contrast with the tendency during the ICO craze, in which users held on to ether tokens in order to participate in the rush of new offerings. Now that ICOs are decidedly less popular, however, the cycle has flipped. ICO issuers holding ether often wish to dump those tokens in order to free up cash for their operations. Should this happen, it's conceivable that the price of ether could be pushed even further down, even as it continues to be functionally important for the ethereum blockchain.