Opinion: ETH, Economic Bandwidth Worth Trillions

Editor's Note: This article is from:Ethereum enthusiasts (ID: ethfans)Editor's Note: This article is from:

Ethereum enthusiasts (ID: ethfans)

Ethereum enthusiasts (ID: ethfans)

, Author: Lucas Campbell, translation & proofreading: Min Min & A Jian, reproduced by Odaily with authorization.

Ladies and gentlemen,

If you subscribe to our daily newspaper, you must already know the concept of economic bandwidth - but have you analyzed the relevant data?

If DAI becomes the mainstream currency, what impact will it have on the price of ETH?

How much demand will a protocol like Synthetix drive for ETH?

Why does ETH's market cap need to be in the trillions?

I love this simple thought experiment.

We should take these numbers with a grain of salt—yes, pledge rates can change, and reality is not as simple as the assumptions made in this article.

—— RSA

But leaving aside these trivial details, the point is still:

Building a trustless economy requires trillions of dollars worth of economic bandwidth.

What does this mean for ETH?

Bullish Expectations for ETH: Becoming the Economic Bandwidth to Enable a Trustless Economy

Projects like MakerDAO and Compound leverage Ethereum's permissionless financial infrastructure to build a new paradigm for global finance. Users around the world can use MakerDAO to obtain trust-free stable value, and use Compound to obtain a higher interest rate for lending funds.

in short:

These projects all highlight a theme: all these financial agreements must be injected with access-free and trust-free value to run. So where do these values ​​come from?

The answer is: neither from dollars, nor from bitcoin, but from ether.

in short:

Ether is a trustless value that provides economic bandwidth for Ethereum's permissionless financial protocols.

Over the past few years, these financial protocols have consumed an increasing amount of ether economic bandwidth. In the second half of 2019, the economic bandwidth of Ethereum consumed by Decentralized Finance (DeFi) has grown significantly, and has now reached about 3% of the total economic bandwidth.

As of early 2020, DeFi has locked 3 million ETH. Let's just say that DeFi's use of Ethereum's trust-free economic bandwidth only started after the soaring ETH in January 2018. But while the price of ether continued to drop in 2019, the amount of ether locked in decentralized finance has continued to increase to this day.

Contention to use bandwidth

Before 2019, decentralized finance consisted mainly of two projects: MakerDAO and Bancor. Since then, dozens of new financial protocols have emerged on the market, each breaking new ground in this new economic space. While MakerDAO remains dominant in permissionless finance, consuming more than 2% of total bandwidth, we found that other lending protocols, derivatives, decentralized exchanges, and decentralized financial products are competition is intensifying.

We’ve seen the explosion of Compound, Uniswap, and InstaDApp, each offering permissionless mechanisms for lending, currency exchange, and frictionless asset management.

All of these projects are enjoying Ethereum's trustless economic bandwidth. As of January 2020, Compound, InstaDApp, and Uniswap consumed 0.34%, 0.29%, and 0.10% of bandwidth, respectively.

Another permissionless financial protocol, Synthetix, has also seen impressive growth this year. Synthetix is ​​a permissionless synthetic asset issuance protocol built on Ethereum. While the total value locked in the protocol has reached $160 million, we do not include the protocol in this diagram because it does not use Ether as a trustless value to generate synthetic assets as collateral. In any case, not yet - more on that below.

While the battle for bandwidth for Ethereum's trustless economy is intensifying, we've only seen the tip of the iceberg so far. Historically, in 2016, with a total value of ETH of $1.1 billion, The DAO consumed 150 million, or 13.3% of total economic bandwidth at the time.

The Ethereum community is currently in the early stages of development, and the popularity of an application can be measured by the consumption of the bandwidth of the Ethereum economy. If permissionless finance is commonplace driven by the value of ETH, then it should not be a surprise that several of the largest financial agreements in global finance each consume 5-10% of economic bandwidth.

After all, to successfully build a permissionless and trustless global financial system requires a lot of economic bandwidth to support it.

The Importance of Bandwidth in a Trustless Economy

To build a trust-free economy, you need trust-free value. Trust-free value means having decentralized cryptographic native assets that can complete settlement without trusting an institution. BTC and ETH can be viewed as trustless assets in their respective networks.

The total liquid value of these trustless assets is the network's trustless economic bandwidth. In other words, the total economic bandwidth of Ethereum (in USD) is the liquid market cap of Ether.

High economic bandwidth is critical to the success of Ethereum’s permissionless finance. The higher the economic bandwidth, the more financial assets the underlying trustless assets of the network can support. If the value of Ether (in U.S. dollars) rises 10x, Ether can serve as collateral for financial assets worth 10x.

However, the current total bandwidth of Ethereum is only 16.2 billion US dollars, which cannot even support the economy of a small country, let alone the global economic system.

Potential market for economical bandwidth

Fortunately, there is no shortage of potential markets right now. Global debt is $250 trillion, the derivatives market is $542 trillion, and the stock market is worth nearly $90 trillion. The traditional capital market is very large.

So let's see how much Ethereum's economic bandwidth is needed to capture a small slice of the traditional economic market.

DAI demand for Ethereum bandwidth

Mario Conti, head of smart contracts at MakerDAO, aims to have 1 billion DAI in circulation by 2020.

Assuming this goal is achieved and other factors of the system are held constant. MakerDAO’s collateralization rate is around 250%, the price of ETH has been maintained at around $150, and the liquid supply is around 108 million ETH. Also, for simplicity, let's assume that Ether constitutes 100% of Dai's collateralized assets.

If the circulation of Dai is to reach 1 billion according to the current price, 15.34% of the circulation of Ethereum must be locked up by 2020 to provide sufficient economic bandwidth for Dai and achieve Conti's goal, which is at its peak compared to The DAO in 2016 At that time, it was even higher by a few percentage points.

Now, let's say ether is doing well, and the price goes up to $500, but that's less than half of its all-time high. Assuming that the pledge rate is still about 250%, the MakerDAO system only needs to lock about 4.6% of the Ethereum circulation, which is doubled compared to the current 2% and is equivalent to the bandwidth consumption of the entire decentralized financial market. than flat.

speak with actual data

Ethereum aims to be the infrastructure for permissionless finance, i.e. a digitally native financial system backed by trustless assets. Since Dai is a stable ether that is seen as the primary medium of exchange for permissionless finance, we can essentially think of the potential market for Dai as that of fiat currencies and their money supply.

What would happen if Dai became popular in Argentina?

Now, let's assume that Conti's home country of Argentina starts accepting Dai as a major trade currency, while the demand for the Argentine Peso declines. Argentina's M1 money supply was reported to be $26.64 billion in October 2019. (Note: M1 refers to all assets and funds available for payments within an economy. These assets and funds include physical notes and coins, demand deposits, travelers checks, and other deposits.)

Given the current state of the Argentine financial system, assuming that Dai is a huge success, accounting for 51% of the M1 supply in Argentina, that is, the circulation of Dai reaches 13.58 billion.

This is obviously not possible given Ethereum's issuance scheme, but it does demonstrate the importance of economic bandwidth.

The only real way for MakerDAO to generate so much Dai is to increase the economic bandwidth of Ethereum by several orders of magnitude. (Alternatively, by increasing the percentage of trust assets in the collateral, at the expense of the Dai system requiring more trust).

Therefore, in order for Argentina to obtain a sustainable economic bandwidth as its primary medium of exchange, the price of ether needs to reach 2,500 (12.5% ​​of the liquid supply of ether locked) or even 10,000 (3.13% of the liquid supply of ether locked ).

image description

-Amount of Ether locked up to reach 51% of Argentina's M1 supply ($13.58 billion) depending on Ether price and pledge rate-

The above discussion is only for Argentina

Although the 13.58 billion Dai in circulation may seem amazing, it is only a small part of the global license-free economic system that may be established in the future. After all, the total value of the traditional capital market is as high as hundreds of trillions of dollars.

Let's reason this one step further and assume that Dai begins to compete with the US dollar as a form of global trade currency. It is known that the M1 money supply of the U.S. dollar has reached 4,034 billion. Assuming that Dai accounts for 10% of it, its circulation has reached 403.4 billion.

Assuming a pledge rate of around 250%, how much Ethereum economic bandwidth is needed to mint so much Dai?

Even at the all-time high price of Ether at $1,400, 663.1% of the total liquid supply needs to be locked to provide enough bandwidth for the 403 billion Dai circulation.

Assuming 46.42% of the total liquid supply is locked in MakerDAO, which is 3.5 times higher than the peak of The DAO in 2016, the price of Ethereum must reach $20,000 to provide enough economic bandwidth for hundreds of billions of Dai in circulation.

If only 18.57% of the liquid supply of ether is locked, the price of ether would reach $50,000.

Finally, if Ether is locked in the current consumption rate range, about 3.7% of the total bandwidth needs to be locked, the price of Ether must exceed $250,000, that is, the total trustless economic bandwidth (liquid market value) must be to $27 trillion. According to today's market value of 16.02 billion US dollars, it will be enough to increase by 1665 times.

image description

-Amount of ETH locked up to reach 10% of US M1 supply ($403.4 billion) based on various ETH prices and pledge rates-

Wait, more than that...

We only outlined MakerDAO, a financial protocol for permissionless and trustless stable value. However, there are dozens of emerging financial protocols vying for economic bandwidth, all targeting different potential markets.

Bandwidth Requirements for Derivatives

Currently, the largest capital market is the derivatives market, with a notional contract value of $640 trillion as of June 2019.

With this data, let's assume that Ethereum's permissionless financial future will absorb 0.1% of global derivatives, with a notional contract value of $640 billion.

So far, the collateralization ratio of Ethereum-based derivatives has not been fully tested. Therefore, we cannot rely on circulating market data and can only assume pledge rates. With this in mind, we can make relatively fair assumptions about the pledge rate based on the different financial agreements currently on the market. MakerDAO has an average staking rate of 250%, while derivatives distribution protocol Synthetix (whose native asset is SNX) has an average effective staking rate of 714%.

Given that derivatives are inherently more volatile than MakerDAO's permissionless stable value system, and Ethereum is inherently more liquid than SNX, we can assume that the collateralization ratio required to generate tokenized derivatives is 250% Between -750%.

Therefore, let’s assume that the basic pledge rate of a derivatives contract that uses trustless liquid assets such as Ethereum as collateral is 350%.

Tokenized derivatives using Ether as collateral to reach $640 billion (about 18.67% of Ether's liquid supply) would require $12 trillion worth of aggregate economic bandwidth on Ethereum, each Ether The price is going to reach $100,000.

Assume further that Ethereum captures 1% of the value of existing derivatives ($640 trillion). With a pledge rate of 350% and a liquid supply of 18.67%, the price of Ether will eventually reach $1 million to provide enough economic bandwidth for $640 billion worth of derivatives.

Synthetix Bandwidth Requirements

Judging from the current value, we can imagine that it is almost impossible for Synthetix to successfully capture enough value solely relying on its native token SNX to provide enough economic bandwidth for the existing capital market.

The protocol must add other liquid collateral types, expanding its economic bandwidth.

In September 2019, the Synthetix community began discussing whether to add ether as collateral for the protocol. In general, this should be the sensible choice given the graph above and its impact on the protocol's economic bandwidth. (RSA Note - Synthetix is ​​planning to include Ether as its collateral type by January 30th)

in conclusion

In short, once a more liquid trustless collateral type such as ether is introduced, Synthetix can issue more assets.

In order to achieve this goal, the first thing the Synthetix community has to figure out is how to solidify the economic model of new collateral and ensure that the value of the SNX token will continue to grow as the Synthetix protocol issues synthetic assets using different types of collateral. increase.

in conclusion

If Ethereum intends to create a new economic system that is both permission-free and trust-free, the demand for the economic bandwidth of Ether will be strong in the future.

Decentralized and permissionless finance is poised to see incredible growth over the next 20 years if you’re patient enough. This financial system will benefit billions of people around the world.