Seven Reasons ETH 2.0 Will Create an Economic Shift

Editor's Note: This article comes fromBlue Fox Notes (ID: lanhubiji), reprinted by Odaily with authorization.

Editor's Note: This article comes from

Blue Fox Notes (ID: lanhubiji)

• Blue Fox Notes (ID: lanhubiji)

, reprinted by Odaily with authorization.

Preface: This article mentions 7 reasons why ETH2.0 drives ETH changes. This article describes the prospect of ETH development in an optimistic way, and does not fully consider various potential risks and market factors, so everyone needs to have their own judgment . This article mentioned that with the advent of the ETH2.0 pledge economic mechanism, how will large rent-seeking investors and retail investors who are afraid of missing out react? What are the reasons behind these reactions? Welcome to discuss together. The author of this article is Adam Cochran, translated by "SIEN" of the "Blue Fox Notes" community.

With ETH 2.0 just a few months away, it has the potential to prove to be a big economic shift. There are seven reasons, as follows. (Blue Fox Note: A more accurate statement is the launch of Phase 0 of ETH2.0, which is mainly based on the beacon chain)

Reason One: Rent Seekers

Due to the size of their stake, big investors are looking at a steady rate of return of around 3%-5%, which is why traditional investing has shifted to below these rates (as the big players stopped pumping money into yields below 3%).

When ETH moves to staking, large investors may put funds into staking lockups until they reach the 3%-5% yield range. ETH2.0 may not be lower than this range. This is because the Ethereum network still has technical risks, which are not found in traditional markets. Therefore, rent seekers hope to have higher returns to take risks.

• To get down to that level, it means that around 10-30 million ETH will be locked up among ETH2.0 validators. In the early stages of ETH2.0, these ETHs cannot be withdrawn. So we're likely to see lower investments and higher interest rates at the start of the launch.

But this means that about 10%-30% of all circulating ETH will need to be locked before the network falls below the rate of return expected by large rent-seeking whales. What happens when 30% of supply is suddenly removed from the supply market? There will be supply shocks.

Every major trader, investor, and miner knows they can be rent seekers, so those who normally provide liquidity to the market are stingy about selling. This is likely to hit lending pools and DeFi liquidity first. (Blue Fox Note: The two have a competitive relationship, and will eventually balance out)

• Supply shocks typically cause sharp increases in commodity prices. It's like what we've had with the disruption of supply chains in COVID, so just the lockdowns have created shortages that have sent prices skyrocketing.

Reason 2: Entry into the second round

The price surge caused by the supply shock means that rent-seekers get a 3%-5% return on ETH investment. In fact, if they follow the legal currency principal on their books, they will get a much higher return. Higher than 2-4 times. Therefore, they will enter the second round of buying & staking until their predetermined ROI returns to 3-5%.

It's a chain reaction with diminishing returns, with each round having less and less impact on price. While it won't have the full impact of the original purchase, all of these knock-on effects can add up to two-thirds of the initial impact, depending on where prices go.

Reason 3: FOMO of retail investors

So now, we have rent seekers, creating a supply shock. At the same time, we also have a second-round knock-on effect. This means that the market is indeed starting to move up. This creates FOMO (fear of missing out) sentiment among retail investors, who tend to act later than any investment stimulus. They tend to buy when the market is rising and sell when the market is falling. Retail investors, especially those who get into FOMO mode, tend to react violently. They flood the market to buy, making sure they don't miss out.

These retail investors don't care about P/E ratios or RSI, nor do they care about market depth. They just want to get in. When they start buying aggressively, the market will be flooded. In the bull market of 2017, the biggest hurdle was the time it took for users to perform KYC/AML for exchanges. At that time, Coinbase had only 5 million users, and it was not possible to buy cryptocurrencies with fiat currency on exchanges like Biannce.

• Now, fiat currency deposit channels are everywhere. Coinbase now has over 30 million users, all verified and ready to operate. This time there will be no barrier to entry, meaning all those users can be in FOMO mode at the same time.

All it takes is a crazy headline on MSNBC about Ethereum's growth to remind their own accounts, and retail investors go crazy. However, as we know, 10-30 million ETH is locked when ETH2.0 is launched, so the supply is reduced and facing a supply shock.

But now we are facing a demand shock and everyone wants an asset. When we have a supply shock and a demand shock at the same time in a short period of time, this can really ignite FOMO and can drive a one-off price spike in the short term.

Now, this is only the third reason for a short-term price spike as we look at the ETH2.0 initiated lock. But what will happen in the long run? There are many factors that create a strong "basic growth rate."

Reason 4: Practical needs

• The best reason for this growth is the actual demand for the asset, i.e. used as a gas fee in decentralized computing, which is something that only ETH2.0 can really claim.

With the release of ETH2.0 (and other improvements), we will see ETH greatly improve its tx/s, thereby increasing its commercial and consumption capabilities. Transaction congestion, high transaction costs, long waiting times for dApps all disappear. This means that all teams building on Ethereum can now deliver products at commercial and consumer scale, with many more projects to come. Use drives value growth with Metcalfe's Law. (Blue Fox Note: This is a bit optimistic. ETH2.0 has a longer completion time. First, it takes time to achieve high performance. Second, eth2.0 fragmentation also has cross-sharding problems.)

In short, the more actual demand to use the Ethereum system, the more upward momentum its price has. This is because the real value base is created by the user.

The best part in an open system like this is that every transaction has a different value for everyone. You can set the value of one 200,000 gas transaction at $0.1 and another transaction at $5. This means that the price is different for everyone in the market, and that's not even taking into account that we can ultimately decide to change what we pay for gas.

• Reason 5: Whales buy in circles

What happens as actual usage drives prices up? Those rent-seeking whales are back. The price went up a lot, and their ROI went up again. Therefore, they can put more money into staking.

However, the more money they invest, the more nodes there will be. More nodes = proportionally lower rewards. This means that every additional node a whale adds dilutes the potential gains of all other rent-seekers. If these rent seekers want to continue to earn the same rate of return, then they also need to invest more capital.

This creates a race condition. Rent seekers must buy more to maintain their yield. However, this in turn creates scarcity and increases the price, which in turn leads to more whales buying to stake. Whale cycle buying continues. However, users cannot pledge part of ETH, not even 1 ETH, they must be distributed in 32 ETH quantities, which brings us the next reason for market growth.

Reason 6: Get enough 32ETH

You have to count how many zeros there are. As ETH is used as gas, it uses decimals as the price of ETH increases. You don't have to worry about whether it's 0.00001ETH or 0.0000001ETH, as long as the transaction is cheap on fiat.

Let’s say a whale finds out that they’ve made a profit of 20ETH from their node, and they can’t simply re-stake that money. They need to collect enough 32ETH. This means, they have to source 12 additional ETH funds from outside to make new pledges.

This is the minimum stake amount per node, and each node stakes the same amount, people cannot recycle their profits. Even whales earning money from the market must bring new funds into the market to essentially "prorate" their staked amounts as the network grows.

This is one of the most effective components of ETH's new design. Because the whale will put new funds into the market to make up the amount of ETH it can just pledge.

Why? This is because of opportunity cost.

• Spare cash loses 2% of income per year. In this case, the idle ETH may earn x% per year, but the pledged ETH can earn (X%+Y%), where Y is the pledge yield. The value of Y is almost irrelevant. Because X+Y always exceeds X.

As long as it has a return of about 2%, then it is more profitable to invest funds to make the amount of ETH pledged just right, rather than losing 2% every year due to inflation. Under ETH2.0, if more than 100 million ETH are locked, the issuance rate of ETH will not exceed 1.81%. But, it would be crazy in terms of demand/supply shocks, which would cause prices to skyrocket.

More likely, it will be in the 3%-7% range. This will cause people to add new funds to buy 32ETH proportional shares.

Finally, the most important reason for the growth of ETH2.0:

Reason 7: Destruction of fees in EIP-1559

EIP-1559 changes the way Ethereum blockchain fees are handled. First, it means more efficient payments without miners voting on fees.

Right now, this represents only 0.01% of the total annual supply, but this is directly proportional to actual usage and could be a significant driver. The short-term goal here is to eventually offset the amount of new ETH issued each year.Simple understanding of Reddit's point currency》）

In the long run, if Ethereum is the world computer, then we can expect that the annual destruction of ETH will exceed the annual new issuance and start to reduce the total amount of ETH.

Right now, we estimate that there are about 1.2 million active Ethereum users, many of whom only use the service 1-2 times. But that will change as large services start to be adopted and deployed on Ethereum.

Considering that there are rumors that Reddit will release its token based on the Ethereum blockchain, and it seems to push the Ethereum wallet in its App. (Blue Fox Notes: You can refer to the article published by Blue Fox Notes "

Simple understanding of Reddit's point currency

This means their 330 million monthly active users will have an Ethereum wallet and have a reason to interact with ETH every week to claim their tokens. If 10% of those users become monthly active ETH users, a 10,000 ETH per year burn could quickly turn into a 250,000 ETH per year burn just for a major service blockchain integration .

Ultimately, in the long run, the supply of ETH will decrease. This is a good thing for everyone.

In ETH, we just need to count to zero. Someone using ETH as a gas fee doesn't care if it costs 0.001 ETH or 0.00000001 ETH, as long as its transaction fee is $0.001 in both cases.

Since gas doesn't have to count to zero (unlike painfully reading a BTC-denominated payment), the price point doesn't matter, as long as the price rises slowly enough that it makes no difference between buying ETH and spending it. However, this is good news for investors as the supply is decreasing and the value of ETH is increasing. Therefore, they will gradually release their pledged ETH to the open market to create a stable basic growth rate.

Perhaps many of you may know that the economic design of ETH2.0 is very clever, but maybe you have not considered how clever it really is.