Analyst: Eth 2.0 will bring about the biggest economic shift in the crypto space
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Adam Cochran, a professor of information science at Conestoga College, said that Ethereum's economic policies will bring about a reduction in the supply of ETH and a significant increase in demand due to attractive staking rewards.
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Staking Rewards Will Attract Large Institutional Investors, Trigger Retail FOMO
According to Adam Cochran, Eth2.0 phase 0 (the beacon chain) will drive the coming economic shift. The information science professor and former head of marketing for Dogecoin[1] published a long article[2] on Medium laying out some of the things that will happen when Ethereum becomes a proof-of-stake (PoS) network.
First, staking returns of 3-5% per annum will make ETH attractive to large investors as they typically look for steady returns in this range. To get staking rewards down to this range, 10-30 million ETH would need to be locked in Eth2.0 validators in Eth2.0, which equates to 10% to 30% of the token's total circulating supply.
Cochran explained that locking up so much of the circulating supply would create a supply shock, and scarcity would cause a price spike."The surge in price will prompt these investors to buy more ETH and thus stake more ETH, which in turn will have a chain reaction that drives the entire market higher. Cochran thinks retail investors will peak FOMO and start buying ETH aggressively to make sure they don't"。
However, unlike the bull run in 2017, this time it will happen faster because there are currently more fiat entry channels available, and large exchanges such as Coinbase[3] and Binance[4] have Hundreds of millions of authenticated users.
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ETH’s long-term forecast is even more optimistic
While the surge of retail investors will drive up the price of ETH, its impact will not be as short-lived as in previous bull markets.
In addition to the staking mechanism, Eth2.0 will bring scalability, allowing dApps (decentralized applications) built on this network to handle more users and improve the viability of applications. As more dApps are available on the network, the number of users of the network will increase significantly. The upshot of this, Cochran said, is that the more there is actual demand to use the system, the more the price will increase because it creates real underlying value for users.
Once the price of ETH increases, whales start buying more ETH in order to put more funds into staking. However, this situation cannot continue forever, because the more validator nodes there are in the network, the lower the reward that the system pays to each validator. Therefore, in order to continue to maintain the previous income level, whales must not only buy more ETH, but also invest more of the purchased ETH in staking.
Cochran wrote:
“This in turn creates scarcity, which in turn raises the price, which leads to more whales buying ETH to stake.”
This is where Ethereum’s monetary policy comes into play, Eth2.0 is designed in such a way that users stake at least 32 ETH. Cochran pointed out that if a whale holding 20 ETH wants to participate in Eth2.0 staking, it needs to use legal currency or other cryptocurrencies to purchase another 12 ETH.
Cochran explained:
“This is one of the most effective components of the new ETH landscape, as whales will continue to collect ETH they can stake by injecting new funds into the market.”
Finally, Eth2.0 will also bring changes in Gas fees in the network. The EIP-1559 improvement proposal proposed by Vitalik Buterin in 2018 will finally "seal" the growth of ethereum's value, Cochran said.
Implementing this proposal means that all transaction fees (BASEFEE) will be burned and miners (validators) will only be able to profit from staking rewards and "tips" that users choose to pay. [Remarks: Related reading "EIP 1559: The Last Puzzle of Ethereum's Monetary Policy [5]"]
Cochran said that early estimates suggest that the burning of BASEFEE (the base fee) could allow around 10,000 ETH to be burned from the supply, and that this number is expected to increase significantly as the number of users on the network grows.
As network usage increases, burning BASEFEE will further reduce the amount of ETH in circulation, and Cochran predicts that the amount of ETH destroyed each year will exceed the amount of newly minted ETH, thereby reducing the total supply. Cochran wrote:
"Many people may know that the economic design of Eth2.0 is very sensible, but they may not consider how wise it is."
In Vitalik's words, ETH's economic policy is the minimum necessary circulation required to keep the network secure.
Cochran said that ethereum will eventually reach this equilibrium, where supply and demand drive steady price growth, ensuring that the security of the ethereum network is always economically viable. This equilibrium will likely occur at a much higher price point than it is today, so it will highly reward early adopters/investors.
Cochran concluded that Eth2.0 will create one of the largest economic growth events in our modern society, and it is acceptable to be a part of it now. It does not need to be a bank to participate in it.
