Scarcity: ETH's Fundamental Value Proposition
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, Author: David Hoffman, Compiler: Unitimes_Jhonny, published with permission.
All the activity on the Ethereum blockchain brings about a general lack of ETH. The privileged role of ETH as the native asset of Ethereum establishes an inseparable link between the economic activities and financial applications of all assets on Ethereum and the scarcity of ETH. As a result of this connection, the health of the Ethereum economy is reflected in, and influenced by, the value of ETH. This connection is created by the general demand for ETH stemming from economic activity in the network that needs to be recorded on the Ethereum chain, thus making this asset scarce.
Ethereum has 3 core pillars that are critical to the functioning of its ecosystem, each of which represents the core mechanics of the Ethereum blockchain and brings demand and scarcity to ETH:
ETH in DeFi: the amount of ETH stored as collateral in Ethereum applications;
Pledged ETH: the amount of ETH pledged in the Eth2.0 network;
These three pillars represent the foundation of the Ethereum protocol and economy, and establish a "privileged relationship" between the Ethereum protocol and ETH assets. The result of these three pillars is the scarcity of ETH's general demand.
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01. ETH in DeFi
Ethereum applications that have a product/market fit are those that allow you to store assets in order to acquire some financial product or service. In theory, these applications can support any asset on Ethereum, but each blockchain platform’s native assets will always be given a privileged status in its internal ecosystem.
Strong permissionless and censorship resistance are must-haves for an M0 settlement currency. Compared with all other assets issued on Ethereum, ETH, which is the native asset of Ethereum, has this strong settlement guarantee. It is impossible for any other asset issued or deployed on Ethereum to achieve ETH's level of trustlessness or censorship resistance, and therefore cannot achieve ETH's settlement assurance. In short, strong permissionless and censorship resistance are the must-haves for M0 settlement currency, and the core features of ETH as an internal asset in the Ethereum financial application ecosystem (DeFi).
For these reasons, various financial applications on Ethereum will likely always favor ETH as "good collateral". ETH is the most "good collateral" for Ethereum applications and has become the driving force behind the growth of ETH demand and liquidity. Due to the demand for this asset with the strongest settlement guarantee, ETH has become the most liquid asset in the Ethereum ecosystem, which further enhances the attribute of ETH as a "good collateral".
Let's take a look at the comparison between the dominance of ETH collateral and other collateral assets in Ethereum financial applications, as shown in the figure below:
Above: The trend of collateral value locked in Ethereum DeFi since 2018, where the blue line represents the total value of ETH stored in DeFi, the white line represents the price of ETH, and the yellow line represents the value of all assets stored in DeFi total value. It can be seen that ETH collateral dominates all collateral values.
Ethereum is a platform for hosting financial applications. All applications on Ethereum are financial in nature, as all cryptoeconomic systems like Bitcoin and Ethereum are economic in nature.
About 2.7 million ETH is staked in various DeFi applications at the time of writing, accounting for only 2.5% of the total ETH supply. The scarcity of ETH is directly proportional to the number of financial applications on Ethereum, because all financial applications require users to store assets in order to use them, and ETH has always been the preferred collateral for users of these Ethereum applications. Additionally, the number of Ethereum financial applications is growing, increasing the overall Ethereum Addressable Market (TAM). The growth of Ethereum applications not only increases the overall demand for ETH, but the increase of new users also increases the capital inflow of these applications.
While users new to Ethereum may not necessarily choose to use ETH as an asset of choice, the privileged attributes of ETH in Ethereum make it always attractive.
The basic value proposition of DeFi is to stimulate a large amount of ETH in circulation to be stored as collateral through different products and services provided by various Ethereum applications.
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02. Burned ETH
(This section assumes that the EIP1559 proposal is in effect. Currently, the proposal has not yet entered into force.)
Economic activity on Ethereum will result in the destruction of ETH. In order to conduct a transaction (any transaction) on Ethereum, you must burn a small amount of ETH. In addition, you can also choose to pay "tips" (Tip) to Ethereum verifiers to make your transactions verified faster, that is, to give verifiers extra rewards to compare your transactions with others Transactions are packaged earlier.
Since Eth2.0 will issue additional ETH by providing block rewards to verifiers, transaction fees no longer need to be paid to verifiers, and the destruction of transaction fees can increase the scarcity of all remaining ETH, thus providing A theoretically safe mechanism for returning value to the ecosystem.
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Economic Activity on Ethereum
Since every transaction on Ethereum will burn a small amount of ETH, the scarcity of ETH will be a function of economic activity on Ethereum. Growth in economic activity on Ethereum will increase the burn rate of ETH, which will increase the scarcity of ETH over time.
As a trustless Internet asset settlement network, Ethereum provides an attractive venue for economic activities. Economic activity tends to consist of two parts: assets and financial logic; on Ethereum, they are called "tokens" and "applications", respectively. Their creation and development on Ethereum creates a usefulness feedback loop whereby as they proliferate (evolve), Ethereum itself becomes more useful.
In short, more total assets and more financial applications on Ethereum will drive a wider range of economic activity. This economic activity reflects the burn rate that removes ETH from circulation, which will ultimately increase the scarcity of ETH.
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Sharding
Sharding is included in the development roadmap of Ethereum [5]. Sharding is the main way Ethereum improves scalability (i.e. increases the total transaction bandwidth of the Ethereum blockchain).
We know that adding new data to a blockchain is inherently limited by the global distribution of nodes that make up the blockchain network. Sharding in Eth2.0 will divide the Ethereum blockchain into 64 smaller blockchains (ie, shard chains), each of which has its own bandwidth limit. These shard chains are eventually combined into a single blockchain (the Beacon Chain).
Fragmentation means greater capacity. With the help of sharding, Ethereum will be able to carry more economic activities. Sharding allows Ethereum to serve 64 times more users at the same time than it currently does, which increases the transaction fees generated in the Ethereum network, all of which will be burned.
However, sharding also increases the supply of blockspace available for purchase. All transactions will compete for 64 times more block space than currently available, which will ultimately reduce transaction fees paid by users. While this may reduce the network's short-term overall transaction fees, it may ultimately improve the overall Ethereum's ability to host more economic activity.
Currently, the Eth1.x chain is running at "full capacity", which leads to an increase in transaction costs. Increased transaction costs reduce the viability of those complex and costly applications and limit the viability of many other otherwise useful types of economic activity.
The increase in the net scale of Ethereum's economic activities will lead to a greater ETH burn rate. The ETH burn rate is a measure of how scarce ETH becomes over time. With the development of the Ethereum economy, the total amount of ETH burned will likely occupy a large portion of the total amount of ETH in circulation, eventually increasing ETH scarcity.
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03. Staked ETH
Ethereum implements the security of the network through the PoS mechanism, which forces all Ethereum verifiers to participate in verification by staking ETH. If you want to become a validator on Ethereum (and earn validation rewards), then you must buy ETH and stake it in the Ethereum protocol, promising that you will not forge transactions. If you forge a transaction, your staked ETH will be "get slashed".
Stakers (validators) are rewarded with ETH rewards and "tips" included in transactions. This is the incentive mechanism for participating in staking: get rewards by staking ETH, and the rewards are paid in ETH.
At present, it is estimated that about 10%-30% of the total ETH in circulation will participate in the pledge (staking) of Eth2.0. If this estimate is accurate, then the PoS mechanism will make 10%-30% of ETH unobtainable in the secondary market. In other words, staking makes ETH more scarce.
In the PoS mechanism, the value of ETH will be the power to protect the Ethereum network. The PoS mechanism creates a "wall of value" against potential attackers, the size and strength of which comes from the amount and value of the ETH that makes up the wall.
To create this wall, Ethereum will issue new ETH as a reward for ETH stakers. Creating this wall of value that protects the Ethereum network has a dual effect: as the amount of ETH used to build the wall (stake) reduces the remaining ETH in circulation in the Ethereum ecosystem, this in turn makes the ETH available to malicious attackers The number has decreased.
The increased security level means that Ethereum can reduce the issuance of ETH. The sole purpose of issuing additional ETH is to protect the Ethereum blockchain, and Ethereum has adopted a monetary policy of "Minimum Necessary Issue" (MIN)[6] [Note: Related reading "Underestimated ETH Monetary Policy [7]"] . If Ethereum is deemed too safe at the current issuance rate, the community may support reducing ETH issuance. It remains to be seen how effectively Ethereum and the Ethereum community will measure security and coordinate appropriate changes around ETH issuance.
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6 Metrics to Measure ETH Scarcity
The beauty of blockchain systems is that they enable maximum transparency. All possible information is freely available. The scarcity of ETH described above can be viewed and verified in real time. Going forward, we will be able to measure ETH scarcity in real time using the following metrics:
Amount of ETH locked in DeFi
That is, the amount of ETH locked in the Ethereum application
The amount of pledged ETH
That is, the amount of ETH pledged to participate in Eth2.0 staking
ETH Stake Rate ETH's pledge rate
The rewards paid to stakers denominated in ETH represent the strength of the incentive mechanism for staking ETH.
Issuance rate of ETH
i.e. the issuance rate of new ETH paid to stakers
ETH burn rate
That is, the burning rate of ETH used as the transaction fee of Ethereum
Issuance of ETH: Burn Rate
That is, the ratio of the issuance rate of ETH to the burning rate
Long-term fundamental analysis of ETH valuation must consider these six variables. These metrics can be condensed into an overall vision that reflects the state of the relationship between ETH, the Ethereum network, and the Ethereum economy.
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ETH value; Ethereum health
Ethereum uses the value of its native token, ETH, as a way to secure and grow the Ethereum economy. ETH provides the Ethereum network with protection from potential attackers (security value) and also provides a valuable asset for Ethereum financial applications.
This creates a duality between the security and utility of the Ethereum network (even if the two can coexist), and this duality focuses on the value of ETH.
Original link:
Original link:https://bankless.substack.com/
Reference link:
[1]https://bankless.substack.com/
[2]https://medium.com/@eric.conner/
[3]https://bankless.substack.com/
