Scarcity will rival gold, investors bet on Ethereum 2.0
This article is from:Hashpie (ID: hashpie), Author: Lucy Cheng, forwarded with authorization.
1. Overview
This article is from:
Hashpie (ID: hashpie)
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1. Overview
The enthusiasm for the third halving of the Bitcoin blockchain reward has just faded away, and the development progress of Ethereum 2.0 has quickly taken over, becoming the focus of the cryptocurrency industry. With the launch of Onyx, a test network version for the latest ETH 2.0 specification on June 15, Beijing time, and the arrival of Altona, a test network for end users, Ethereum, which has long been dubbed "forever 18 months" The first stage of 2.0 seems to have come to the final moment.
The gradual advancement of relevant progress in the final stage has enhanced the field's confidence in Ethereum to a certain extent. Although the price of Ethereum has risen weakly in recent weeks, the overall market trend is still mainly sideways; but at present, many basic indicators on the chain, including the growth of mainnet addresses, the adoption rate of tokens, etc., are relatively strong growth momentum. In this article, Hashpie (public account ID: hashpie) will analyze the underlying reasons why the market is highly optimistic about the upgrade of Ethereum in combination with the major economic transformation that ETH 2.0 is about to usher in.
Ethereum price rise and fall in the past three months (data source: Glassnode)
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In the middle of this month, Ethereum multi-client test network developer Afri Schoedon stated publicly that if everything goes well, the ETH 2.0 main network will be launched in November this year, or delayed until 2021. Even though the launch of Phase 0, the first phase of the 2.0 upgrade, has been pushed back and forth, the market enthusiasm has not shown signs of weakening.
In April this year, Topaz, the test network launched by Prysmatic Labs, took nearly a month to attract 29,300 verifiers, with pledged funds exceeding 1 million ETH; if it is real Ethereum, this is equivalent to an amount of 240 million US dollars. The Onyx Network quickly ushered in 244 active nodes in less than a week after its launch.
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Changes in the new addresses of Ethereum in 2020 (data source: Glassnode)
In addition, the number of addresses holding at least 32 ETH has risen steadily to over 130,000, an increase of 12% during the year. According to the official plan of Ethereum, 32 ETH is the minimum threshold for participating in the operation of a validator node in Ethereum 2.0; judging from its growth, investors are quite busy accumulating ETH to participate in the PoS mechanism at this stage. It is worth mentioning that, according to Nansen co-founder and data scientist Alex Svanevik in an interview in mid-month, most of these Ethereum wallets containing 32 ETH belong to individuals, not exchanges.
The address growth of the Ethereum network holding about 32 ETH in 2020 (data source: Glassnode)
At the same time, other large households and whale addresses are also ready to move. According to data from Santiment, a cryptographic data analysis company, as of early June, the top 100 non-exchange wallets held a total of 21.8 million Ethereum, a record high for the total amount of coins held by whale addresses in ten months. At current Ethereum prices, this amount equates to $5.3 billion, the largest collective balance ever held by the top 100 whale wallets.
Changes in the balance of Ethereum in each exchange (data source: ViewBase)
On the other hand, the Ethereum balance of major exchanges also showed a significant upward trend; according to the data from ViewBase, the ETH holdings of the exchanges increased by more than 130,000 within 30 days, and only two large exchanges, Bitfinex and Binance The platform has 106,000 and 39,000 Ethereum recharges respectively. In addition, Adam Cocharan, a professor of information science at Conertoga College, published an analysis on Metiuam, saying that between April and May, the price of Ethereum achieved about 50% growth, but the amount of ETH sold on the exchange was only 19.5 million, accounting for the total amount of the platform. 58% of the stock; compared with past data, this is the first time in the history of Ethereum that the price has risen by 50%, but the proportion of exchanges sold is less than 80%. It can be inferred from this that whale users are absorbing a large number of goods.
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In Ethereum 2.0, the consensus mechanism for network verification will switch from the original proof-of-work mechanism to the proof-of-stake mechanism; that is, the newly issued ETH will no longer be mined by PoW miners, but will be carried out by verification nodes earning rewards through pledges. issued. Different from the strong hardware requirements for miners in the PoW mining model, participating in Staking only requires a computer with at least 32 Ethereum and sufficient hardware specifications to enter.
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Recommended computer configuration requirements given by the official test network (Source: Prysmatic Labs, Standard Consensus)
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Based on the number of pledged Ethereum, analyze the profitability and inflation rate of stakeholders in ETH 2.0
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The reduction of entry barriers, reduction of maintenance costs, and increase in the rate of return will, to some extent, attract some small-scale verifiers to participate in the operation of Ethereum 2.0. The increase of more than five percentage points in the number of wallet addresses with more than 32 ETH holdings this month also reflects the enthusiasm of individual investors.
However, it should be noted that this is only the potential income when there are 1 million ETH participating in the pledge in the network. In the future, as the number of Ethereum pledged on the 2.0 network increases, the staking rewards that each ETH will be able to earn will gradually decrease. , and at the same time, the proportion of investment cost to obtain the corresponding rate of return will also increase. Therefore, as far as small investors are concerned, the earlier they enter the market, the higher the pledge rate of return.
4. The annual inflation rate will decrease, and the scarcity will move closer to Bitcoin and gold
The ETH 2.0 upgrade will not only change the way of network verification and new currency issuance, but also its economic model will undergo major changes; the most direct impact is the annual issuance rate of Ethereum.
Similar to Bitcoin, Ethereum, which is still using the PoW mining mechanism, also regulates its inflation rate by reducing block rewards. Between 2016 and 2019, the network’s block reward has been reduced from 5 ETH to 2 ETH; its annual inflation rate is approximately 11.20%, more than double Bitcoin’s annual inflation rate of 5.58% over the same period.
Ethereum's past, present, and future issuance ratios (image source: ethhub.io)
However, based on the proof-of-stake mechanism, after the network is upgraded to 2.0, the issuance rate of Ethereum will be linked to the number of validators participating in Staking, the total number of pledges of ETH, etc., which has great uncertainty. According to the data given by the core developers on Github, even if all current Ethereum users participate in the pledge of Phase 0 of the first phase of 2.0, the maximum issuance is only 2 million ETH/year. In other words, the inflation rate of Ethereum 2.0 in the first full year will not exceed 1.80%, which is better than the current inflation rate of Bitcoin.
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More importantly, the analysis data of introducing the Bitcoin stock-to-flow ratio S2F model into Ethereum shows that after the 2.0 upgrade is launched, its scarcity will be greatly enhanced, and it may even reach a level comparable to gold.
This model was proposed by Bitcoin researcher Plan B, and it is mainly used to measure the relationship between asset scarcity and market price. The data calculated in the above figure shows that the S2F value of Ethereum has gradually increased since 2016 and reached 21.95 in 2019, which is close to the level of the precious metal silver S2F value of 22. But by the end of 2020, when the S2F value of Ethereum climbs to 28.25 (the white dot in the figure below), its scarcity will surpass that of silver.
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Bitcoin's SF model diagram made using gnuplot and gnumerics (data source: PlanB's Medium)
Not only that, once Ethereum 2.0 is fully launched, the S2F value of ETH will jump by 100% to 57.2 in 2021 (the black dot in the figure above), and will continue to rise to 58.2 by the end of 2022. This growth trend means that in 2022, the scarcity of Ethereum will likely move closer to gold (gold's current S2F value is about 60).
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5. The lock-up fuels the ETH market, and the rising price continues to stimulate enthusiasm for pledge
According to the plan of the Ethereum development team, staking 32 ETH is the entry threshold for becoming a Phase 0 beacon chain validator, and at least 16,384 verification nodes are required to start the beacon chain, that is, the minimum threshold for the total amount of ETH pledged on the chain is 524,288 pieces. It should be emphasized that this mortgage is one-way; once participating in the pledge, the ETH on the beacon chain must wait until Phase 2 goes online before it can resume circulation; and at this stage, the official launch of the third phase of Ethereum 2.0 is still at least There are two to three years. That is to say, this batch of mortgaged ETH needs to be locked until 2021 or even 2022.
Although 524,288 ETH accounts for less than 1% of the current total circulation, this is only the minimum threshold for activating the beacon chain. Judging from the staking amount of over 1 million ETH on the test network Topaz in June and the current hot market situation, the total amount of Ethereum participating in Phase 0 staking is very likely to be higher than this value.
Take Grayscale Bitcoin Trust, which has continued to increase its holdings of Ethereum in recent months, as an example. The approximately 540,000 ETH that the institution has successively purchased this year has exceeded the minimum threshold for the start of the beacon chain. According to the calculation based on the lock-up amount of more than 1 million ETH on the test network, the total amount of pledge is about 1% of the total circulation; in addition, its founder Vitalik Buterin estimates that the lock-up amount of about 10 million ETH is equivalent to nearly 10 million ETH at the current stage. % of the total Ethereum issuance.
The proportion of various types of ETH in the current total circulation (data source: Defipulse, network, Coinmarketcap)
Large-scale ETH lock-ups will seriously reduce the circulation of Ethereum; so in effect, the scarcity of ETH will be greatly enhanced before the deployment of the third phase of Ethereum 2.0. At the same time, the sudden removal of a certain share of Ethereum from the supply market may cause an imbalance between supply and demand in the market. In theory, this would push up the price of the associated cryptocurrency for a short period of time.
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Once the price of Ethereum rises, the return on investment of users participating in Staking based on fiat currency will also increase, which will stimulate the second round of purchases and pledges in the market. However, the increase in the total amount of ETH pledged will dilute the potential income of all participants to a certain extent, making the pledge income of Staking users less and less.
This means that capable investors must invest more funds and pledge more ETH if they want to maintain their staking income. Before the start of Phase 2, the influx of funds and the inability to circulate pledged ETH will in turn enhance the scarcity of Ethereum, thereby further driving up the price and continuing to attract more whale users to enter the pledge. Repeating the cycle, the price of Ethereum may show a continuous growth trend for a period of time.
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6. Burning transaction fees, ETH 2.0 will lead to a negative circulation of Ethereum
After the Ethereum network is upgraded to version 2.0, its new issuance will be linked to the total amount of ETH pledged; however, the net issuance rate will also be affected by the Ethereum improvement proposal EIP 1559.
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https://stablecoin.tokenview.com/cn/chart/USDT_txcount
For Ethereum investors, what is worth studying in EIP 1559 is the transaction fee burning mechanism related to ETH issuance. This mechanism means that if the proposal comes into effect, the active economic activities on Ethereum will bring about the destruction of a large amount of ETH, and its net inflation rate will further decrease, and the annual circulation may even be negative.
Taking the average data of this month as an example, the transaction fee generated by the Ethereum network is about 2,200 ETH per day, which is nearly 800,000 ETH when converted into a year’s cost (multiplied by 365 days). Assuming that the number of pledged Ethereum on the beacon chain is less than 30 million, the new issuance of ETH in this year will be lower than the transaction fee burnt amount of ETH.
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7. Summary
Among them, as the current largest Gas user on the Ethereum network, the USDT official has gradually transferred the activities of stablecoins on the BTC chain to the ETH chain since August last year, and issued a large number of USDT on the latter in recent months. The DeFi market, which had cooled down slightly earlier, has also performed relatively strongly since June this year. The amount of ETH locked up has surged, with an increase of over 12 percentage points within the month.
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