- A researcher has highlighted that Ethereum would have to decrease its issuance or increase its token burn to restore its status as “ultrasound money.”
- According to him, the much-anticipated Petra Upgrade would lead to significant growth in the short term and the realization of its long-term vision.
Researcher Justin Drake has, in a comprehensive post, explained how Ethereum (ETH) could restore its “glory” as an “ultrasound money.” According to the post, Ethereum currently has a technical edge over Bitcoin, as the battle for the “internet money” status would be determined by security even though scarcity is important.
Delving into Details
Firstly, Drake pointed out that the possibility of Ethereum rising into dominance would depend on two things – decreasing issuance or increasing supply burn. Currently, the supply of the asset grows by 0.5% annually. Mathematically, this represents 1% of yearly issuance minus 0.5% of yearly burn. Per his observation, both phenomena could certainly happen.
Further explaining his thesis, Drake highlighted that the current issuance of the curve of ETH is a trap. According to him, its issuance was misdesigned as even 100% ETH staked only guarantees (2% tail APR). In this case, rational holders would rather stake their assets since the staking cost is lower than 2%. Meanwhile, there is a huge loss among the general holders of the ETH tokens whenever most of the asset is staked. Shedding more on this assertion, Drake highlighted two key reasons:
- ETH Displacement: According to Drake, the “pristine ETH as a unit of collateral” is usually displaced by liquid staking tokens like stETH and cbETH. While this causes systematic risks including custodial risks and slashing risks, it also reduces the potency of the asset as a unit of account.
- Real Yields and Taxes: Explaining this, Drake disclosed that the yield adjusted for supply growth tends to reduce when more holders stake their ETH. The implication is that this pushes income taxes to normal yield.
The Ethereum (ETH) Burn
Speaking on the ETH Burn, the researcher suggested that the developers scale data availability to sustainably burn a huge portion of the asset. Per his observation, it is more important to have 10 million transactions per second while each transaction pays $0.001 in DA than having 100 TPS at $100/tx. Interestingly, Ethereum had burnt $13 million worth of the asset on February 4, entering into the deflationary phase, according to our recent analysis.
The upcoming Petra Upgrade is also expected to significantly increase the efficiency of the network by doubling the capacity of layer 2. To him, the short-term impact of this upgrade is growth, and he expects “a lot of it.” As previously mentioned in our report, Petra is expected to go live in March.
Yes, the data availability supply shock from EIP-4844 that introduced blobs temporarily lowered total burn. This is the nature of supply and demand. When demand for DA catches up expect the blobs to burn hard. The Pectra hard fork, in a couple months, will double blob count.
Not taking sides, the researcher concluded that the fundamentals of projects would be a determining factor in cementing the internet money status, and it could be the security of Bitcoin, issuance of ETH, or the burn of ETH’s supply.
At press time, ETH was trading at $2,800 after surging by 3% in the last 24 hours. As highlighted in our previous article, ETH could likely bounce back to $3,700 if it successfully breaches the $3,140 zone.
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