The recent surge in the price of ethereum (ETH) is largely due to the ongoing hype surrounding the impending merger event and repeated predictions that the world's second-largest cryptocurrency by market capitalization is about to become an An almost perfect deflationary asset in a world plagued by inflation. However, as with almost everything in life, the truth is much more subtle.
The Problem with Deflationary Money and How to Profit From It: A Blog About Jordi's Arguments Against Ethereum's Deflationary Model
Looking back at the upcoming merger event, Ethereum will officially transition from a proof-of-work (PoW) transaction authentication mechanism to a proof-of-stake (PoS)-based proof-of-work (PoW) transaction authentication mechanism, in which miners spend computing power to obtain the right to authenticate incoming transactions. frame, where Validators lock specific amounts of ether in dedicated nodes to compete against each other to validate transactions and introduce new blocks into the chain.
In another article, we detailed the deflationary scenario for Ethereum. Please read this article for an in-depth look at the opposite of the views presented here.
Jordi Alexander is the CIO and game theory expert at Selini Capital. Bankless recently elaborated on his pessimistic view of Ethereum’s deflationary characteristics in a dedicated newsletter. In this article, we'll expand on Jordi Alexander's perspective.
Everyone agrees that the next merger event will significantly reduce Ethereum’s issuance. After all, PoS frameworks are much more efficient than PoW systems and use far fewer resources. Miners are now responsible for issuing approximately 13,000 ETH per day.
Initially, the PoS transaction authentication framework will issue about 2,000 ETH per day to authenticate transactions. This daily issuance could increase to roughly 5,000 ETH as the amount of currency staked on the Ethereum network increases, but is still down by over 60%.
Most of the current deflationary predictions are based on Ethereum’s burn mechanism. The technology is included in the Ethereum Improvement Proposal (EIP) 1559 innovation.
Busting the Myth of High Gas Prices on Ethereum: This blog busts the myth that high gas prices may be counter to crypto’s deflationary goals
The redesign includes a base price calculated in real time using network congestion as the main input. The base fee is burned, and the validator's reward mainly consists of two variables: Specific transaction and block subsidy, currently fixed at 2 ETH per block and distributed equally among all validators. Please watch the YouTube video above for more information.
But here's a problem. High fever requires network congestion, which hasn't existed for a while.
Indeed, barring new sensational phenomena — such as the launch of virtual real estate bidding in BAYC’s metaverse initiative Otherside, which ends up causing a massive spike in Ethereum fees — base fees are thus expected to remain subdued. this weakens Deflationary predictions for Ethereum.
Which brings us to one last key factor: staking yield and the imminent deluge of staked ETH on the network. The current annualized mortgage rate of return on Ethereum is 4.04%. News claiming that Ethereum’s yield will reach 25% APR immediately after the merger event is circulated on social media sites.
And even if it does, it's likely to be a blip. After all, such a large return is bound to attract a lot of staking activity, reducing yields, as shown in the chart above. Crucially, the more ETH staked, the higher the supply of Ethereum, which reduces the value of the token Deflationary outlook.
Vitalik Buterin predicted in July that after the merger, the annual issuance of ETH will be 166 times the square root of the number of pledged tokens.
As of now, 13.369 million Ethereum tokens have been invested in the Beacon Chain. Buterin’s calculations show that based on current staking levels, Ethereum’s annual supply is 606,959.54 ETH or 1,662.90 ETH per day. 7099 ETH has now been burned in the past 7 days, with a daily burn rate of 1014.14 ether.
As you can see from the simple math above, Ethereum will continue to add 648.76 ETH to its net supply per day, which is far from deflationary.
Of course, with the likely exponential growth in post-merger staking activity, this net boost to Ethereum supply will only become more pronounced unless there is a dramatic increase in overall network activity.
So why is there such a gap between those predicting Ethereum’s deflationary future and those advocating caution? The problem is that experts’ assumptions about Ethereum’s base fees are incorrect. If you forecast a big jump based on previous historical norms Ethereum’s burn rate is sure to grow, heralding a deflationary tailwind. However, the world's second-largest cryptocurrency by market capitalization will remain inflated if base fees remain at current levels.
📊 #Bitcoin #Ethereum #SP500 and #gold are both down sharply on traders' #bearish Friday. $BTC retreats to 6-week lows after #JeromePowell's #hawkish comments on the state of the US economy despite a positive #CPI report. https://t.co/hTtPT7nWuN https://t.co/ThliKG6SeY pic.twitter.com/mtlkuEBTtB
— Santiment (@santimentfeed) August 26, 2022
As the tweet above shows, Ethereum continues to suffer from significant macroeconomic challenges.
In this case, if Ethereum fails to exhibit its much-touted deflationary tendencies, readers should brace themselves for a sharp price drop as expectations reset.
 is largely due to the ongoing hype surrounding the impending merger event and repeated pr…){kind=link}
Comments
Post a Comment