ETH’s scarcity engine

You may have heard / seen the Ethernet Square researcher Justin Drake spoke in a recent podcast series Bankless in cooperation with ETH ‘s “scarcity engine.” In these podcasts, he described how ETH has 3 main scarcity engines , which over time will make ETH the most scarce and most in-demand crypto asset. This article will disassemble and discuss this.

ETH's scarcity engine

ETH’s first scarcity engine is its use as a staking asset on the PoS beacon chain . There are currently more than 7 million ETH (valued at approximately US$22.5 billion) in pledge, which means that this part of ETH is locked and cannot be used elsewhere in the crypto ecosystem (although some platforms provide these pledged Derivatives of ETH). At the time of writing, the annual return rate of pledged ETH is approximately 5.9% (priced in ETH, only from the perspective of additional issuance of the agreement), which essentially turns these pledged ETH into Ethereum’s ” local bonds “. From the perspective of the Ethereum network, these pledged ETHs are used to directly protect the Ethereum network, which enhances the decentralization of the Ethereum network and makes people more confident to use the network and build on it .

The second scarcity engine of ETH is its use as a trustless collateral asset in the prosperous DeFi ecosystem on Ethereum . According to data from the DeFi Pulse website, there are currently approximately 9.6 million ETH currently being used in more than 50 Ethereum DeFi applications. To be clear, not all of these are ETH ” Lock in DeFi in ” because much of it is being used to ETH Uniswap , Curve, SushiSwap and Balancer and other DEXs (decentralized exchange) liquidity , And among these DEXs, ETH trading is very active. But I don’t think this weakens the role of DeFi as a scarcity engine for ETH, it just shows the diversity of ETH’s use cases in DeFi.

The third scarcity engine of ETH is the EIP-1559 destruction mechanism that everyone loves to see . In the first 15 days after the mechanism went live, more than 67,000 ETH (worth more than US$200 million) were destroyed. EIP-1559 is very special. It has a much greater impact on the scarcity of ETH than the first two engines, because the destruction of ETH actually means that it will be removed from circulation forever , and the pledged ETH may be used as DeFi collateral. ETH can always reflow into the market at some point. But I actually think that EIP-1559 can offset the ETH supply shock that the first two engines may release through its destruction mechanism. This leads to my last point of view, that is, how all these are combined to form a nearly perfect ETH scarcity. Sexual system.

Let us compare these three scarcity engines in the context of the PoW Ethereum system and the PoS Ethereum system. At present, the annual ETH issuance rate of the Ethereum network based on the PoW consensus mechanism is about 4.2% . These additional ETHs are used as block rewards to incentivize the miners who protect the network. If we burn the ETH brought by EIP-1559 annually Taking the rate into account, the annual net issuance rate of ETH in PoW Ethereum is about 3.2% (because the current annual burn rate of ETH is about 1%). When Ethereum has fully turned to PoS consensus, if it is calculated based on the current 0.6% annual ETH issuance rate of the current PoS beacon chain (Note: In PoS Ethereum, the ETH issuance rate is determined based on the amount of pledged ETH, which is The more ETH pledged, the higher the annual issuance rate of ETH. These additional ETH is used to pay the pledgers/validators who propose and verify blocks). When we take this burn rate into account, the annual issuance rate of ETH The net issuance rate will be negative . That’s right, that’s it. Under a full PoS system, based on the current cost of destruction and the amount of pledged ETH, the annual issuance rate of ETH will be net negative .

As you can see, ETH is becoming the scarcest asset in the crypto ecosystem . Of course, scarcity is only one side of the equation, and ETH also needs market demand to fully utilize its scarcity engine: Fortunately, ETH has an incredible demand side. This is because, as time goes by, the demand for staking ETH will continue to grow (because the pledged ETH is actually an Ethereum ” local bond ” that can bring income ), and the demand for using ETH in DeFi will also increase significantly. (Because ETH is the most valuable, liquid and trustless collateral asset on Ethereum), and all activities on the Ethereum network will only continue to increase (the corresponding fee income will also increase), which means More ETH will continue to be burned.

Written by: Anthony Sassano, co-founder of EthHub


Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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