Author: Encrypted Wei Tuo
I wonder if you have the same feeling that after listening to a lot of FUD about ETH, I feel that it is not on point? Since the fundamentals of technology and developers are very good, it is normal to have challengers in every round. Why is it so sluggish this time?
Let’s dive in from both the supply and demand sides using the three-plate theory.
Ethereum Demand Side
The demand side of Ethereum can be divided into two factors: native and external.
The native factor refers to the fact that due to the development of Ethereum technology, a large number of splits denominated in ETH have been generated, thus driving the demand for ETH: such as the ICO in 2017 and DeFi in 20/21. In this round of market, the main narrative should be L2 and Restaking. However, as I wrote in November last year, the L2 ecological project is highly overlapped with the main chain and cannot cause an explosive trading boom. PointFi and Restaking are essentially locking ETH to reduce liquidity, rather than allowing more assets to be priced in ETH. Even the pricing power of large restaking projects such as Eigen, Rez, and Ethfi are on the exchange (USDT standard), unlike the previous round of YFI, CRV, and COMP on the chain (ETH standard). As long as there are no large numbers of new assets denominated in ETH, users do not need to hold ETH. Another native factor is the burning mechanism caused by EIP1559. The main function of ETH is the settlement layer, and the clearing and settlement of large DeFi all occur on the main chain. Nowadays, L2 and the main chain have highly overlapped functions, resulting in a large amount of such demand being diverted to L2, while the burning caused by such transactions is only a fraction of the original, weakening the demand for ETH.
External factors are mainly external demand and macroeconomics. In terms of macroeconomics, the last cycle was an easing cycle, and this cycle is a tightening cycle. The last round of external demand was Grayscale Trust, and this round is ETF. But Grayscale was a Pixiu back then, and could only be bought but not sold. But ETF is different, it can be in and out. It has been a month since the opening of the ETF, and the total net outflow has reached -140.83K, most of which are through Grayscale. This is completely different from the net inflow of BTC ETF since its opening, which is equivalent to the new and old whales of the entire ETH cashing out through ETF.
Understanding Ethereum’s Supply Side
Ethereum itself is a classic dividend-sharing platform. Whether in the POW era or the POS era, the main selling pressure comes from new output. But why did a problem occur this time? Because of its output cost structure.
ETH POW Era [Before September 15, 2022]
The output logic of ETH is the same as that of BTC, which is the output of miners.
The cost for a miner to obtain ETH consists of:
1. Fixed costs: One-time non-refundable ETH mining investment, including:
- ETH mining machine cost
2. Incremental costs: Costs that increase over time as you participate in mining, including:
ETH mining electricity cost
The hosting cost of ETH mining machines (including mining site rental, personnel, and maintenance)
Unexpected costs (including fines, disasters and other force majeure) It should be noted that this cost is in fiat currency: whether it is fixed or incremental cost, it needs to be paid in fiat currency, and this cost is a non-refundable sunk cost. Due to the limited life of the mining machine, the output of the mining machine throughout its life cycle can be regarded as a fixed amount. The acquisition cost of each ETH = total cost of gold standard/total ETH output
There is a game here: when the market price of Ethereum in fiat currency is lower than the acquisition cost (shutdown price), miners will not sell because they will lose money.
Mining machines are constantly updated, and each generation is more expensive. In each round of the market, mining competition is more intense. Not only is the output decreasing, the difficulty is increasing, but also the electricity and hosting fees are rising. The pressure brought by government supervision is increasing as the industry expands. This means that the total incremental cost has increased, which in turn has raised the ETH floor price.
But in the POS era, this effect disappears
ETH POS Era [After September 15, 2022]
The role of miners disappears, replaced by validators. To obtain Ethereum output, you only need to stake ETH to the verification node. The output cost of ETH becomes:
Validator: - Cost of providing infrastructure (such as personnel, servers)
Stakers: - Opportunity cost of staking ETH - Fees paid to validators See the difference?
Although the cost of the validator is also based on fiat currency, in theory, it can carry an unlimited number of ETH stakes and there is no scrapping of mining machines, so the unit cost of acquiring ETH is almost negligible. In addition to the opportunity cost, the staker has no fiat currency cost to obtain ETH output, and the handling fee is also a currency-based cost. Therefore, there is no "shutdown price". The staker will not maintain the lower limit of the ETH price like the miner, but can mine, sell and withdraw unlimitedly.
Even if we assume that the average entry price for staking Ethereum is the average price of ETH in the previous round, such a mechanism cannot continuously raise the floor price of ETH. However, ETH is constantly being issued. As long as the number of newly issued Ethereum is positive, the price will continue to be under pressure.
ETH cannot escape the third round: Today’s minefield was already laid in 2018
This is a sad story:
At the end of the ICO era in 2018, a large number of ETH-denominated ICO project owners dumped ETH in a disorderly manner, with the lowest price dropping to less than $100. From the perspective of splitting, the split rate in the ICO era was extremely high, but there was no DEX that could cash out using ETH-denominated transactions. Project owners could only dump ICO tokens and ETH in exchange for USDT, which ultimately led to a sharp drop in ICO Beta returns, with the opportunity cost being higher than holding the currency, forming a Davis double kill
Perhaps it was because of the painful experience of ICO in 2018 that we saw that Vitalik and the foundation continued to emphasize the roadmap, main narrative, and orthodoxy, thus forming a group of "core circle" developers and VCs. The success of DeFi Summer has further strengthened this institutional solidification - allowing the chips to be concentrated in the hands of Eth Aligned's concerted actors rather than everyone, thereby preventing disorderly splits and disorderly selling pressure.
However, this eventually evolved into "to V entrepreneurship", "Halal = high valuation", which led to:
The split rate is too low: the dev and plate that can handle considerable liquidity and assets are suddenly reduced
- Market Beta cannot outperform competitors: "Halal" and "grouping" lead to high valuations, making Beta returns weaker than other chains
Coupled with the costless selling pressure brought about by L2 weakening burning and POS, all the efforts made by the Ethereum core to prevent disorderly selling pressure were offset, which ultimately led to today's tragedy.
What have you learned from ETH’s lessons?
1. If you want to maintain long-term stability in the dividend market, don’t innovate on a whim. Remember to form fixed costs and incremental costs based on the gold standard. As asset liquidity increases, the cost line will continue to increase, raising the lower limit of asset prices. If you really don’t know how to do it, go back and look at the BTC cost model.
2. Splitting the market to reduce selling pressure is just a delaying tactic. The real purpose is to turn your mother currency into a pricing asset, so that holding does not depend on the increase of the mother currency itself, thereby expanding the demand side and liquidity.
