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A teenager in the currency circle: What are the potential opportunities in the encryption market as the merger of Ethereum is imminent?

On July 15th, Tim Beiko, the core developer of Ethereum, stated in a conference call that it is expected that the implementation date of the merger upgrade of Ethereum's consensus algorithm migration to PoS will be September 19th, and the community has no objection to its proposed timetable.

After the news was announced, the main narrative line of the crypto market surrounding the merger of Ethereum became clear:

  • The supply side of Ethereum has undergone major changes, with a 90% reduction in production, which has driven the revaluation of the price of Ethereum.
  • The status of the Ethereum liquidity staking protocol has been greatly improved.
  • Ethereum mining machines quit, and part of the computing power migrated to other networks.
  • L2 Summer.

ETH: Towards a "deflationary" currency

According to ultrasound.money data, the current annual circulation of Ethereum is 5.5 M, and the annual burning amount through EIP1559 is 1.0 M, and the actual annual inflation rate is 3.7%. After the merger of Ethereum, the annual circulation of Ethereum is 0.6 M, which is 90% less than the current production. Assuming constant burn, the combined annual inflation rate is -0.3%.

The output of Ethereum is decreasing, but the demand side is increasing day by day. From the earliest gas fee, it gradually expands to more and more usage scenarios such as DeFi, NFT, DAO, NFT, etc., which has a high probability of bringing a new round of price revaluation.

In addition, the narrative of ETH becoming a global digital bond is being accepted by more people. Bitmex CEO Arthur Hayes discussed in detail the great value of ETH as a perpetual bond and the possibility of replacing U.S. dollar treasury bonds in an article "Five Ducking Digits" in April this year.

According to Ethereum researcher Justin Drake, after the merger, stakers can get an annualized rate of return of about 8-11.5%. Using the 5-year, 10-year, 20-year, and 30-year yields as a comparison, in extreme cases, even if Ethereum falls by more than 60%, it can still achieve a yield higher than that of the US 30-year Treasury bond after 30 years.

Ethereum Liquidity Staking Protocol Becomes New Age 'Miners'

After the conversion of Ethereum to POS, physical mining machines will gradually withdraw from the Ethereum network, and ETH will be produced by the node operators of the liquid pledge agreement. They will replace miners and become the new masters of the Ethereum POS network.

Currently, representative projects of decentralized Ethereum liquidity staking agreements include Lido, SSV Network, StakeWise, Rocket Pool, Ankr network, etc. Among them, the ETH pledged in Lido exceeded 4 million, occupying an overwhelming advantage.

The business model of the Liquidity Staking Protocol is to charge stakers a commission. Taking Lido as an example, 10% of the stakers' rewards will be collected, 5% of which will be collected by Lido, and the other 5% will be given to Lido's node operators. According to current figures, Lido's annual revenue is about 15 million US dollars.

Liquidity staking protocols usually issue governance tokens, but currently these tokens have no more empowerment for holders other than governance functions and reward node operators. Just like UNI, Uniswap is a good project, but none of the proceeds will be distributed to UNI holders.

Nevertheless, we cannot deny the strategic significance of governance tokens, especially the top projects in the subdivision track. Capital is already on the move, and Dragonfly Capital is buying 10 million LDOs from the Lido DAO treasury at a price of $1.45. At this price, LDO's fully diluted valuation is $1.45 billion.

The way out for Ethereum miners

There are two parts of the withdrawn physical mining machine, one is ASIC mining machine and the other is GPU mining machine, the former can only switch to mining ETC, and the latter can mine other POW currencies. This is part of the reason why ETC has been hyped by capital recently. However, because the block reward of ETC is much lower than that of Ethereum, unless there is funds willing to continue to increase the price, it is difficult to undertake the computing power of Ethereum.

In addition, these GPU graphics cards can also be used for other high-performance computing services, such as rendering, machine learning, etc. These businesses are not as profitable as the original mining, and it is estimated that they will not attract the attention of capital.

Layer2 is sought after by capital again

In the eyes of POS supporters, the merger will bring Ethereum one step closer to the sharding chain, and Layer 2 will be positively affected by sharding, and the throughput will increase significantly.

In the secondary market, Layer 2 project tokens performed well. Polygon token MATIC and Optimism token OP both rose by more than 50% in the past 7 days, outperforming BTC by a large margin.

After experiencing the suspension of the Arbitrum Odyssey event, although some users poured cold water on Layer2, the Layer2 project is still working hard. On July 18, Polygon announced that it will launch zkEVM on July 21, which will provide an "EVM-equivalent" solution. On July 19, Scroll, the Layer 2 expansion solution, announced the launch of the pre-alpha test network. In addition, projects such as StarkWare and zksync are also progressing at full speed, and L2 Summer is more likely.

The opinions in this article are for reference only and do not constitute investment advice. The currency circle fluctuates greatly, and investment needs to be rational.

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