Opinion articles present diverse views and do not represent the position of “WEB3+”.
Does technology drive prices?
Whenever there is news about new technology, the market often believes that it will drive demand and thus push up the price of some coins while lowering the price of others. For example, some people call this year the “staking year.” After the launch of EigenLayer, applications like Restaking have sprung up like mushrooms. The market believes that the staking volume of Ethereum will increase, so the buying interest in Ether will increase, and the price must rise.
However, there is another perspective on the impact of technology on coin prices, which comes from changes in the supply and demand curves and basic economics. For example, this EIP1559 article. Because protocol changes are also closely related to currency issuance, we need to understand how new technologies in the blockchain field shape price equilibrium in a more long-term way.
Example of EIP4844
Once the supply and demand curves move, the impact of fundamentals is stronger and longer-lasting. For example, the recently launched EIP4844 is expected to reduce the cost of Ethereum transactions by 90-99%, and the cost of computation has already become very low due to Layer 2. This makes transaction fees significantly lower, making them more affordable and user-friendly.
In theory, the reduction in transaction fees should promote an increase in Ethereum usage. With an increase in demand, the coin price should rise. However, burning transaction fees was the source of Ethereum deflation, and a significant reduction in transaction fees means that the amount of Ether burned will decrease, leading to an increase in currency circulation. At this time, the supply curve of Ether will shift to the right, and the coin price will decrease as the supply increases.
However, the impact of fundamentals may be more profound. After all, EIP4844 will make transaction costs very low. It may increase the number of people using Ethereum, leading to network effects that outweigh the loss of low transaction fees. Therefore, most people still believe that the impact of EIP4844 on the protocol is positive. More precisely, the decrease in transaction fees will shift the supply curve of Ether to the right. However, if the number of people using Ethereum increases significantly, the magnitude of the rightward shift in the demand curve will be even greater, causing the price to rise.
How can this dynamic relationship between supply and demand be balanced? No one can say for sure. Once the update goes live and starts operating, it will disrupt the market. We may see prices fall or rise due to changes in supply and demand, which is not contradictory to short-term topic-driven price changes. However, long-term market changes are obviously more worthy of our attention.
Example of Restaking
Another popular topic, Restaking, is also suitable for illustrating how new technologies can rewrite supply and demand equilibrium in the long term.
Now, Ethereum PoS validators can use the same collateral to earn additional income. We can observe a significant increase in the demand for Ether in the market. People buy Ether, lock it as collateral, and then restake the same collateral to earn additional profits. This is a typical model of credit creation in the traditional financial world.
You don’t need to understand complex monetary theories. Just think about the following statements, and you can understand: the economic incentive of restaking encourages more people to buy Ether as collateral, so the demand for Ether will naturally increase, and locking it will reduce the currency circulation. With an increase in demand and a decrease in supply, the coin price will rise. It seems logical and fully consistent with rational economic reasoning. But is it really that simple?
There are some blind spots that need to be clarified. Once you restake your assets, you cannot immediately respond to market fluctuations during the lock-up period. And your collateral can be used to run nodes and help run oracles (or any application). So, no matter which side you do something wrong, the same collateral will be cut, resulting in incalculable risks. Currently, the market generally looks favorably upon Restaking, partially due to the bull market in cryptocurrencies, so there is no immediate concern about liquidity issues caused by a large number of locked assets.
In addition, although the economic incentive of Restaking may stimulate an increase in coin prices, it is bad news for monetary policy. Because the mining reward formula for Ethereum PoS is different from PoW, PoW has a fixed production, with each person getting 1/n if there are n people mining. PoS has a smooth square root relationship between the number of mining nodes and mining rewards:
ETH issuance rate ∝ sqrt(ETH total staked)
For example, when there are 100 nodes, 1 ETH is produced each time, and each person gets 0.01 ETH. When there are 400 nodes, 2 ETH is produced each time, and each person gets 0.005 ETH.
This design is to prevent the impact of staking quantity on income from being too drastic. The problem is, PoS mining rewards will increase with the increase in nodes, and the economic incentive of Restaking will increase the willingness to stake, thus increasing the number of stakers.
Assuming that the original equilibrium point between supply and demand was a 4% PoS interest rate before Restaking, Restaking provides an additional 2% interest rate, which will increase the number of stakers and reduce the mining interest rate. The new equilibrium point may be 3% (PoS) + 2% (Restaking), and players who restake can earn a total of 5% interest. However, due to the increase in nodes, Ethereum will experience accelerated inflation, leading to a decrease in coin price.
While individuals may benefit from this, when looking at the overall environment, the result of inflation is a decrease in the value of assets. Those who did not participate in restaking would be worse off, as they did not earn any coins but experienced inflation. Therefore, this technology that increases income by adding more to PoS nodes is actually harmful to the underlying protocol’s monetary policy.
Future Outlook
Of course, it is not ruled out that Restaking has indeed created a large number of new applications (and corresponding new “value”?). However, in the process, excess collateral that does not contribute to security has inevitably been brought to the chain, along with additional inflationary pressures. For this reason, protocol developers are actively developing the concept of minimum viable issuance and discussing several solutions to reduce inflation and limit the entry of ETH into PoS staking.
When looking at EIP4844 or Restaking, the market should consider not only whether the demand for Ether will increase and whether the coin price will rise but also the simultaneous movement of the supply and demand curves. The impact of new technology on coin prices is still unknown. But the short-term incentives driven by news are tempting, so it’s better to buy some ETH.
Opinion articles present diverse views and do not represent the position of “WEB3+”.
This article is licensed and reproduced from:
Ping Chen
Proofreading Editor: Gao Jingyuan
