Opinion articles present diverse opinions 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 prices of some coins while lowering the prices of others.
For example, some people call this year the “staking year”. After the introduction of EigenLayer, applications such as Restaking have sprung up like mushrooms after rain. The market believes that the staking volume of Ethereum will increase, therefore increasing the demand for Ether and causing its price to rise.
However, when it comes to the impact of technology on token prices, there is also a viewpoint from the perspective of changes in the supply and demand curve and basic economics, such as this EIP1559 article. Because protocol changes are closely related to currency issuance, we need to understand how new technologies in the blockchain field shape price equilibrium in a longer-term manner.
Example of EIP4844
Once the supply and demand curves shift, the fundamental impact is stronger and more long-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 has greatly reduced transaction fees, making it more affordable and user-friendly.
In theory, reducing transaction fees should promote an increase in Ethereum usage. With increased demand, the token price should rise. However, the burning of transaction fees was the deflationary source of Ethereum, so a significant reduction in transaction fees means that the amount of Ether burned decreases, leading to an increase in the circulation of the currency. At this point, the supply curve of Ether moves to the right, and the token price will decrease as the supply increases.
However, the impact of the fundamentals may be more profound. After all, EIP4844 will make transaction costs very low, which may lead to a significant increase in the number of Ethereum users and drive network effects beyond the loss of low transaction fees. Therefore, most people still believe that the impact of EIP4844 on the protocol is positive. More precisely, the reduction in transaction fees will cause the supply curve of Ether to shift to the right, but if the number of Ethereum users increases significantly, the magnitude of the rightward shift in the demand curve will be greater, causing the price to rise.
How does this dynamic relationship between supply and demand reach equilibrium? No one can say for sure. When it starts operating after the update, it will disrupt the market, and we may see prices fall or rise due to changes in supply and demand. This is not in conflict with short-term topics stimulating token prices, but long-term market changes are obviously more worthy of our attention.
Example of Restaking
Another hot topic, Restaking, is also suitable for illustrating how new technologies can reshape supply and demand equilibrium in the long term.
Now Ethereum PoS validators can use the same collateral to earn additional income, and we can observe a significant increase in the demand for Ether in the market. People buy Ether, lock it as collateral, and then re-stake the same collateral to earn additional profits. This is a typical credit creation model in the traditional financial world.
You don’t need to understand complex currency theories. Just think about the following statement: the economic incentive to re-stake encourages more people to buy Ether as collateral, which naturally increases the demand for Ether, while locking reduces the circulation of the currency. With increased demand and decreased supply, the token price rises. It seems logical and fully in line with rational economic reasoning, but is it really that simple?
There are some blind spots that need to be clarified. Once you re-stake your assets, you cannot immediately respond to market fluctuations during the lock-up period. In addition, your collateral can be used to run nodes and assist in running oracles (or any other applications) on either side. So no matter what you do, the collateral being cut is the same, which can create immeasurable risks. Currently, the market generally has a positive view of Restaking, partly because of the cryptocurrency bull market, and there is temporarily no need to worry about the liquidity problems caused by a large number of lock-ups.
In addition, although the economic incentives of Restaking may stimulate an increase in token prices, it is actually bad news for monetary policy.
Because the mining reward formula of Ethereum PoS is different from PoW. PoW has a fixed output, and if there are n people mining, each person gets 1/n. PoS has a smoothing square root relationship between the number of mining nodes and the mining rewards:
ETH issuance rate ∝ sqrt(ETH total staked amount)
For example, when there are 100 nodes, 1 ETH is issued each time, and each person receives 0.01 ETH. When there are 400 nodes, 2 ETH is issued each time, and each person receives 0.005 ETH.
This design is to ensure that the impact of staking amounts on income is not too drastic. The problem is that the PoS mining rewards will increase with the increase in nodes, and the economic incentive of Restaking will increase the willingness to stake. So the number of stakers will also increase.
Assuming that before Restaking, the original supply and demand equilibrium point was 4% PoS interest, and Restaking provides an additional 2% interest, this will increase the number of stakers, and the original mining interest will decrease. The new equilibrium point may be 3% (PoS) + 2% (Restaking), and players who re-stake can earn a total of 5% interest. However, Ether will accelerate inflation due to the increase in nodes, which leads to currency inflation.
While it does increase individual benefits, when viewed on a larger scale, the result of inflation is a decrease in token prices. At this time, players who re-stake hold more Ether, but the total value of their assets may depreciate. Those who do not re-stake are even worse off as they do not earn any tokens and still experience inflation. Therefore, this kind of technology that increases additional income on PoS nodes is actually harmful to the underlying protocol’s monetary policy.
Looking ahead
Of course, it is not ruled out that Restaking does create a large number of new applications (and corresponding new “value”?), but in the process, it inevitably brings excessive collateral that does not contribute to security and additional inflationary pressure. For this reason, protocol developers are actively developing the concept of minimum viable issuance and discussing several solutions to reduce inflation and restrict ETH from entering PoS staking.
When we look at EIP4844 or Restaking, the market should consider not only whether the demand for Ether increases and whether the token price will rise, but also the unknown impact of new technologies on token prices when the supply and demand curves move simultaneously. However, the short-term incentives driven by news are tempting, so it’s a good idea to buy more ETH.
Opinion articles present diverse opinions and do not represent the position of “WEB3+”.
This article is authorized for reprint from:
Ping Chen
Proofreading editor: Gao Jingyuan
