My attempt at a novel thought re: how EIP-1559 and Proof of Stake change the way $ETH accrues value.
After months of EIP1559 coverage, just 1 month till 1559 is released, I *still* don't think people understand how $ETH will be priced moving forwards.
Enjoy!
🧵 x/25
After months of EIP1559 coverage, just 1 month till 1559 is released, I *still* don't think people understand how $ETH will be priced moving forwards.
Enjoy!
🧵 x/25
2 key ideas
1. EIP1559 ties theoretical value of Ether to value of Ethereum network bc unstaked $ETH must be paid as gas
This is neglected by most casual observers, but seems well known as perhaps the most important feature of 1559 to serious $ETH investors.
1. EIP1559 ties theoretical value of Ether to value of Ethereum network bc unstaked $ETH must be paid as gas
This is neglected by most casual observers, but seems well known as perhaps the most important feature of 1559 to serious $ETH investors.
2. PoS ties actual $ETH price to value of Ethereum network bc annual fee burn can't go above some % of unstaked ETH without moving price
In my opinion, this is neglected by....everyone. I've never heard this mentioned anywhere else.
This is the subject of this thread.
In my opinion, this is neglected by....everyone. I've never heard this mentioned anywhere else.
This is the subject of this thread.
It's the year 2025. $ETH is net 2% deflationary. 80% of ETH is staked.
For my argument on why a huge % of ETH will be staked, see my substack article linked.
Anyways, in this world, annual gas fees burn 10% of unstaked ETH.
This is untenable.
squish.substack.com/p/ethereum-mov…
For my argument on why a huge % of ETH will be staked, see my substack article linked.
Anyways, in this world, annual gas fees burn 10% of unstaked ETH.
This is untenable.
squish.substack.com/p/ethereum-mov…
At 10% of unstaked ETH burned per year, unstaked $ETH prices would have no choice but to rise.
Unstaked $ETH is too valuable, that would be too scarce.
I'm not even being hyperbolic here, it has to do with a deeper understanding of gas prices.
Walk with me.
Unstaked $ETH is too valuable, that would be too scarce.
I'm not even being hyperbolic here, it has to do with a deeper understanding of gas prices.
Walk with me.
Lets say I'm Fred and I don't care about $ETH. I just want to send $USD across borders in peace.
Ethereum the network is valuable to me because I can do that by sending $USDC to people.
I'm very happy with my setup, and don't give 2 shits about all the Ethereum fuss.
Ethereum the network is valuable to me because I can do that by sending $USDC to people.
I'm very happy with my setup, and don't give 2 shits about all the Ethereum fuss.
Our man Fred here needs DeFi, specifically stablecoins, for daily business life.
What characterizes his relationship to $ETH?
Fred is heavily sensitive to gas prices, but actually completely $ETH price insensitive.
Fred just want to do transactions.
What characterizes his relationship to $ETH?
Fred is heavily sensitive to gas prices, but actually completely $ETH price insensitive.
Fred just want to do transactions.
This is a KEY idea
Agents buying ETH for use as gas (like Fred) are gas price sensitive, *not* ETH price sensitive.
I get sooo many messages about this. Crucial misunderstanding.
As unstaked ETH prices go up, gas prices don't need to rise.
Agents buying ETH for use as gas (like Fred) are gas price sensitive, *not* ETH price sensitive.
I get sooo many messages about this. Crucial misunderstanding.
As unstaked ETH prices go up, gas prices don't need to rise.
Why would this be the case?
Here's the core concept: The gas I'm willing to pay is based on the opportunity cost of not doing the transaction I wanted to use the gas for.
h/t @RyanBerckmans
Here's the core concept: The gas I'm willing to pay is based on the opportunity cost of not doing the transaction I wanted to use the gas for.
h/t @RyanBerckmans
Back to Fred. Fred uses Ethereum to move dollars, so he's unwilling to spend more than $5 in gas to transact - else he'll go to TradFi.
So, regardless of the price of $ETH, Fred can only do his transaction when gas is $5.
So, regardless of the price of $ETH, Fred can only do his transaction when gas is $5.
I'll assume the average opportunity cost of transactions remains the same across all actors, at $5 - aka I'll assume everyone buying $ETH for gas is like Fred.
This won't be an empirically true assumption, Ethereum offers different value to different actors, but bear with me.
This won't be an empirically true assumption, Ethereum offers different value to different actors, but bear with me.
In that world, $5 buys same # of transactions whether at low ETH/high gas prices or high ETH/low gas prices bc regardless of $ETH price, I'm willing to spend $5 on gas, so gas prices will go to $5.
gas = 1ETH, ETH= $5
or
gas=5ETH, ETH=$1
same $5 opportunity cost to transact
gas = 1ETH, ETH= $5
or
gas=5ETH, ETH=$1
same $5 opportunity cost to transact
This is why fees spike when $ETH is rocketing upwards AND when it is crashing downwards.
In both moments, speculators are willing to pay more to transact bc the opportunity cost of not transacting is higher. Gas fees rise as a result.
Gas Fees = opportunity cost
In both moments, speculators are willing to pay more to transact bc the opportunity cost of not transacting is higher. Gas fees rise as a result.
Gas Fees = opportunity cost
So now we understand why if opportunity cost of not transacting stays the same & unstaked $ETH prices rise, gas prices will fall.
Let's get back to the point.
People transacting on the network are $ETH buyers who are $ETH price-insensitive and gas price-sensitive.
Let's get back to the point.
People transacting on the network are $ETH buyers who are $ETH price-insensitive and gas price-sensitive.
Let's repeat some key facts about them:
- These are people who CANNOT replace their price insensitive $ETH buying with buying of staked ETH derivatives. They're limited to that small fraction of unstaked ETH.
- Did I mention that they're price insensitive?
- These are people who CANNOT replace their price insensitive $ETH buying with buying of staked ETH derivatives. They're limited to that small fraction of unstaked ETH.
- Did I mention that they're price insensitive?
The inevitable result is that the price of unstaked $ETH must rise so gas fee burn represents a smaller % of unstaked ETH OR demand for gas must fall.
The max gas fees as % unstaked ETH depends on *unstaked* ETH order book thickness because again, these buyers can't buy stETH.
The max gas fees as % unstaked ETH depends on *unstaked* ETH order book thickness because again, these buyers can't buy stETH.
Pause to think about what liquidity looks like here.
Do you think big institutional players who are HODLing ETH as an investment asset are holding the unstaked ETH?
Nope. They'd be pouring free yield down the drain in a yield starved world.
Do you think big institutional players who are HODLing ETH as an investment asset are holding the unstaked ETH?
Nope. They'd be pouring free yield down the drain in a yield starved world.
The unstaked $ETH order book will come solely from a actors moving within a small fraction of total $ETH supply.
It will be dominated by $ETH price insensitive buyers. Gas buyers.
This is where the rubber meets the road.
This is where the network's value accrues to price.
It will be dominated by $ETH price insensitive buyers. Gas buyers.
This is where the rubber meets the road.
This is where the network's value accrues to price.
The wild thing is throughout the entire history of $ETH, price has always moved on speculator's assessment of future value.
Looking at transaction volumes on the Ethereum network has been a fun way to hype, but always just an indirect actor on price.
Looking at transaction volumes on the Ethereum network has been a fun way to hype, but always just an indirect actor on price.
After PoS and EIP1559, (at least at these levels of transaction volumes), $ETH prices will be forcibly moved at a lower limit by Ethereum network activity itself.
This is another tail wagging the dog story as the value of that small supply of unstaked $ETH will determine the entire market cap.
(See my substack writeup linked above for why staked ETH must be at least as valuable as unstaked ETH at all times after the merge)
(See my substack writeup linked above for why staked ETH must be at least as valuable as unstaked ETH at all times after the merge)
I mentioned that the reason gas prices go up when $ETH spikes up or crashes down is transactions are more valuable to speculators in those moments.
This is another way value can accrue to the network. The cost of *not* transacting could just get higher.
This is another way value can accrue to the network. The cost of *not* transacting could just get higher.
If transacting on $ETH becomes more valuable...
Concretely: If I'm willing to pay more of my monthly salary in gas each month because I *need* the transactions more than I do now...
Then total gas spent, the value of the Ethereum network, and the value of $ETH will rise.
Concretely: If I'm willing to pay more of my monthly salary in gas each month because I *need* the transactions more than I do now...
Then total gas spent, the value of the Ethereum network, and the value of $ETH will rise.
What would make me *need* to transact on Ethereum more than I do now?
DeFi needs to make TradFi cost & trust prohibitive.
It needs to lower the barrier to learn to use its products & make products that I can't afford to not use everyday.
With DeFi comes $ETH. Fin.
DeFi needs to make TradFi cost & trust prohibitive.
It needs to lower the barrier to learn to use its products & make products that I can't afford to not use everyday.
With DeFi comes $ETH. Fin.
I'd love to know what y'all think!
Also if you've been shouting this idea everywhere and I just missed it somehow, apologies - link & I'll happily RT.
@iamDCinvestor @RyanSAdams @TrustlessState @sassal0x @RyanBerckmans @ryanallis @RyanWatkins_ @CryptoCobain @zhusu
Also if you've been shouting this idea everywhere and I just missed it somehow, apologies - link & I'll happily RT.
@iamDCinvestor @RyanSAdams @TrustlessState @sassal0x @RyanBerckmans @ryanallis @RyanWatkins_ @CryptoCobain @zhusu
Sorry to drop this late, probably won't respond to anything till tomorrow night. Gotta get sleep before diabetes clinic tomorrow.
Gnight y'all!
Gnight y'all!
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