Prominent crypto analyst and developer Adam Cochran stated on Apr 17 that Ethereum 2.0 will create the next economic shift, through a detailed post on Twitter. Mr Cochran provided multiple reasons as to the how Eth2 will create increased demands for ETH tokens through its shift to Proof of Stake (POS), resulting supply shock from staked tokens, FOMO from retail investors and actual demand rise due to increased blockchain performance. The blockchain native ETH token used for activity on the network will probably get a big boost in its value and price.
Large investors Seeking Steady Passive Income Generated By Ethereum 2.0 Staking
Ethereum 2.0 will apply the Proof of Stake (POS) algorithm and require 32 ETH for running a staking node. The large investors or whales will likely pour in their huge supplies, hoping for the 3-5% passive income generated by staking on Ethereum 2.0 blockchain. Because of the risks associated with novel tech, Mr Cochran believes that the returns won’t go below the 3% return mark, as the investment won’t remain lucrative for large investors below this level.
This process will require locking up of 10M – 30M+ ETH, which is equivalent to ~ 10%-30% of the circulating supply and it will create a supply shock. Traders, liquidity providers and miners will be hesitant to sell or provide, since they can earn this passive income by staking themselves also. Because of the newfound scarcity, the Ethereum (ETH) price has the potential to skyrocket.
After seeing the return on their investments from staking, the large scale holders might go on a secondary round or second buying spree, to increase their staked ETHs.
Retail FOMO Resulting From Ethereum 2.0 Price Action
By this time, retail Fear of Missing Out (FOMO) would likely have set in. These would be the retail investors, who typically react after seeing the large rise in the price of an asset or high coverage on media networks. According to Mr Cochran, the retail investors are typically not considering many technical or fundamental factors, are late to the investing stimulus (they invest when the prices have risen already) and want in, at any cost.
Unlike the last bull run of 2017, the fiat-on-ramp facility has improved tremendously and is more accessible. It means unlike earlier, where people were restricted to only Coinbase, currently they can purchase crypto using their FIAT from virtually anywhere, with their credit or debit cards easily. The activity on the exchanges and infrastructure has only seen massive improvement and all of this would see higher FOMO than the last time.
With the supply locked up and the supply shock already set in, this retail FOMO situation will create a demand shock. This will ignite a major price spike in a short period of time.
Actual Use Cases Will Result In a Higher Demand For Ethereum Tokens
The genuine demand and long term growth for Ethereum tokens will come from the rise in actual use cases. Ethereum 2.0 release will improve performance and cause number of transactions to rise on the network. Since ETH tokens are used as the fees for activity on the network. The previously seen network congestion, its resultant longer wait times and associated high transactions costs will be a thing of the past. The already high numbers of companies and developer teams building on the Ethereum network will increase and they can churn out more feature packed quality products. The resultant network effect and increased usage of the blockchain will create more value for the user. This will cause a long term rise in the price of the Ethereum tokens.
Whale Cycle Buying Resulting From The Rise In Ethereum Price
The large investors can use the profits from the Ethereum tokens and the staking nodes to buy even more tokens for staking. However, the more nodes there are, the lower the payout becomes, since the rewards get diluted with the rising nodes in staking mechanism. So to earn more, you have to stake more. This creates a race condition among whales, who compete with each other to buy and stake more. This raises the scarcity, causing the price to rise further.
The minimum number of tokens that can be staked are 32 ETH. This is also the only amount that can be staked per node. So the stakers can’t just cycle their profits to introduce new nodes. So the large investors will need to buy more ETH from new funds. The people need to round up their funds to 32 ETH to increase their stakable amounts.
EIP-1559 – Adjusting Fees On The Ethereum 2.0
The improvement proposal once implemented will make payments efficient, burn ETH and offset the annual issuance in the short term. However, if Ethereum blockchain use and adoption increases heavily, then a scenario is possible, where the burned ETH tokens exceed the annual issuance in the long term. This can create a deflationary effect, which usually results in price rising for the existing tokens. Investors will start releasing their holdings back to the market, creating a smooth background growth.
Bottom Line
Ethereum economic policy in its co-founder Vitalik Buterin words is the minimum necessary issuance to secure the network. It’s a highly intelligent design which will create one of the largest economic growth events, in our history. With the current relatively low price of Ethereum tokens and major developments happening on the network, it’s a good option for investors which can provide high returns in the long term.
