Ethereum is by far the largest cryptocurrency behind Bitcoin. The asset has a market capitalization of $46 billion, which makes it around the size of a medium-cap company in the S&P 500.
Although impressive, analysts say that Ethereum could rally exponentially higher, likely towards its previous all-time highs, once it gains two more value accrual mechanisms.
The first value accrual mechanism, which is ETH acting as a store of value, is arguably already in place as millions of coins have been locked as collateral in DeFi contracts.
The two other value accrual mechanisms, Ethereum Improvement Proposal 1559 (EIP-1559) and ETH 2.0 staking, have yet to arrive.
ETH’s 3 value accrual pillars:
– Trustless SoV ✅
– EIP-1559 (fee burning) ⏲️
– Staking ⏲️Which leads to:
– Trustless economy (DeFi)
– Deflationary ETH
– In-protocol ETH yieldWe’ve only got 1 out of 3 currently but ETH has a market cap of $46bil.
Imagine when ETH has 3/3.
— Anthony Sassano | sassal.eth ⛽ ? (@sassal0x) October 24, 2020
The importance of EIP-1559
The first value accrual pillar on the chopping block is EIP-1559.
EIP-1559 is a technical improvement that suggests that the current transaction model of the blockchain is currently “inefficient and needlessly costly to users.”
To solve the inefficiencies caused by this system, the authors of EIP-1559 propose a flat rate for all Ethereum transactions:
“The purpose of EIP 1559, according to Eric Conner, is to provide wallets and users a much needed improvement to the user-experience of gas management. The way that EIP 1559 solves the gas-management problem also improves Ethereum’s monetary management system.”
EIP-1559 also has the crucial ability to burn a small amount of ETH after every transaction is sent. That’s to say, the more transactions are sent, the more ETH is destroyed forever.
Estimates suggest that if the upgrade as implemented over the past year, nearly one million Ethereum, valued at over $400 million, would have burned.
This upgrade has the potential to make Ethereum deflationary, whereas the number of ETH burnt each year will actually outpace the number of coins mined or produced, resulting in a deflationary asset. Assuming demand stays consistent, prices should start to surge higher as the amount of Ethereum in the market, the supply, has trouble meeting demand.
Ethereum 2.0 to play a longer-term role
The second value accrual pillar in the works is the Ethereum 2.0 (a.k.a. ETH2 or Serenity) upgrade.
Along with improving the Ethereum user experience, ETH2 will also activate what is known as Proof of Stake. Staking, where users put up ETH as collateral to process transactions, will replace mining.
Estimates suggest that stakers will be able to earn around 5-12 percent a year on deposits of ETH.
Analysts believe that the ability to earn yield natively on Ethereum within the protocol will drive prices higher as ETH gains a staking premium.
Adam Cochran, a professor of information science at Conestoga College and a member of the DuckDuckGo team, has suggested that the introduction of Ethereum staking will create the “biggest economic shift” the crypto industry has ever seen. He believes that the introduction of safe yields to Ethereum will drive prices dramatically higher as both retail investors and “whales” look to participate:
“This is one of the most effective components of ETH’s new layout, as whales will pour new money into the market to continue to round-up their stakable amounts of ETH.”
This has been echoed by Delphi Digital, a leading research firm in the digital asset space:
“Tying things together, EIP 1559 and staking [create a] symbiotic relationship where not only does increase usage drive value but the introduction of cash flows to a wider group of participants for securing the network creates a more effective long term value proposition [for ETH].”
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