Article Rewrite:
Diverse Perspectives on the Impact of Technology on Prices
Whenever there is news of a new technology, the market often believes that it will drive demand and thus increase the price of some coins while lowering the price of others.
For example, some people believe that this year will be the “staking year” and that the introduction of EigenLayer and the surge of Restaking applications will increase the staking volume of Ethereum, leading to increased demand and a price increase of Ether.
However, when it comes to the impact of technology on coin prices, there is another perspective from the changes in the supply and demand curve and basic economics, as discussed in this EIP1559 article. Because protocol changes are closely related to the currency issuance, we need to understand how new technologies in the blockchain field shape price equilibrium in the long run.
An Example of EIP4844
Once the supply and demand curve moves, 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 significant reduction in transaction fees makes it more affordable and user-friendly.
In theory, a decrease in transaction fees will stimulate an increase in Ethereum usage. With increased demand, the price of the coin should rise. However, the burning of transaction fees was the source of Ethereum’s deflation, and a significant decrease in transaction fees means that the amount of Ether burned will be lower, resulting in an increase in the circulating supply of the currency. This causes the supply curve of Ether to shift to the right, leading to a decrease in price.
However, the impact of the fundamentals may be more profound. EIP4844 will make transaction costs extremely low, which may attract a large increase in 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 decrease in transaction fees will cause the supply curve of Ether to shift to the right. However, if the number of Ethereum users increases significantly, the demand curve will shift to the right to a greater extent, resulting in an increase in price.
How does this dynamic relationship between supply and demand reach equilibrium? No one can say for sure. Once the update is implemented and starts operating, it will disrupt the market, and we may see prices fall or rise due to changes in supply and demand. This is not contradictory to short-term topic-driven price fluctuations, but the long-term market changes are clearly worth our attention.
An Example of Restaking
Another popular topic, Restaking, is also suitable for illustrating how new technologies can reshape supply and demand balance 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 model of credit creation in the traditional financial world.
You don’t need to understand complex currency theories. Just think about the following statement: the economic incentive to restake encourages more people to buy Ether as collateral, thus increasing the demand for Ether, while locking reduces the circulation of the currency. With an increase in demand and a decrease in supply, the price of the coin rises. It seems logical and in line 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. Moreover, your collateral can be used to run nodes or help run oracles (or any application). So, regardless of which side you do something wrong, the same collateral will be affected, resulting in incalculable risks. Currently, the market generally has a positive view of Restaking, partly due to the bullish cryptocurrency market, which temporarily avoids the liquidity problem caused by a large number of lock-ups.
In addition, although the economic incentives of Restaking may stimulate a price increase, it is actually bad news for the currency policy. This is because the mining reward formula for Ethereum PoS is different from PoW. PoW has a fixed output, with each person receiving 1/n when there are n people mining. PoS has a smooth square root relationship between the number of mining nodes and the mining reward:
ETH issuance rate ∝ sqrt(ETH total staking amount)
Assuming that 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 will be issued each time, and each person will receive 0.005 ETH.
This design is to prevent the impact of staking volume on income from being too drastic. The problem is that the PoS mining reward will increase as the number of nodes increases, and the economic incentive of Restaking will increase the willingness to stake, thereby increasing the number of stakers.
Assuming that before the emergence of Restaking, the original supply and demand equilibrium point was 4% PoS interest, Restaking provides an additional 2% interest, which will increase the number of stakers and reduce the original mining interest. The new equilibrium point may be 3% (PoS) + 2% (Restaking), and players who restake can earn a total of 5% interest. However, Ethereum will accelerate inflation due to the increase in nodes, resulting in currency inflation.
Although it may increase individual benefits, when viewed from the overall environment, the result of inflation is a decrease in coin prices. At this time, players who restake hold more Ether, but the total value of the assets may depreciate. Players who do not participate in restaking suffer even worse, as they do not earn coins but still experience inflation. Therefore, this technology that increases more income to PoS nodes is actually harmful to the underlying protocol’s currency policy.
Future Outlook
Of course, it is not ruled out that Restaking does create a large number of new applications (and corresponding new “value”?), but it also inevitably brings excess collateral to the chain 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 several proposals to reduce inflation and limit the entry of ETH into PoS staking are under discussion.
When we look at EIP4844 or Restaking, the market should consider not only whether the demand for Ether increases and whether the price will rise, but also the simultaneous movement of the supply and demand curves. The impact of new technologies on coin prices is still unknown, but the short-term incentives driven by the news are compelling. So it’s a good idea to buy more ETH.
The viewpoints presented in this article do not represent the position of “WEB3+.”
Article source: Ping Chen
Proofreading editor: Gao Jingyuan
