The Negative Impact of Technology on Ethereum from the Supply Side A Harmful New Innovation

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,” and after the introduction of EigenLayer, applications like restaking have sprung up like mushrooms. The market believes that the staking volume of Ethereum will increase, therefore increasing the demand for Ether and causing its price to rise.
However, there is another perspective on the impact of technology on coin prices, which involves changes in the supply and demand curve and basic economics, as discussed in this article about EIP1559. 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 more long-term manner.


Example of EIP4844
Once the supply and demand curve moves, the fundamental impact is stronger and longer-lasting. For example, the newly 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 makes transaction fees significantly lower, making them more affordable and user-friendly.
In theory, a decrease in transaction fees should promote an increase in Ethereum usage. With increased demand, the price of Ether should rise. However, the burning of transaction fees is the source of Ethereum deflation, and a significant decrease in transaction fees means a lower amount of Ether burned, leading to an increase in the circulating supply of the currency. At this point, the supply curve of Ether moves to the right, and the price of Ether will decrease as the supply increases.
However, the impact of fundamentals may be more profound. EIP4844 will make transaction costs very low, which may lead to a significant increase in the number of Ethereum users and surpass the loss of low transaction fees in terms of network effects. Therefore, most people still believe that the impact of EIP4844 on the protocol is positive. More precisely, the decrease in transaction fees will make the supply curve of Ether move to the right, but if the number of Ethereum users increases significantly, the magnitude of the demand curve moving to the right will be greater, resulting in an increase in price.
How does this dynamic relationship between supply and demand achieve equilibrium? No one can say for sure. Once the update goes live 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 topics stimulating coin prices; it’s just that 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 technology rewrites the long-term supply-demand balance.
Now, Ethereum PoS validators can use the same collateral to earn additional income. We can observe a significant increase in the demand for Ether in the market. People buy Ether, lock it as collateral, and then stake the same collateral again 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 description: the economic incentive of restaking encourages more people to buy Ether as collateral, so the demand for Ether will naturally increase, while locking it reduces the circulation of the currency. With an increase in demand and a decrease in supply, the price of the coin will rise. It seems logical and fully conforms to rational reasoning in economics, 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. Furthermore, your collateral can be used to run nodes or help run oracles (or any other application). So, no matter which side you do something wrong, it will be the same collateral that gets slashed, resulting in incalculable risks. Currently, the market generally has a positive outlook on restaking, partly due to the bull market in cryptocurrencies, so there is no need to worry about the liquidity issue caused by a large number of lock-ups.
In addition, although the economic incentive of restaking seems to stimulate an increase in coin prices, it is actually bad news for monetary policy.
Because the mining reward formula for Ethereum PoS is different from PoW. PoW has a fixed yield, where if there are n people mining, each person gets 1/n. PoS has a smooth square root relationship between the number of mining nodes and mining rewards:
ETH issuance rate ∝ sqrt(ETH total staked)
Assuming that when there are 100 nodes, 1 ETH is issued each time, and each person gets 0.01 ETH. When there are 400 nodes, 2 ETH is issued each time, and each person gets 0.005 ETH.
This design is to make the impact of staking quantity on income not too drastic. The problem is that PoS mining rewards will increase with the increase in nodes, and the economic incentive of restaking will increase the willingness to stake. Stakers will also increase.
Suppose before the appearance of restaking, the original supply-demand equilibrium point was a 4% PoS interest rate. Restaking offers an additional 2% interest rate, which increases the number of stakers and lowers the original mining interest rate. The new equilibrium point could be 3% (PoS) + 2% (Restaking), and players who restake can earn a total of 5% interest. However, Ethereum will accelerate its inflation due to the increase in nodes, leading to inflation.
While individuals may benefit from this, when looking at the overall environment, the result of inflation is a decrease in coin prices. At this point, players who restake hold more Ether, but the total value of their assets may depreciate. Players who do not restake are even worse off, as they do not earn coins but still experience inflation. Therefore, this kind of technology that increases more income on PoS nodes is actually harmful to the underlying protocol’s monetary policy.
Future Outlook
Of course, it is not ruled out that restaking has indeed created a large number of new applications (and corresponding new “value”?). However, in the process, it inevitably brings excessive collateral that does not contribute to security and additional inflationary pressure. To address this, 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 looking 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 unknown impact of new technologies on coin prices when the supply and demand curves move together. However, the short-term incentives driven by news are very enticing, so it might be a good idea to buy some ETH.
The opinions expressed in this article do not represent the views of “WEB3+”.
This article is authorized for reprint from:
Ping Chen
Proofreading editor: Gao Jingyuan