Will the supply and demand dynamic history of ETH be rewritten after the merger of Ethereum?

Disclaimer: This article aims to convey more market information and does not constitute any investment advice. The article only represents the author's viewpoint and does not represent the official stance of Mars Finance

Disclaimer: This article aims to convey more market information and does not constitute any investment advice. The article only represents the author's viewpoint and does not represent the official stance of Mars Finance.

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Source: Deep Tide TechFlow

The Merge - This is the most important upgrade in Ethereum's history. Big events like this are often just short-term "hype", and some people say that $ETH will do the same, but I don't agree. This article will explain why $ETH will undergo a facelift after the merger.

This merger is to remove the proof-of-work consensus mechanism in Ethereum and replace it with the PoS consensus mechanism. But in this article, we ignore technical details and only focus on the price of $ETH. The price of each asset is determined by the forces of supply and demand. What factors will change the supply and demand dynamics of $ETH after the merger?

• Triple reduction by half
• ETH Pledge Annualized Yield (APR)
• ETH (release) lock
• Institutional needs

Triple reduction by half

Through PoS, the circulation of $ETH has been reduced by 90%: this requires BTC to be halved three times to generate a supply reduction of the same specification. What Bitcoin can only achieve in 12 years, Ethereum has achieved in one go this year. But this is not just a 90% reduction in selling pressure, it means more.

In PoW, $ETH was issued to miners operating high cost businesses. They were forced to sell a large amount of ETH to pay for high electricity bills.

In PoS, new ETH flows to validators who only need to care about the lowest electricity and hardware costs, and they are no longer forced sellers.

In addition, Bitcoin miners don't have to be BTC bulls, they invest in hardware and electricity to mine, rather than Bitcoin. On the contrary, Ethereum validators must pledge $ETH, so they are usually long-term holders. If they see ETH prices rising, why would they sell their pledge rewards?

ETH Pledge Annualized Yield (APR)

There are currently $11.4 million in ETH pledges, with an annualized yield of 4.6%. This ETH denominated income only comes from pledge rewards. In PoS, the pledgor will also receive gas fees currently belonging to the miners, which will double or even increase the APR.

The annualized return on pledge (APR) can be considered as a near risk-free return on $ETH. When it rises, it will attract more ETHs to be pledged as it becomes a very attractive alternative compared to other earning opportunities in DeFi. More ETH pledges mean a decrease in supply in the market and may even trigger panic buying.

3 ETH (Unlock)

Currently, pledging $ETH is a one-way operation as the pledgor cannot retrieve their ETH and rewards. Many people seem to believe that the merger of Ethereum will make withdrawals possible, and that "when 12 million pledged ETHs are unlocked, ETHs will be sold in large quantities. I have noticed that some people believe that mergers are a negative price catalyst, with ETH being unlocked and flooding the market. This view is completely wrong.

1 Pledged ETH will not be unlocked during merger

ETH merger will not result in withdrawal. This is another Ethereum upgrade plan that will take place 6-12 months after the merger. That is to say, neither the pledged $ETH nor the pledged reward will enter the circulation state for a long period of time. When the withdrawal is finally enabled, only 30kETH can be extracted daily, without a significant amount of unlocking.

2 The unlocked ETH will slowly release

Even if withdrawal is enabled, all pledged $ETHs are not immediately available. It will introduce an exit queue mechanism, which may take more than a year in the worst-case scenario and several months under normal circumstances. To extract $ETH, validators must exit the active set of validators, but there is a limit to the number of validators that can exit during each period. There are currently 395k validators (active+pending), and if a new one is not established (highly unlikely), all these validators will need 424 days to exit.

3 The pledged ETH is usually a stack that will never be sold

Who would voluntarily lock in $ETH for several months, and not even know when to withdraw it? Undoubtedly, the people who are most optimistic about ETH. Most ETH pledgers are long-term investors. They are not interested in selling, especially not at the current price. Short term $ETH pledgers prefer to use a liquidity pledge option (such as @ LidoFinance) so that they can sell their tokenized shares at any time.

I used Nansen and Etherscan to view the ETH distribution of pledges by type: current pledges are only 35%.

In addition, 30% of the pledged $ETH comes from addresses that are not marked as exchanges or pledge pools. It may represent a validator running separately. Running a validator is not an easy task, so typically only true ETH believers can complete it. They won't sell it, will they?

In summary, I do not believe that there will be any exaggerated sell-off due to $ETH unlocking. It will be released slowly in a few months, and many pledgers will not sell it anyway.

Institutional needs

Why does PoS transformation spark institutional interest?

• DCF model (Free cash flow discount model) will be applicable to the valuation of $ETH, which indicates that the value of ETH is underestimated;
• ETH, as an "Internet bond", will become a substitute for US treasury bond bonds;
• ETH is environmentally friendly, which is a good narrative;
• EIP-1559 burns $ETH per transaction.

1 DCF Model Valuation $ETH

The DCF model is a popular valuation method in TradFi. For decades, institutions that manipulate trillions of dollars in global wealth have been using it. PoS will use the DCF model for valuation and ultimately apply to the value of $ETH. Why is it so important?

By predicting future cash flows, the fair value of $ETH can be evaluated, which is necessary for institutional investors to approve investments worth millions of dollars. Moreover, as you may have guessed by now, ETH is severely underestimated. Because based on DCF and P/E valuation techniques, the fair value of $ETH is definitely higher than $10000. After the successful transition of PoS, institutional investors will become interested in ETH. Now, we can preemptively run these mechanisms by purchasing ETH.

2 $ETH converted into internet bonds

Mortgage proceeds convert $ETH into Internet bonds, a viable alternative to US treasury bond bonds. Although ETH has greater volatility than bonds, it ensures higher yields, and if the ETH price did not plummet, actual returns would still be better.

3 ETH Environmental Narrative

The transition to PoS will result in a 99.98% reduction in energy usage in the Ethereum network. When the issue of climate change is widespread, energy intensive PoW will receive many hateful glances. Whether this criticism is reasonable is irrelevant, narrative is the most important. Although supporters of $BTC have had to fight back against the ongoing PoW attacks and spare no effort to prove that the energy consumption of the Bitcoin network is reasonable, $ETH holders will be bathed in a new narrative of environmentally friendly blockchain. Changing the narrative is easier than winning a war.

4 EIP-1559 Combustion $ETH

Institutional needs EIP-1559 $ETH 8 200 ETH 6 ETH/ETH 2.2%ETH =

Everyone is talking about $ETH being burned. Indeed, this is very exciting. Has ETH already deflated? No, its inflation rate is relatively low. Will there be deflation? I'm pretty sure I will. Let me share some useful resources to track ETH becoming a valuable currency. After the merger, we don't even need a bull market to turn ETH into deflation. In the recent bear market, gas prices have been very low. However, EIP-1559 will still burn more ETH than after the merger. The merger will mark ETH supply as peak.

We don't need an economics degree to understand a principle: what happens to asset prices if the supply of assets decreases and demand increases. Yes, the numbers are rising. I think this is exactly what will happen to the $ETH price after the merger (long-term trajectory). Perhaps you would say, 'But everything has already been priced!' right? The efficiency of the encryption market is extremely low. I even feel that 'very few people understand' all the above developments. Do you remember when EIP-1559 started burning a large amount of $ETH, everyone was surprised? They will be surprised again after the merger.

Institutional needsPoS $ETH

In summary:

• The merger has not yet been included in the price;
• We can preempt institutions by purchasing $ETH to run the Pos mechanism;
• You don't have enough ETH, and neither do I.