After the London hard split, these predictions for Ethereum 2.0 are worth a look

Original title: "After the London Hard Fork, the predictions for ETH2.0 that must be seen"
Written by: Sales Wallet
Translation: ChinaDeFi

It’s been over a week since the Ethereum London hard fork, and since then, Ethereum has gone from strength to strength.

Today we’re taking another deep dive into Ethereum. This post will explain how the London upgrade affects the price, and what it all means for ETH 2.0.

What is the London Upgrade?

First, it’s time to explain what the London upgrade is and why it’s so important to the Ethereum network. Essentially, it’s an Ethereum upgrade that incorporates a number of Ethereum Improvement Proposals, or EIPs.

One of the most important is EIP-1559. This is an EIP that has been in development for some time and aims to fundamentally change the way Ethereum transaction mechanisms work. It will eliminate the method of users competing for block inclusion through a bidding system. Users will bid up gas fees for transactions, and these fees will be earned entirely by miners who drive block development.

However, this often incentivizes miners to drive up these fees through a strategy called miner extracted value (MEV).

What EIP-1559 does is that it will change how the amount of ETH required for a transaction is calculated and where the ETH goes. There will be what is called a base fee, which will be determined by network demand and will be dynamic. This fee will be burned, i.e. eliminated from the ETH supply.

In addition to this base fee, users will also have a priority fee. This is also called a tip, paid to the miner to get the user's order into a block first.

However, when it comes to this particular EIP, it is the base fee that is of most concern. Because it is still responsive to the needs of the network, it will not have a material impact on the amount of fees paid. However, because it is being burned, it will have a long-term cumulative benefit for all participants.

Miners were not happy about this, saying it was an unnecessary target. However, despite their objections, the upgrade went through. On August 5, at block 12,965,000, London went live. The upgrade went about as smoothly as anyone could have imagined.

More than 96% of Ethereum nodes have upgraded to the new client, and all mining pools have implemented the new code. In fact, this is the first time in Ethereum history that no blocks have been mined on the old chain after the fork.

Additionally, the gas fee cap is stable at the $30 million target, and the gas usage distribution is pretty accurate compared to the model. While this may sound nonsense to us, it is important because it shows how this upgrade was coordinated and planned. This is a precursor to ETH 2.0. But let's not jump to conclusions, the most important question for us users right now is what this means for ETH token economics and usability.

Impact of upgrades

As the base fee begins to be paid, ETH begins to be destroyed. There are many websites that track the destruction rate of ETH, and we have over 28,000 ETH destroyed and counting, which is equivalent to 36% of all issued ETH.

This basically means that the inflation rate of ETH has dropped from 4.2% to 3%. However, it is important to understand that this is not deflation, but a reduction in the inflation rate. This is because users still have block rewards given to miners. However, due to this destruction, the issuance rate is reduced.

You can see what that looks like from this chart. Of course, this is still bullish for ETH. Think of it this way, if you were willing to pay x for ETH based on scarcity and future demand before the upgrade, then the scarcity price will definitely be worth more after the future fork.

This is exactly why many people place so much emphasis on the Bitcoin halving. Slowing supply growth will affect the scarcity of the asset.

Not only that, there should be less selling pressure in the market. Miners are more likely to want to keep ETH on their balance sheet rather than sell it immediately, precisely because they believe it will be worth more in the future.

Less selling pressure from miners means less impact on price. This is perhaps why ETH rebounded after the fork and did not sell off as many expected. When it comes to network fees, there is no particularly noticeable change. Some users are disappointed, but as mentioned earlier, this is not the goal of the upgrade.

However, there are benefits in terms of usability. Before, users only had to pay a gas fee for what they thought would complete the transaction, but now they have two more transaction parameters. They can set a maximum fee and a maximum priority fee for the transaction.

The maximum fee is the total amount they are willing to pay for the transaction. This will include the base fee and the tip. If the base fee is higher than the maximum fee, the transaction will not go through.

However, by further increasing the maximum priority fee, users can more specifically determine the amount they are willing to pay for a tip. Therefore, if the maximum transaction fee is lower than the base fee plus the maximum priority fee, the user will receive a refund.

Besides this, another reason why the new transaction mechanism is more friendly is that users can easily send the optimized base fee and know exactly what it is. They are sure about the transaction in the block and do not need to guess the gas fee of future blocks.

For users who frequently use DeFi, this benefit is even more obvious. But in the context of the upcoming ETH 2.0 upgrade, what’s most exciting is the implications of EIP-1559. This is good for all of us in a big way.

ETH 2.0

ETH2.0 will transform Ethereum from Proof of Work (PoW) to Proof of Stake (PoS).

Not only that, we will also see other scaling technologies implemented on the network, such as sharding.

The roadmap for ETH 2.0 goes through three phases. We have passed the initial phase of the beacon chain. However, the next phase is phase 1, which is the Proof of Stake (PoS) merger. In this phase, we will move to Proof of Stake (PoS).

Proof of Stake will allow for greater scalability, which will result in lower transaction fees and faster transactions.

This ETH 2.0 merger is likely to happen early next year. The most important thing about this transition is the impact it may have on the destruction and issuance of ETH.

I would like to bring to your attention this spreadsheet, which was drawn up by Senior Ethereum Researcher Justin Drake. Yes, that’s Justin Drake, one of the lead developers of Ethereum 2.0.

In this spreadsheet, he does some rough calculations on ETH’s supply returns and burn rates on the merged Ethereum network. It’s pretty revealing.

Just pointing out some of the most important numbers here. First, on the day of the merge, the supply of ETH is estimated to be around 120M ETH. Assuming all other parameters like staking, etc., the spreadsheet estimates that we will have 2.7M ETH destroyed and 963K ETH issued. So, this basically means that the amount of ETH burned exceeds the new ETH supply. This will make it a deflationary asset.

The supply of this asset is decreasing every year. ETH developers call it Ultrasonic Money. According to these predictions, it will take about 11 years for ETH to reach a supply of 100 million ETH. Not only that, Justin also calculated the reduction in the selling pressure of ETH on the open market.

In total, about 7 million ETH will not enter the open market due to the upgrade. This is good for the price, of course, because the price responds to the balance between buying and selling. So, these numbers look very optimistic.

We can also look at these predictions based on other scenarios. Even with the less optimistic and conservative estimates, we will destroy 1.3 million ETH. At the same issuance rate, this will still put ETH into deflation. Daily selling pressure will also drop to 5.4 million ETH.

The point is that after the merger, ETH's deflation rate could reach 1.4%. Bitcoin's inflation rate is 1.8%, and the current inflation rate of the US dollar fiat currency is over 5%.

Now it’s clear why ETH can be considered ultrasonic. Of course, it’s important to emphasize that these are just estimates. This model is based on the input of the fee burn rate and the stake growth at this time.

If you ask when the merger will happen, I tend to be conservative. We know from past experience that development takes much longer than expected, especially on large open source projects like Ethereum. Therefore, from a technical point of view, the situation is quite positive. However, in the medium term, there are other fundamental factors that may have a big impact on the price of ETH. Let's start with some on-chain data.

On-chain data

The first thing to look at is the exchange balance. This is because it gives us a rough idea of ​​how much ETH might be taken out of the tradable supply.

As you can see from the graph, the amount of ETH held by exchange addresses has been declining since the beginning of the year. We went from just over 19 million to less than 16 million today. Over $9 billion of ETH has been removed from the order books.

Of course, this isn’t just because of a lack of ETH on exchanges. The total amount of ETH held in smart contracts has been rising consistently this year. This is ETH that is most likely to be used in DeFi protocols to provide liquidity, earn interest, or other types of liquidity mining strategies.

The point is that this ETH is being used for a specific purpose and generating revenue. Therefore, those who control it are unlikely to want to sell it, and the ETH is just sitting in a wallet doing nothing.

Here’s another picture, this is the total supply of every wallet with a balance greater than 32 ETH. The reason this is important is that this is the amount of ETH required in order to stake ETH on the beacon chain.

This can be further verified by looking at the current heat in the beacon chain smart contract. The number is currently over 6.6 million ETH and is still rising.

The consequences of ETH being locked in a 2.0 staking contract are more severe, as it cannot currently be revoked until Proof of Stake merges. As Justin Drake noted in that report, the most optimistic estimates are that this could happen as early as February. However, as mentioned, it is more likely that this will be pushed to a conservative timeline of April 1st.

Until then, $19.5 billion of ETH won’t come close to the open market, and that number keeps rising. OK, on-chain metrics are very bullish, but what about the institutional space? After all, that’s been the main theme of the past year.

Wall Street adoption

The poster child for Wall Street is, of course, Goldman Sachs, which has become increasingly active in its commentary on the crypto space.

According to a Business Insider source, a few weeks ago, GS sent an internal note stating that Ethereum could one day flip Bitcoin.

This is based on Ethereum being cited as “the most popular development platform for smart contract applications due to its native digital currency.”

As noted in a previous article on Ethereum, Goldman Sachs decided to offer futures and options tied to Ethereum before it had a similar tool for Bitcoin.

Another very important report that came out recently was Coinbase’s Institutional Investor Report for the first half of this year.

But there are some very insightful points. First, in terms of transaction volume, ETH's transaction volume is really surging. Last year's transaction volume was 92 billion. This year it's 1.4 trillion. This number is up 146% in just one year.

Coinbase also commented that “many of our large institutional clients, including hedge fund endowments and corporations, added or increased their first exposure to ETH in the first half of the year, believing that the asset has long-term staying power.”

Coinbase also recently released its second-quarter earnings report. In the second quarter of this year, ETH trading volume on its exchange exceeded Bitcoin for the first time.

Another very interesting institutional report you may want to look at is Genesis, which is an OTC desk based in New York that has been providing agency services for regular institutional block orders for many years.

The report said the share of certain assets in trading volume: Bitcoin's trading volume has dropped from 80% at the end of the second quarter of last year to around 47% in the second quarter of this year.

Looking at ETH’s transaction volume, last year, ETH’s transaction volume was less than 5% of Genesis’ transaction volume, while this year, its transaction volume reached 25% of the second quarter’s transaction volume.

Another chart below is the market cap of Bitcoin against ETH. As you can see, this has been declining significantly since the beginning of the year, which they say “indicates ETH’s expanding role as an institutional portfolio asset.”

Options Market

The fact that there is so much demand for ETH, but limited supply, is bullish enough. However, there are a few other data points we can look at to get an idea of ​​where the market thinks ETH might be headed.

When pricing future assets, it helps to look at what’s happening in the options market. That’s because these instruments reflect the market’s best estimate of the potential price of future expirations.

First of all, I want to draw your attention to this article on Coindesk. After the London Hard Fork went live last week, Ethereum's activity increased significantly.

This volume is dominated by calls, which is a bullish signal given the buying of options. But it’s not just the types of options being sold that are interesting in this market flow.

This is also the strike price of these options. The most popular options are those expiring in March of next year with strike prices of 50K and 40K. Most of these are traded on an institutional basis, further proving that there are some very bullish bulls in the hedge fund space.

We can also see the price that investors are willing to pay for call and put options. Obviously, if the price of a call option is higher than the price of a put option of the same sensitivity, it is more of a bullish signal. The measurement method is to use the option sku.

You can see how the ETH 25d Skew has evolved in this chart. For options with different expiration date ranges, the skew has been decreasing.

So this means that over a range of tenors, call options have become more expensive than put options. The entire term structure is bullish.

in conclusion

The London hard fork showed how smoothly the Ethereum community can execute base protocol upgrades. It was a great showcase. With the Proof of Stake (PoS) merger, we will see ETH become an ultrasonic currency. The supply of these currencies will decrease year by year, day by day, block by block. It seems that most of the crypto community agrees that ETH is being stacked, staked, and removed from the open market.

It's a scarce store of value that will be in even shorter supply a year from now. It's not just us trying to suck up ultrasonic money. Institutions are trying as they continue to accumulate more. This is a theme that I don't think will slow down anytime soon. With all of this in mind, it's understandable why options expiring next year have such high strike prices. Market momentum is on our side and the ETH bull run hasn't lost steam. If ETH is 17K, that would give it a market cap equivalent to Microsoft.

Source link: medium.com