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viernes 23 de septiembre de 2022

Economía y finanzas

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08/18/22

Ethereum 2.0, The Merge

Mateo Besada

The Merge will be the transition of the Ethereum network from Proof of Work (PoW) to Proof of Stake (PoS) and its most significant improvement to date, and here is why I am excited about it.

  • Less supply.
  • Cash flows and DCF.
  • Eco-friendly.
  • It is not priced in.

Less supply

The price of any asset is shaped by its supply and demand, and less supply, holding all else equal, means price go up. And once the merge is done, the supply of ether ($eth) will be reduced considerably due to two main factors.

1) Less issuance and sell pressure from miners:

In PoS, eth issuance will be reduced by 90% from current levels. And even though this alone would already represent a significant decrease in supply, it is not only that. Additionally, given the nature of the PoS consensus mechanism, the sell pressure from miners will be considerably less too. While currently, in PoW, issued eth goes to miners that operate extremely costly business and are forced to sell some of these eth to cover their expenses; in PoS issued eth goes to validators that will only need to incur on minimal hardware and electricity cost.

2) Incentives and locked eth:

Currently there is around 14.02M eth staked, earning 4,1% APR. This eth-denominated yield comes only from the staking rewards right now. Once the update starts running however, stakers will also receive the unburnt fee revenue, that now goes to miners, which is expected to increase the staking APR 2X. This staking APR can be considered as a near risk-free yield on $eth. When it goes up, as it becomes an attractive alternative to other earning opportunities in DeFi, it will likely result in more eth being staked. And more eth being staked means less supply on the market, or even increased buying pressure. Also, it is worth highlighting that while many people seem to believe that The Merge will enable withdrawals and suddenly the >13M ETH will get unlocked and flood the market, this is far from a truth. Currently, staking eth is a one-way ticket in which stakers can’t withdraw their eth, nor rewards, for at least 6 months after The Merge. And when withdrawals are finally enabled, only 30k ETH can be withdrawn per day. There won’t be no huge unlock to flood the market.

So, if markets still see some value on the future of this experiment that crypto is, and demand for eth remains, the equation is simple. But that would still be falling short to me. In PoS, the Ethereum network will provide cashflows and become eco-friendly, which I think will make eth more investable for institutional money.

Cashflows and DCF

The DCF is probably the most common model that traditional institutions have been using to decide whether to invest on something or not for the past 50 years, and now it will be applicable to eth. Currently there is only an indirect profit distribution to eth holders in a form of a «buyback». Transaction fees that are burned (since EIP-1559 upgrade) reduce the supply of eth and, thus, transfer a part of the network revenue to eth holders. However, in PoS, stakers will get the unburned part of the transaction fees which will be a direct profit distribution from the Ethereum network to eth stakers, like a dividend. And based on these, and an expected growth rate of the Ethereum network revenue, it’s possible to build a DCF model that will allow institutional investor to better analyze eth as an investment.

Eth will become eco-friendly

Climate change concerns are widespread and energy-intensive PoW gets a lot of hate. And, whether this criticism is justified or not will now become irrelevant as the transition to PoS will decline the energy use of the Ethereum network by 99,98%. This, I think will give eth a better image and make it a viable investment to even the most climate change conscious institutions.

It is still not fully priced in

Lastly, while big events like this usually are to hyped and end up on sell the news action; given the current environment, I do not think that The Merge is fully priced in. Even though we already have a delivery date -announced to be between de 15th and 16th of September, since progress has been slow and the macro-outlook has been all but optimistic for crypto during the first half of the year, I think that the market is still skeptical and waiting to actually see news before buying in.

 

Seguí leyendo sobre este temaEfectos Secundarios Del Merge: ETHPOW

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