The Impact of Technology on Coin Prices: A Different Perspective
Whenever there is news about new technology, the market often believes that it will drive demand and consequently raise the prices of some coins while lowering the prices of others. For example, some people refer to this year as the “staking year,” and with the introduction of EigenLayer, the application of restaking has become widespread. The market believes that the staking volume of Ethereum will increase, leading to an increase in demand for Ether and an inevitable price increase. However, when it comes to the impact of technology on coin prices, there is another perspective to consider – the changes in the supply and demand curve and the basic principles of economics, as discussed in this EIP1559 article. Understanding how new technologies in the blockchain field shape price equilibrium requires a long-term approach.
Let’s take the example of EIP4844. Once the supply and demand curve shifts, the impact on the fundamentals becomes stronger and more long-lasting. EIP4844, which has just been launched, is expected to reduce the cost of Ethereum transactions by 90-99%. Additionally, the introduction of Layer 2 has significantly reduced the computational cost, making transaction fees more affordable and user-friendly.
In theory, the reduction in transaction fees should stimulate increased usage of Ethereum. With increased demand, the coin price should rise. However, the burning of transaction fees is a source of deflation for Ethereum. A significant reduction in transaction fees means that the amount of Ether burned will decrease, leading to an increase in the circulation of the currency. In this case, the supply curve for Ether will shift to the right, causing the price to fall.
However, the impact of the fundamentals may be more far-reaching. EIP4844 will significantly lower transaction costs, which may lead to a substantial increase in the number of Ethereum users. This increase in network effects may outweigh the loss of low transaction fees, leading to the belief that the impact of EIP4844 on the protocol is positive. More precisely, while the reduction in transaction fees will shift the supply curve for Ether to the right, if the number of Ethereum users increases significantly, the shift in the demand curve will be even greater, resulting in a price increase.
How can this dynamic relationship between supply and demand achieve equilibrium? Nobody can say for sure. Once the updates are implemented and begin to operate, they will disrupt the market. We may witness price fluctuations due to changes in supply and demand. This does not contradict the short-term stimulation of coin prices by trending topics, but the long-term market changes are undoubtedly more worthy of our attention.
Another popular topic, restaking, is also suitable for illustrating how new technology can rewrite the supply and demand balance in the long term. With Ethereum’s Proof of Stake (PoS) validators now able to earn additional income using the same collateral, we have observed a significant increase in the demand for Ether in the market. People buy Ether, lock it up as collateral, and then restake the same collateral to earn additional profits. This is a typical credit creation model in the traditional financial world.
You don’t need to understand complex monetary theories to understand the following statement: the economic incentive of restaking encourages more people to buy Ether as collateral, thereby increasing the demand for Ether and reducing its circulation. With increased demand and reduced supply, the price of the coin naturally 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. Additionally, your collateral can be used to run nodes or assist with running oracles (or any other application). Therefore, regardless of which side you choose to engage in misconduct, the same collateral will be affected, resulting in incalculable risks. Currently, the market generally has a positive outlook on restaking, partly due to the bullish cryptocurrency market, which temporarily alleviates concerns about the liquidity issues caused by a large number of locked assets.
Furthermore, although the economic incentive of restaking seems to stimulate an increase in coin prices, it is actually detrimental to monetary policy. The mining reward formula for Ethereum’s PoS is different from Proof of Work (PoW). PoW has a fixed production yield, where each miner receives 1/n. On the other hand, PoS has a non-fixed number of miners, and the mining reward has a smooth square root relationship with the number of miners:
ETH issuance rate ∝ sqrt(total staked ETH)
For example, 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 is issued each time, and each person receives 0.005 ETH.
This design is intended to ensure that the impact of staked volume on income is not too drastic. The problem arises when the PoS mining reward increases with the increase in the number of nodes, and the economic incentive of restaking increases the willingness to stake, thus increasing the number of stakers.
Assuming that the original supply and demand balance point was at 4% PoS interest, the additional 2% interest provided by restaking would increase the number of stakers, resulting in a decrease in the original mining interest. The new equilibrium point could be 3% (PoS) + 2% (restaking), allowing players who restake to earn a total of 5% interest. However, this would accelerate the issuance of Ether due to the increased number of nodes, leading to inflation.
Although it appears that individuals benefit from restaking, when viewed from a broader perspective, the result of inflation is a decrease in coin prices. Players who restake hold more Ether, but the total value of their assets may depreciate. On the other hand, players who do not engage in restaking suffer from inflation without earning any coins. Therefore, this technology that aims to increase profits by staking more on PoS nodes is actually harmful to the underlying protocol’s monetary policy.
Looking ahead, it is not entirely impossible that restaking has indeed created a large number of new applications (and corresponding new “value”?). However, this process inevitably brings excessive collateral to the chain without contributing to security and additional inflationary pressures. For this reason, protocol developers are actively developing the concept of minimum viable issuance and discussing several solutions to reduce inflation and limit the entry of ETH into PoS staking.
When we consider EIP4844 or restaking, the market should not only consider whether the demand for Ether will increase and whether the price will rise. The simultaneous movement of the supply and demand curves means that the impact of new technology on coin prices is still unknown. However, the short-term incentives driven by news are quite appealing. So, why not buy more ETH?
This article presents diverse opinions and does not represent the stance of “WEB3+”.
Article source: Ping Chen
Proofreading and editing: Gao Jingyuan