The following article presents diverse viewpoints and does not represent the stance of “WEB3+”:
Technology Driving Prices (Huh?)
Whenever news of new technology emerges, the market often anticipates that it will stimulate demand, thereby boosting the prices of some coins while lowering others.
For example, some speculate that this year will be the “staking year.” Following the debut of EigenLayer, applications like Restaking have proliferated like mushrooms after rain. The market expects an increase in Ethereum staking, leading to heightened demand for Ether and inevitably driving its price up.
However, regarding the impact of technology on coin prices, there’s another perspective stemming from changes in the supply-demand curve and basic economics, such as this EIP1559 article. Because protocol changes are closely tied to currency issuance, we need to understand how new technologies in the blockchain sector shape price equilibrium in the long term.
An Example of EIP4844
Once the supply-demand curve shifts, the fundamental impact becomes more robust and enduring. For instance, the newly launched EIP4844 is expected to reduce Ethereum transaction costs by 90–99%, and with computing costs already low due to Layer 2, transaction fees have significantly dropped, making them more affordable and practical.
Normally, lower transaction fees would stimulate an increase in Ethereum usage. Increased demand should lead to a rise in coin price. However, since burning transaction fees originally served as Ethereum’s deflationary source, a substantial reduction in transaction fees means less Ether burned, resulting in increased currency circulation. At this point, Ethereum’s supply curve shifts to the right, causing prices to fall with increased supply.
Yet, the fundamental impact may be more profound. EIP4844 is set to make transaction costs very low, potentially increasing Ethereum users substantially, which could outweigh the loss from lower transaction fees. Thus, many still believe that EIP4844’s impact on the protocol is positive. To be more precise, while lower transaction fees shift the Ether supply curve to the right, if the number of Ethereum users increases significantly, the demand curve’s rightward shift will be greater, thereby increasing prices.
How does this dynamic relationship between supply and demand achieve equilibrium? No one can say for certain. As updates go live and start operating, disrupting the market, we may see prices rise or fall due to changes in supply and demand, which is not contradictory to short-term stimulus driving coin prices but rather underscores the importance of long-term market changes.
An Example of Restaking
Another hot topic, Restaking, is also suitable for illustrating how new technologies can rewrite supply-demand equilibrium over the long term.
Now, Ethereum PoS validators can use the same collateral to earn additional income, significantly increasing the demand for Ether in the market. People buy Ether, lock it as collateral, then re-stake the same collateral to earn additional profits. This is a typical model of credit creation seen in the traditional financial world.
You don’t need to understand complex currency theories; consider the following to grasp: the economic incentive of re-staking encourages more people to buy Ether as collateral, which naturally increases Ether demand while reducing its circulation. With increased demand and decreased supply, prices rise logically, fully conforming to rational economic reasoning. But is it really that simple?
There are some blind spots that need clarification. Once you re-stake assets, you cannot immediately respond to market fluctuations during the locking period. Additionally, your collateral can be used for node running or other applications, potentially involving unforeseen risks. Currently, Restaking is generally favored in the market, partly due to the cryptocurrency bull market, temporarily mitigating concerns about liquidity issues arising from extensive locking.
Moreover, superficially, Restaking’s economic incentives may stimulate price increases. However, for monetary policy, Restaking is bad news. Because Ethereum PoS mining rewards are formulated differently from PoW, where PoW has a fixed yield distributed among miners, PoS involves variable mining nodes and rewards with a smoothed square root relationship:
ETH issuance rate ∝ sqrt (ETH total staked)
Assume initially with 100 nodes, 1 ETH is issued per time, each receiving 0.01 ETH; with 400 nodes, 2 ETH is issued per time, each receiving 0.005 ETH. This design moderates the impact of staking quantity on income. Here lies the issue: PoS mining rewards increase with more nodes, while Restaking’s economic incentives increase staking willingness, thereby increasing stakers.
Suppose before Restaking, the original equilibrium point was 4% PoS interest. Restaking offering an additional 2% interest would increase staker numbers, thereby lowering mining interest. The new equilibrium point could be 3% (PoS) + 2% (Restaking), resulting in a total potential interest of 5%. However, more stakers mean more Ether is printed due to node increases, leading to inflation.
While individual gains indeed increase, when viewed holistically, inflation caused by pushing more assets into PoS nodes may devalue overall asset holdings. Those not engaged in Restaking may fare worse, experiencing inflation without benefiting from the coins. Hence, this technology aiming to increase yields on PoS nodes is actually detrimental to the underlying protocol’s monetary policy.
Future Outlook
Certainly, it cannot be ruled out that Restaking has indeed created numerous new applications (and corresponding new “values”?). However, the process inevitably introduces excess collateral that does not contribute to security and accompanying inflationary pressures. To address this, protocol developers are actively exploring concepts like minimum viable issuance to reduce inflation and limit ETH entering PoS staking.
When we consider EIP4844 or Restaking, the market should not only focus on whether there is an increase in Ether demand or whether prices will rise. Because if both the supply and demand curves shift simultaneously, the impact of new technologies on coin prices remains uncertain. Nevertheless, the short-term incentives driven by news are compelling; maybe it’s time to buy more ETH.
The article presents diverse viewpoints and does not represent the stance of “WEB3+.”
Original article source:
Ping Chen
Proofreading editor: Gao Jingyuan