ETH Inflation is Higher Than What Analysts are Expecting
by Ben Lilly
Double Dose of ETH Inflation
The conversation about Ethereum's monetary policy is about to get heated. That's because the rate of new ETH coming into circulation will be higher than anybody is expecting. And it's being made possible thanks to synthetic ETH.
Messari recently discussed Ethereum's monetary as sound.
You can view a recent thread by one of the authors... Give it a quick read as I'll be referencing it.. Here's the link: https://twitter.com/RyanWatkins_/status/1334327593827504130
Now, before I start I'd like to mention if you haven't read Messari's work, its solid and comprehensive. My essay is by no means a call out or anything of the sorts. Instead, I'd like to consider this a reply to a discussion initiated within the broader crypto community. For that we should instead be grateful for the report.
In fact, if you haven't read Messari's ETH 2.0 report, it's the best in the industry and a must read. Here it is in case you are interested: https://messari.io/pdf/messari-report-eth2-the-next-evolution-of-cryptoeconomy.pdf. I'm really in awe with the report.
Now, in the report you'll find this chart:
source: Messari.io
It's a representation of the amount of inflation ETH2.0 will add when a certain amount of ETH is staked to the ETH2.0 network.
The takeaway of this chart is the actual issuance rate isn't as high as we may expect as ETH2.0 staking begins. Well, I disagree on this... Here's why.
The figure to note in the chart above is the "ETH staked" and "% of Supply" figure on the x-axis. Six of the ten scenarios use a figure below 10%. Which means less than 10% of the ETH supply will be staked in ETH2.0.
The future staking percentage will in no way remain in the ranges provided.
To get perspective on what percent is a normal amount, let's look at a few of the major networks...
The four networks that most closely resemble Ethereum in terms of size and market attention are Polkadot, Cardano, Tezos and Cosmos. These networks have 66%, 55%, 79% and 71% of their supply staked according to stakingrewards.com, respectively.
If you travel further down the list in terms of market cap you'll even see EOS (57%), DASH (52%), and Waves (68%), are all greater than the higher bound found in the chart, which is 27%.
So where is Ethereum right now?
The amount of ETH locked up in ETH2.0 is less than 1% of supply (just north of 1 million ETH now). The projected APR is just above 15%, so it's safe to say more ETH will come to ETH2.0.
The reason is simple. New staking solutions are coming online each week. They are getting simpler by the day... And what's more, these services are starting to mint synthetic versions of ETH in order for users to have instant liquidity.
Think of these synthetic versions like you do a tradable share in the market that is backed by gold. In some instances you can redeem the gold that the share represents after a certain period of time. The same holds true for ETH on ETH2.0. It'll be redeemable after a certain period of time... And the synthetic version of that ETH can remain tradable in the meantime.
After we realize these synthetic ETH tokens can be traded, held in a vault or stored in a wallet in a similar manner as the underlying ETH token can, how is there not a scenario where the amount of ETH locked up is closer to 70%?
Sure, it might take some additional development to make these SynETH tokens as compatible as ETH is (and it's why it might never trade 1:1 with real ETH), but users who stake will keep pace with inflation and enjoy the benefit of stacking their yield through various DeFi tools.
Coinbase has announced they will enter the staking game, and with it they'll roll out a SynETH token. And through their simple method of delegating tokens we can fully anticipate the percentage of staked tokens on ETH2.0 will be closer to the market norm of large cap projects.
If this is the case, the true rate of inflation for Ethereum will be higher than what analysts, investors and even industry professionals are anticipating. And to be fair to crypto in general, I'm not sure people expected development to progress this quickly.
Because of the speed of development, I believe the Messari team didn't have an oversight on SynETH. In fact they addressed their existence and mentioned they will play a larger role soon. But in terms of how soon, I don't think the market expected the speed we're seeing.
Now, to gauge what the inflation rate will be based upon other large cap Proof-of-Stake cryptos, let's dive into the ETH 2.0 Economics paper here: https://docs.ethhub.io/ethereum-roadmap/ethereum-2.0/eth-2.0-economics/
You can see the real inflation rate is somewhere in this region:
source: docs.ethhub.io
With that said, the real rate of inflation for Ethereum will be closer to 5-5.4% at some point in 2021. Meaning inflation might jump 35% in short order (I've seen several stated rates of inflation. I'm going by Messari's use of 3.99% for continuity).
So what to make of all this?
Just keep in mind the conversation regarding the inflation rate for Ethereum will heat up as more staking services come online that lower the barriers to entry... Meaning more average investors will gain access to these services.
And as this conversation gains momentum we can anticipate the bullish horns ETH is sporting to dull just a tad.
We also need to begin preparing for a world where true native ETH tokens garner a premium in the market and an array of SynETH tokens coexist. But that's a topic for another day. Until then...
Your Pulse on Crypto,
B Lilly
p.s. - Despite the market's expectation of inflation being too low, we are still very bullish on ETH.
p.p.s. - I want to thank L.P.! They were literally the one subscriber who sent over an e-mail. We truly appreciate it. The team hopes to get more from the rest of you soon!
Are you interested in Jarvis taking the guess work out of trading?
Are you ready to start compounding your portfolio?
Click the button below to learn more on how Jarvis can start turning the market into a second stream of income for you... while you sleep.
Any questions you may have please don't hesitate to reach out to us at askus@jarvis-labs.xyz
