Ethereum Tokenomics: Powerful Flywheel or Cycle of Doom?

Miners’ key objective is to maximize profits from their mining operations. As such, they benefit from higher network activity (higher demand for block space results in higher tip + higher base fee burn), as well as higher ETH price (since all fees earned by miners are denominated in ETH but mining operating costs are denominated in fiat). Additiona... See more

There are many ways to look at value of financial assets globally, but one thing is clear - the current $133bn sitting in Ethereum TVL (and $221bn sitting across ALL blockchains) pales in comparison to the total addressable market. One can take their own view on how much of these assets migrate to decentralized trustless blockchains, but the upside... See more

A key distinction of stakers from miners is that they are also “owners” of the network since to be a validator one needs to lock in 32 ETH in collateral. Therefore, stakers care a lot about overall network security and resilience. They benefit from higher ETH price given their exposure to token via staked collateral holdings, as well as staking rew... See more

One valuation approach that has been making its rounds through Crypto Twitter is a Discounted Cash Flow analysis that calculates the present value of future cash flows of the Ethereum network. While this clever approach may be attractive to people with TradFi backgrounds (i.e. recovering investment bankers like me!), I see a few key issues with thi... See more

It requires taking an arbitrary view on the transaction fee growth of the protocol for the next 10-20 yearsIt requires taking an arbitrary view on the appropriate discount rate to determine present value.

Given anticipated limited new token issuance rate under Proof-of-Stake (and potentially even a deflationary token supply given the fee burn), this creates a competition for ETH tokens between staking and DeFi. Assuming DeFi activity continues to rise as more users are onboarded onto the network, the only way for the market to solve this conflict is... See more

Under the Proof-of-Work consensus mechanism, miners are responsible for validating transactions and keeping the overall network secure from attacks. For doing so, they are compensated with a “subsidy”, which is awarded to them by issuing 2 brand new ETH tokens for every new validated block (in December 2021 alone miners earned $1.7bn this way!). It... See more

RisksThe flywheel effect described above can only play out IF and only IF activity on the Ethereum network continues to increase. However, as we discussed above, high transaction costs have resulted in many users migrating to alternative blockchains, stealing meaningful market share from Ethereum in 2021, and who now have sufficient critical mass t... See more

Although most actives ETH addresses contain <$100k worth of ETH, the wealth distribution within the Ethereum ecosystem is highly unequal, with top 100 wallets accounting for ~35% of total ETH supply (for reference, top 100 Bitcoin wallets account for ~13.5% of all BTC supply).

I believe that following the full transition to Proof-of-Stake, most long-term financial investors will become stakers to maximize their total return and capture the yield available to stakers. Not doing so would be akin to owning a stock that pays a dividend and actively opting out from receiving the dividend!