Ethereum Tokenomics: Powerful Flywheel or Cycle of Doom?

It is possible that in the short term migration of transactions to Layer 2’s will exert downward pressure on transaction fees earned by ETH stakers, which could negatively affect token price. However, as I explained in my valuation framework, I do not believe it is appropriate to value Ethereum based on its revenues using a DCF - given that Ethereu... See more

Put differently, Ethereum’s inability to successfully migrate a meaningful chunk of its users onto the Layer 2 chains will likely result in continued market share loss to alternative Layer 1s as they continue to offer cheap and fast transaction execution and rapidly growing dApp ecosystems. This would directly reduce network activity over time and ... 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

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

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

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! 

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).

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

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