Supply Shocks - The Daily Gwei #339

ETH is only going to get scarcer from here.


We all know that EIP-1559 has been burning a lot of ETH over the last 6-7 weeks (336,000 and counting) but what I hadn’t seen yet was some data on the impact of this burning for miners. As you can see below, miners have much less ETH to sell in a post-1559 world ($1 billion+ counting) - and this is only just the beginning of ETH’s scarcity journey.

Source: https://dataalways.substack.com

EIP-1559 is not the only supply shock that miners will be facing - once the eth1<> eth2 merge occurs, miner revenue will drop to 0 and new ETH issuance (that will now go to stakers) will be ~90% less than new ETH issuance under PoW and stakers will also get all of the unburnt fee revenue. Now, there is a major difference here between miners and stakers - stakers are not forced to sell their ETH profits in order to pay for very high electricity bills, maintenance costs, personnel costs, rent, hardware costs etc. Stakers simply only need to sell some ETH to cover taxes (if required) and a small electricity cost (which they can probably cover with their non-staking reward income anyway). What this all leads to is an even more pronounced supply shock than the initial ~90% issuance reduction.

Of course, scarcity without demand doesn’t mean much, but the beautiful thing about ETH is that it has an insane amount of demand from many diverse use-cases. There is great demand to use ETH to pay gas fees (most of which are burnt), to use ETH as collateral within DeFi, to use ETH as money to trade NFTs, to use ETH as a store of value, to use ETH as a staking asset and more. It’s quite obvious that this demand will only continue grow and strengthen over time as Ethereum expands it’s use-cases and ETH continues to cement itself as the native money of the internet. For more info on this, I wrote a piece about ETH’s scarcity and demand engines here.

Some may push back on this and ask if scarcity of this magnitude is actually desirable for a cryptocurrency but I think there is a common misunderstanding here. While ETH is a money and a currency, it is not an ideal money or currency - it’s best use is as a strong and valuable collateral asset to create an ideal money/currency. For example, RAI is a “stablecoin” (that is not pegged to the USD) that uses only ETH as collateral because it wants to harness ETH’s decentralization and collateral properties while also producing a stable asset. Of course, there are plenty of other projects attempting to create a decentralized stablecoin that’s actually stable and scales - and I bet almost all of them will use ETH in some way.

As I’ve said many times before, EIP-1559 is just the appetizer - the real supply shock is the merge. I’m also personally looking forward to seeing how much churn staking will have and how much newly issued ETH actually ends up getting sold. I think both of these things will be very low which is going to quite literally lead to a supply-side liquidity crisis for ETH - there will simply not be enough ETH available to match the extreme demand.

And I’m sure you can all imagine what happens to the price of ETH in this scenario.

Have a great day everyone,
Anthony Sassano


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