Ultra Sound Summer - The Daily Gwei #309

If an ETH gets burned and no one is around to observe it, does it make an ultra sound?

‘Ultra sound money’ - it’s a term that’s come to prominence within the Ethereum community over the last few months and it’s mainly used to describe ETH as a (potentially) deflationary asset. I won’t be breaking down in detail what this term means in today’s piece (you can read this piece for an overview of that), but I did want to talk about some auxiliary things that feed into this ‘ultra sound money’ meme.

ETH as an asset has come a long way since the day Ethereum went live and is now viewed as a trustless store of value/collateral asset, a staking asset (“internet bond”) and ETH being used as gas is actually now an incredibly powerful value driver (thanks to EIP-1559 burning most of that fee revenue). What the Ethereum community has essentially been able to do over the last couple of years is completely shift the narrative around ETH as an asset through innovation and iteration rather than dogmatic belief that the original design of Ethereum’s monetary policy was perfect. This is why the meme ‘ultra sound money’ exists - it is both an accurate descriptor of ETH as a deflationary asset (post-merge) and a playful jab at Bitcoin’s inferior monetary policy.

As I mentioned above, now that EIP-1559 is implemented most of the value that is being generated by the Ethereum protocol (via network fees) are being burned which, over time, flows to ETH holders. This includes every DEX trade, every liquidation, every NFT mint and even every rug pull - if it pays a network fee, it increases the value of everyone’s ETH holdings by just a little bit. Though, this is only 1 piece of the ultra sound money puzzle with the next piece - the coveted eth1<>eth2 merge - unlocking hopefully in Q1 of 2022. This will lead us to a net deflationary ETH as burns from fee revenue will out-pace new issuance (assuming an average gas price of 10-15 gwei).

What’s also been quite interesting to see is the shift in narrative around high gas fees on Ethereum. I don’t really see many people complaining about these high fees anymore and I think that’s due to 2 main reasons: the fact that layer 2 and other scaling solutions are an option for end-users now and the fact that high fees are now actually driving value to people’s ETH holdings. It’s probably best to think about this as a ranking of wants - do people care more about their ETH holdings going up than having to pay high gas fees? I believe they do!

In saying the above, I think that long-term the only transactions that will be high enough value to justify the high fees on Ethereum’s layer 1 will be layer 2 proofs, MEV and some whale-related activities - everything else will be pushed to layer 2 (which is definitely a good thing). This will mean that ETH will still most likely be net deflationary (post-merge) while end-users won’t be burdened by the high gas fees as individuals - rather, their collective use of the layer 2 ecosystem will be fed down to layer 1 via proofs where most of that fee revenue burned - ultimately leading to positive growth for ETH as an asset - without the negative externalities of high fees for users - a beautiful symbiotic relationship.

Have a great day everyone,
Anthony Sassano

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All information presented above is for educational purposes only and should not be taken as investment advice.