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Why Isn’t ETH Pumping?

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With virtually every fundamental metric on Ethereum reaching all time highs, many holders are wondering: Why isn’t the price of ETH pumping? 

Over 3% of the ETH supply is now locked in decentralized finance (DeFi), Ethereum is accruing ~$700K in fees per day while processing over 1 million transactions, there’s now 100 million addresses on the network, total gas used is hitting new highs, and daily issuance is the lowest it’s been in Ethereum’s history. 

But the price of ETH remains flat. What gives?

It simply comes down to basic economics – supply and demand. Unfortunately, the Ethereum economy is still facing repercussions from the 2017/18 ICO bubble and daily block issuance is only adding to the ETH sell pressure.

ETH Sell Pressure

In 2017/18, ICOs raised roughly $15 billion dollars in venture-like capital for token projects. Those same projects, which raised funds predominantly in ETH, have been forced to sell said ETH in order to cover operating expenses over the past two years. As depicted in the graph below, ICO treasuries have declined by 3.37M ETH since the beginning of 2018. 

Only recently has that number been outstripped by the demand for open finance, although despite the DeFi frenzy, the ~$840 million ETH locked still pales in comparison to the amount raised and sold during the ICO era.

Then there is the 15 million ETH issued via block rewards. Since Ethereum still secures the network via Proof of Work, similar to ICO projects, hardware miners are forced to sell a portion of their rewarded ETH in order to cover their operating expenses (like energy costs).

So for the past two years, ETH supply has largely outpaced ETH demand; the result of ETH sales from the ICO boom and constant sale pressure coming from miners in Proof of Work.

Source: Diar, Santiment

Changing Economics

But there’s light at the end of the tunnel. While we’ve been beating the same bullish drum for years now, Ethereum 2 truly is on the horizon. And it’ll act as a massive steroid for the Ethereum economy. 

The transition from Proof of Work to Proof of Stake will move ETH from a capital asset to an interest-bearing asset or “crypto capital asset” – an asset that provides users with the rights to the protocol’s cash flows (currently at ~$255,000,000 in annualised fees and rising).

Better yet, running a validator has minimal operating costs compared to hardware mining. This in turn will minimize sell pressure on the supply side as validators will not need to make regular ETH liquidations to cover the high electricity fees and expensive maintenance costs that come with mining (arguably, this also increases wealth concentration but that’s for another piece). 

Adding to this, the possible introduction of EIP-1559 also directly connects ETH’s value proposition to the Ethereum network. In EIP-1559, the more transactions made, the more ETH burned and the scarcer the asset is. With EIP-1559 all ETH holders win when the network is used.

All of this will happen while DeFi continues to expand its gravity well, capturing and tokenizing global financial assets on Ethereum. We’re only now just seeing the tip of the iceberg for open finance, with more and more projects coming online while the established applications continue to soak up ETH and other assets into their respective protocols.

Proof of Stake, DeFi and EIP-1559 – these are the three ingredients that create a recipe for the next market cycle. It’s not here today, but it’s getting there. And those who are patient enough could well be rewarded handsomely. 

My guess is that once the deposit contract comes online, the real mania will begin. But with the way markets have moved against fundamentals, exact timing is anyone’s guess.

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