Ethereum will complete the mainnet upgrade and merger in September this year or by the end of the year at the latest. This process is called the Ethereum 2.0 merger. The merger will include a shift from Proof of Work (PoW) to Proof of Stake (PoS), as well as the merging of the main Ethereum chain and the Beacon chain.
Merge steps:
The Merge: The transformation from PoW to PoS will be carried out and the Ethereum main chain and the beacon chain will be merged.
Sharding: Ethereum will expand from one chain to an eventual 36 shard chains, which will significantly improve transaction performance. The implementation of sharding is expected to be completed in 2023, and the expansion task will mainly rely on second-tier solutions.
To ensure that the merger goes smoothly, Ethereum developers have conducted multiple testnet merges and resolved possible issues. If all goes well, Ethereum is expected to complete its integration between late August and November.
2. Changes brought about by Ethereum itself
The ideal future blockchain goals are to have sufficient bandwidth (also called scalability), decentralization, and security. This merger of Ethereum is an upgrade of the underlying consensus mechanism from PoW to PoS. It aims to solve the external criticism that the PoW mining mechanism consumes a large amount of power resources, and to improve the degree of decentralization (solve the problem of large miner clusters) and security. However, this upgrade has no direct impact on Ethereum’s transaction processing capacity per second (TPS), which currently stands at 14, meaning it can process 14 orders per second. Therefore, when operating on Ethereum, gas fees may still be higher and transaction speeds slower, which are mainly affected by the overall popularity of the market. In Ethereum's expansion roadmap, the protocol layer mainly focuses on decentralization and security, while the expansion task is mainly undertaken by sharding and Layer 2 (L2) technology.
Reduce inflationary pressure on Ethereum:
In the PoW stage, Ethereum issues about 10,000-20,000 additional ETH every day as blockchain network rewards. This reward is allocated to Ethereum miners, and the miners usually sell these additional ETH directly to pay for electricity and operating costs. This has caused a lot of selling pressure, currently equivalent to about $16 million in inflationary pressure per day.
However, after the merger is completed, the daily issuance of Ethereum will be reduced to 1,800 ETH, which is equivalent to about 15% of the previous amount. All this ETH will be rewarded to the pledge verification node operators who participate in ETH pledge. Due to lower operating and electricity costs for staking verification node operators, selling pressure on Ethereum will be significantly reduced. This effect is similar to the three halvings of Bitcoin (the three halvings have brought about three major bull markets in the currency circle). The significant reduction on the supply side, coupled with increasing demand, is expected to push prices higher. At the same time, the pledge mechanism reduces the circulation, and the price increase will attract more pledges, which may form a positive cycle of Ethereum.
Beacon chain pledge cannot be unlocked temporarily
Currently, the Ethereum beacon chain launched in 2020 has pledged more than 10 million ETH, with an annualized rate of return of 4.6%, which is only part of the staking rewards. After the PoS is completed, the stakers will also receive the GAS fees originally belonging to the miners, increasing the annualized yield to about 8%.
However, the pledged ETH may face pressure to sell when it is unlocked, because the mechanism for unlocking the pledge limits operations and withdrawals in future upgrades after the merger is completed. It is expected that it may take 6-12 months to unlock. In addition, since the amount of ETH that can be withdrawn per day is limited, everyone needs to wait in the queue sequence and can only withdraw up to 30,000 Ethereum per day. This means it could take over a year for everyone to unstake.
Due to the long-term locking system, most of the pledgers are holders who are optimistic about Ethereum in the long term. They choose to use a liquidity staking protocol (such as LIDO) to stake Ethereum and receive liquidity tokens stETH corresponding to the pledged amount 1:1 (currently 3% different from the ETH price).
Deflation expectations:
Ethereum can be understood as a company whose vision is to become a global computer. Its initial fundraising method is centralized. In July 2014, the team established the Swiss Ethereum Foundation and conducted a 42-day Ethereum pre-sale event, raising a total of 31,531 Bitcoins, which was equivalent to US$184.3 million based on the Bitcoin price at the time. The final sale The number of ether coins issued is approximately 60 million, which is equivalent to US$0.3 per coin. Currently, the total circulating supply of Ethereum is close to 120 million, with the remaining 60 million being mined and circulated by miners over the past few years.
If Ethereum is compared to a traditional company, its tokens are equivalent to stocks. Operating income mainly comes from platform fees, that is, GAS fees. This can be directly regarded as most of the income is used to repurchase shares, while part of the income is distributed to shareholders as pledge rewards. In the initial stage, Ethereum issued stocks to employees (i.e. miners) as salary rewards, but as the company's technology upgraded, employees were no longer needed, so profits were directly distributed to pledged shareholders.
Future cash flows can be predicted based on the traditional company's DCF (discounted cash flow) and PE (price-to-earnings ratio) valuation models. Net income can be thought of as the sales of GAS fees minus the burned portion, plus the staking rewards for shareholders. According to the current revenue model after the PoS upgrade, 2.54 million ethers are burned every 345 days, which is approximately US$3.62 billion based on the current price of US$1,350 per ether.
Based on the PE ratio of leading technology growth stocks, assuming 40 times, combined with Ethereum’s high growth rate and high net profit business model, its market value can be estimated to be approximately US$144.8 billion. Considering the growth potential and fair value of Ethereum, its value is expected to reach US$10,000 in the future, showing good prospects.
At the same time, Ethereum is similar to a bond, and pledging can give nearly 8% of the corporate bond income. Obviously there will be better yields. Obviously, the above models are beneficial for institutions to evaluate and analyze the value of Ethereum and allocate Ethereum as a fund position.
Finally, let’s talk about token deflation. According to the current EIP-1559, Ethereum token burning distribution mechanism, the current daily burning volume is close to 7k, and the POS pledge additional issuance is about 1.8k. It is close to deflation of 5k coins every day. This is equivalent to a daily repurchase of 675,000 US dollars. -Annual combustion is 182.5w, which is equivalent to annual deflation of 1.5%.
With the development of Ethereum 2.0, the number of users will increase in the future. Obviously there will be room for continued growth in combustion volume.
Possible investment opportunities in related tracks
1. Pledge service provider track
1. Since it is relatively complex to be independently established as a staking node, it requires network and equipment, and it also requires operation and maintenance and understanding of basic public chain knowledge. It is not easy for ordinary users to directly participate in staking. Therefore, the pledge service provider track was created. Liquidity staking service provider:
After the user pledges ETH at the service provider, the user is also given a pledge verification product (steth and reth can not only be used to pledge for interest, but also used for transactions.) and then find the downstream node operator for the actual pledge. Solve the problem of users losing liquidity when pledging and locking ETH. Service providers who build their own nodes include Binance and kraken, and service providers who do not run their own nodes include: Lido, Rocket Pool and Stader. Node operators: specifically operators who run nodes on the blockchain, they need to use equipment to run the chain The client stays online, maintains the consensus of the blockchain, and runs smoothly.
POS brings the demand for staking nodes, due to the lock-in of liquidity by staking Ethereum. The service provider application for liquidity staking was born. This market currently absorbs 15 million Ethereums, accounting for approximately 10% of the total Ethereum supply. (Because when the Stake ratio is too low, the cost for an attacker to conduct a 51% attack will be lower, which will endanger the security of the protocol; while if the Stake ratio is too high, the (actual) circulation rate of the token will be reduced, which is not conducive to The construction of public chain ecology. The ideal pledge rate is 50%, and the network can theoretically be absolutely safe)
The annual staking return is about 8%, of which 10% is used as staking third-party service fees. Therefore, the service provider market size is 120,000 Ethereum per year. will continue to grow.
1. Mainly focus on the target
1.1 Lido FIlnanceLido is a service provider of liquidity staking solutions. It currently also supports staking ETHISOL and other POS public chains. As the traffic entrance for ETH staking, Lido captures the most ETH liquidity. The main reason is the pledge verification product steth launched by Lido. ,with stable anchoring and powerful use cases. It has very good liquidity on Curve, and is accepted by mainstream lending protocols aave and maker, and can be used as collateral. The current total amount pledged in the agreement is approximately 424,000 Ethereums, worth 6.3 billion. In terms of handling fees, Lido currently charges 10% of staking reward fees from users, 5% of which is allocated to node operators, and the other 5% goes to Lido’s insurance fund. Lido Investment is very luxurious. In March this year, a16z announced that it had accepted 70 million investment. The main use case of LDO tokens is as a reward token to incentivize better development of the Lido ecosystem, as well as governance. 64% of the tokens belong to team and institutional financing, and will be unlocked linearly from December 21. The remaining 35% of the treasury will be used as liquidity incentive expenditure. The total number of tokens is 1 billion, the circulation is 500 million, and the current market value is 800 million US dollars. The annual net income of the protocol is 3.40,000 Ethereums.
1.2Rocket PoolRPL is similar to lido, providing liquidity staking services (users will receive ETH derivatives rETH after staking). The current total amount pledged in the protocol is 19.60,000 Ethereum. Node operators are required to stake RPL tokens to provide services. The total number of tokens is 18 million, with 16 million in circulation. After that, the annual inflation is 5%. The current price is 1.73, and the market value is 280 million. Overvalued relative to lido.
1.3.SSV The main service provided by Networkssv is to allow users to encrypt the validator key and divide it into multiple parts, and distribute them to different node operators. And SSV technology can ensure that the offline or malicious behavior of certain node operators will not be affected. Verification results from Ethereum validators. Currently in the testnet stage. Simply put, staking service providers can use the ssvt protocol to help them manage node operators, eliminating the risk of single point failure. For node operators, access to the ssv network will not have a higher cost, but entering sv The network may receive more SSV token incentives. For Ethereum, it is a supplement to the validator system. All node operators access the beacon chain through the SSV network, so they can obtain better security without sacrificing network decentralization. Bring more security redundancy to the bottom layer. The total amount of tokens is 11 million, basically in full circulation. The current value is 8.5, and the market value is 93.5 million. The last round of financing used 1 million tokens to raise 10 million, the coinbase cost is 6.3u, and the second batch of institutional costs is 12.6u. It has great potential and is a dark horse on the track.
2. Miner exits
The Ethereum mining machine industry is huge. With the merger and upgrade of POS, the existing Ethereum mining machines will be eliminated. However, mining machines and related graphics cards will not be scrapped. Mine owners have reasons to choose ETC as an alternative for mining, because ETC is a fork of Ethereum. Although it has declined, the underlying protocol is consistent with the early days of Ethereum. Therefore, mine owners will naturally transition to mining ETC, and there is a demand for ETC speculation. Increase mining income.
3. Second-layer solution.
As the merger of Ethereum approaches, and in the future = layer expansion plan will be supplemented with support, Ethereum's overall support TPS will be higher, which can carry higher scalability and accommodate more user transaction needs. At the same time, the second-layer solution also uses Ethereum tokens as GAS. As the ecosystem prospers, it will be more beneficial to the future growth of the Ethereum ecosystem. The second layer naturally undertakes the overflow value of the Ethereum main network and is responsible for accommodating the next 10 times or 100 times the number of users. Related landmarks: op, metis, zk ecology, etc. 4. Related Ethereum leading ecological application tokens #坎昆升级，了解layer2概念
4. Related Ethereum leading ecological application tokens
