The Ethereum 2.0 upgrade may not have a bullish impact on prices

Author: yudan, ZeroX Dry Goods Store

With the approach of Ethereum 2.0, the price of Ethereum has seen an astonishing 50% increase within a week, and everyone is starting to have high hopes for Ethereum post-merge, mainly focusing on the following points:

1. The deflationary effect of EIP-1559, which is the most important and highly anticipated aspect.

2. Staking Ethereum can yield nearly 9% annual returns, which is quite appealing.

3. Lower operating costs for nodes, as validators no longer need to frequently sell tokens to cover node operating expenses.

4. A reduction in Ethereum's issuance, with post-merge issuance being only 10% of the current rate, meaning reduced selling pressure.

Here are my thoughts on the above points:

1. Regarding the impact of EIP-1559, it changes Ethereum's economic model by burning transaction fees instead of directly giving them to miners, allowing for sustained deflation. This idea is appealing, but the main issue is that only the base fee portion of transactions will be burned, which is determined by the overall network usage. In other words, if Ethereum does not experience explosive traffic post-merge, then EIP-1559 will not be effective, resulting in low burn rates and minimal deflation. Furthermore, post-merge, there will be an increase in capacity, which means increased bandwidth. Under the same level of activity, lower gas fees will lead to a decrease in the deflationary effect of EIP-1559, creating a deflationary death spiral.

2. The ability to earn 9% from staking Ethereum reminds me of EOS, which offers 10% returns. This figure is only meaningful when the token price is high; if the price is low, even 100% returns are useless.

3. Regarding the operating costs of nodes, it is undoubtedly lower, but saying that operating costs have decreased only addresses the hard selling risk. There is no rule that states one cannot sell after making a profit; this is a form of PUA thinking. Therefore, it can only be said that the hard selling pressure has decreased, not that selling pressure has decreased. If we must insist, with Ethereum transitioning to a security nature post-merge, stocks in the stock market do not have operating costs; they will be sold regardless.

4. While Ethereum's issuance is decreasing, its total supply is still large. Even if it is halved three times, it cannot be compared to Bitcoin, which has a total supply of only 21 million. So, we cannot only look at the issuance; we must consider the total supply.

5.1 My own view is that Ethereum has never been positioned as a store of value. Its positioning is as the world's computer, and Ethereum is the fuel, meaning it is a consumable. When the Ethereum ecosystem is thriving, Ethereum as a consumable is rapidly depleting, becoming a perishable good. Therefore, to complete transactions, people must continuously buy new Ethereum, increasing demand and thus driving up the price. However, once Ethereum becomes user-friendly, it will no longer be a perishable good but just an ordinary consumable. If you can use one Ethereum for a lifetime, there is no need to buy so much; you only need to buy one. Clearly, this would reduce the purchasing demand for Ethereum, making deflation and reduced issuance meaningless.

5.2 After Ethereum transitions to PoS, there is no longer a hard mining cost, as stocks, or securities, have no hard costs. If there are any, they are zero, or they are related to the prosperity of the ecosystem, which we often refer to as company performance. Without mining costs as support, Ethereum has no bottom. Relatively speaking, if one goes long on Ethereum, it is essentially betting on the ecosystem growing more than tenfold post-merge, rather than due to EIP-1559 and the reduced issuance.