Why is Ethereum on the decline? Explaining the reasons using the three dishes theory

Author: encryption Weituo

I don't know if you guys have a feeling that, after hearing a lot of fear, uncertainty and doubt about ETH, it doesn't quite hit the mark? Since the technology and developer fundamentals are very good, it's normal to have challengers in each round, so why is this round so weak?

Let's use the three-disc theory to penetrate from both the supply and demand sides.

Ethereum Demand Side

The demand side of Ethereum can be divided into two factors: native and external.

Native factors refer to the development of Ethereum technology, which has generated a large number of ETH-denominated split plates, thereby driving the demand for ETH: such as ICO in 2017 and Decentralized Finance in 2020/2021. In this round of market trends, the main narrative should be L2 and Restaking. However, as I mentioned in November last year, L2 ecological projects overlap heavily with the mainchain, which cannot cause explosive trading prosperity. PointFi and Restaking essentially lock the flow of ETH drop, rather than pricing more assets in ETH, and even the pricing power of large restaking projects such as Eigen, Rez, and Ethfi is based on exchange (USDT), not on-chain (ETH) like the previous round of YFI, CRV, and COMP. Users do not need to hold ETH as long as there is no significant amount of new assets priced in ETH. Another native factor is the burning mechanism caused by EIP1559. ETH's main function is the settlement layer, and the clearing and settlement of large-scale Decentralized Finance occur on the main on-chain. Nowadays, L2 and mainchain have highly overlapping functions, resulting in a large amount of such demand being diverted to L2, while the burning caused by these transactions is only a small fraction of the original amount, weakening the demand for ETH.

External factors are mainly ecological external demand and macro. Macroscopically, the previous cycle was a loose cycle, and this cycle is a tightening cycle. In terms of ecological external demand, the previous round was grayscale trust, and this round is ETF. However, grayscale was a mythical animal that could only be bought and not sold. But ETF is different, it can be bought and sold. ETF has been opened for a month, and the total net outflow has reached -140.83K, the vast majority of which is through grayscale. This is completely different from the net inflow of BTC ETF since its opening, which is equivalent to the entire new and old Whales of ETH cashing out through ETF.

Understanding the supply side of Ethereum

Ether itself is a classic dividend plate. Regardless of whether it is in the POW era or the POS era, the main selling pressure comes from new output. But why did problems arise in this round? Because of its production cost structure.

ETH POW era [Before September 15, 2022]

The output logic of ETH is the same as BTC, it is produced by MinerMining

The cost composition of a Miner acquiring ETH:

1. Fixed Cost: One-time non-refundable ETH mining investment, including:

• ETH mining machine cost

2. Incremental Cost: The cost that rises with the time of participation in Mining, including:

• ETH mining electricity cost
• Hosting cost of ETH mining machine (including Mining Farm rental, personnel, maintenance)
• Unexpected costs (including slashing, disasters, etc.) need to be noted that these costs are based on Fiat Currency: whether it is fixed or incremental costs, they need to be paid in Fiat Currency, and these costs are sunk costs that cannot be refunded. Due to the limited lifespan of the Mining Rig, the entire output of the Mining Rig's lifecycle can be seen as a fixed quantity. The cost of obtaining each ETH = total cost in Fiat Currency / total ETH output.

There is a game here: When the market price of Ethereum Fiat Currency is lower than the acquisition cost (shutdown price), the Miner will not sell, because it will lose money.

While the Mining Rig is innovating, each generation of Mining Rig is more expensive. In each market cycle, mining competition becomes more intense, not only the output is dropping, but also the difficulty is increasing. Even the electricity and hosting fees are soaring. The pressure brought by government regulation is increasing as the industry expands. This means that the total incremental cost has increased, indirectly raising the floor price of ETH.

However, in the POS era, this effect has disappeared

ETH POS Era [After September 15, 2022]

The Miner role has disappeared and has been replaced by validators. To obtain Ethereum output, simply stake ETH in the validation Node, and the production cost of ETH has become:

1. validators: - provide the cost of infrastructure (such as personnel, servers)
2. Pledgers: - Opportunity cost of pledging ETH - Fees paid to validators Do you see the difference?

Although validators' costs are also Fiat Currency-based, theoretically they can support an infinite amount of ETH staking and there is no Mining Rig scrap, so the cost of obtaining ETH units can be almost negligible. In addition to opportunity costs, stakers have no Fiat Currency costs for obtaining ETH output, and the fees are also coin-based costs. Therefore, there is no "shutdown price," and stakers will not maintain the lower limit of ETH price like Miners, but can continuously sell and withdraw without limit.

Even if we consider that the average stake Ethereum get on board price is the average ETH price of the previous round, this mechanism cannot constantly raise the floor price of ETH, but ETH is constantly increasing, as long as the increase in the number of Ethereum is positive, the price will continue to be under pressure.

ETH cannot escape the three rounds: today's thunder was already laid in 2018

This is a sad story:

At the end of the ICO era in 2018, a large number of project parties conducting ICOs priced in ETH indiscriminately dumped ETH, with the price dropping to below $100. From the perspective of splitting the market, the splitting rate during the ICO era was extremely high, but there was no DEX that could trade ETH-based cash. Project parties could only dump ICO tokens and exchange ETH for USDT, ultimately leading to a sharp decrease in ICO Beta returns. The opportunity cost exceeded holding assets, resulting in a double kill for Davis.

Perhaps due to the painful experience of ICO in 2018, we saw Vitalik and the foundation constantly emphasizing the roadmap, narrative, and orthodoxy, which formed a group of "core circle" developers and VC. The success of DeFi Summer further strengthened this institutionalization, concentrating chips in the hands of Eth Aligned collective action rather than individuals, thus preventing disorderly splitting and dumping.

However, this ultimately evolved into "to V entrepreneurship", "Halal = overvaluation", which resulted in:

• Low splitting rate: The dev and plate that can handle considerable Liquidity and assets plummet.
• • Market Beta cannot outperform competitors: 'Halal' and 'Ponzi' lead to overvaluation, causing weaker returns for Beta compared to other chains.

Plus, the weakening of burning and the cost-free selling pressure brought by L2 and POS have offset all the efforts made by the Ethereum core to prevent disorderly selling pressure, resulting in today's tragedy.

What have you learned from the lesson of ETH?

1. If the dividend plate wants to be stable, do not innovate on a whim, remember to form a fixed cost and incremental cost priced in gold, and with the increase of asset Liquidity, constantly raise the cost line and raise the lower limit of asset price. If you really can't, go back and look at the BTC cost model again.

2. Splitting the plate to reduce selling pressure is just a delaying tactic. The real purpose is to turn your base currency into a quoted asset, so that holding does not depend on the rise of the base currency itself, thereby expanding the demand side and Liquidity