Written by Loki, Huobi Incubator
1. Merge is a major turning point in ETH fundamentals
1.1 Miners die, nodes thrive
A large amount of mining revenue has been obtained by miners. The total revenue of Ethereum miners in July 2022 reached 596 million US dollars. According to this data, the annual revenue is estimated to be about 7 billion US dollars (18 billion US dollars in 2021). According to the data in 2021, the electricity cost accounts for about 33% of the ETH mining revenue, and the mining machine cost accounts for 10%, corresponding to the cost of 7.7 billion US dollars and 3.5 billion US dollars in 2021 and 2022.
On the one hand, ETH miners are also ecological participants, maintaining the operation of the network. But on the other hand, ETH miners are also the opponents of the ecology and ETH holders, and need to sell ETH to cover the cost. The switch of ETH to POS can greatly reduce the cost required to maintain the network, and the fixed output is expected to be reduced by 90%. That is, the cost of maintaining system operation is reduced to 700 million (2022E) and 1.8 billion (2021E). Considering the burning mechanism, ETH may enter into substantial deflation. According to the income of 1 billion, the node can also obtain a very considerable APY.
1.2 In the context of anti-regulation, the importance of the consensus layer is further highlighted
The recent addition of addresses related to Tornado Cash to the Entity Sanctions List by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) is a landmark event, as this is the first time a smart contract application has been sanctioned. This behavior, and further behaviors in the future, raises several problems:
(1) ETH ecology, USDC and Uniswap have shown weakness, and DeFi may be differentiated in terms of censorship.
(2) The review has risen from the address level to the protocol level, and the next step may continue to rise to the consensus level. On August 20, the Ethereum mining pool Ethermine will no longer generate blocks containing Tornado Cash transactions. After ETH is converted to POS, validators have become potential regulatory targets, and the anti-regulation and decentralization of the consensus layer have become new issues.
1.3 Bonded ETH becomes similar to national debt, ETH becomes more like a super-sovereign economy
National debt is the cornerstone of the modern financial system. The history of the past few decades shows that the United States provides safe assets to the world by using its sovereign credit as collateral, leveraging global resources. The so-called "safe assets" refer to assets that can maintain a stable value under various conditions (including systemic risk shocks).
ETH also has high liquidity, is endorsed by services within the ecosystem, has a relatively stable approximate risk-free rate of return, and can be freely circulated. The current market value of ETH is 200 billion US dollars. In addition, there are a large number of ERC-20 assets and NFTs. Converted according to 300 billion US dollars, it can be ranked in the top 60 in the global national net wealth ranking, which is about the same as Ukraine and Argentina.
2. StakingFi becomes a direct beneficiary of ETH Merge
2.1 Significant improvement in StakingFi fundamentals
Liquidity Staking refers to the process by which users obtain liquidity by staking their assets. The process begins
For investors to pledge tokens (ie ETH) into a protocol, which pledges on behalf of investors
stake, and then mint the claim assets of the mortgaged assets 1:1 for investors, and then the Staking rewards belong to
Liquid staking tokens, which is similar to the case of decentralized exchange LP tokens. these mobile
Staking tokens can be exchanged or used as collateral to borrow assets.
In fact, it unlocks additional revenue streams in addition to staking rewards. including but not limited to:
Discounted benefits unlocked early
Proceeds from the reuse of capital pledge certificates
With the gradual increase of Bonded ETH, the fundamentals of StakingFi & New DeFi will be significantly improved. For StakingFi, a stable and reliable source of income will appear. Previously, StakingFi projects such as Lido and Kiki were all caused by the collapse of LUNA . The market value of LUNA is about 1/5 of that of ETH, and the StakingFi project will be directly impacted.
As of early 2022, the current market value of all staking tokens is about $146 billion, while the total value currently locked in DeFi is $186 billion, and the market size of liquid staking protocols is $10.5 billion, with a penetration rate of about 7%. According to Messari's estimates, liquid staking could usher in a considerable wave of market growth as crypto networks such as Ethereum transition to a proof-of-stake (PoS) consensus mechanism on a massive scale.
By 2025, it is expected that the annual staking reward will reach 40 billion US dollars, and the average staking rate of return will be between 5% and 10%, which means that the total market value of pledged tokens will be between 400 billion and 800 billion US dollars. Even assuming no increase in penetration, the annual growth rate in 2021-2025 could be in the range of 17%-40%
In the range.
The governance value is estimated at 1%/2%/3% of the Staking scale, respectively
2.2 Comparison of ETH Staking Modes
ETH offers multiple staking modes:
Independent staking and staking-as-a-service have relatively higher thresholds, so collective staking and centralized exchange staking are expected to be the main battleground for Staking service competition. As of August 25, 2022, the total amount of ETH2 pledged is 4.88 million ETH, of which Lido occupies 90% of the market share. For the StakingFi project, its own Bonded Token is the golden key to finance and governance, and Lido's market position is also reflected in the recognition of stETH.
It should be noted that if StakingFi forms a monopoly, it may complete control of mainstream DeFi protocols or establish its own DeFi ecosystem through election bribery, governance attacks, TVL attacks, etc., forming a DeFi trust organization, and the ensuing anti-centralization and monopoly The governance of giants will also become a new topic, and DVT (such as SSV) technology is expected to play a greater role.
3. The rise of ETH national debt and StakingFi creates conditions for DeFi 2.0
The typical representative of DeFi 1.0 is liquidity mining. The essence of this "mining" is: using the time value of assets in exchange for short-term or long-term benefits, and taking potential risks, including smart contracts, systemic, and associated risks, etc. For the demand side, the "mining" mechanism of the DeFi protocol can perform larger-scale financial services after helping to improve liquidity.
Generally speaking, the cost of capital required to lease TVL = risk-free rate of return + risk-reward rate = risk-free rate of return + impermanent loss expectation + other loss expectations (such as theft, Rug, etc.) + risk preference premium
The biggest pain point of DeFi 1.0 is the need for a large amount of TVL. This part of TVL will bring huge usage costs, entry barriers and security risks. Defunding, improving efficiency, and reducing costs are important directions of DeFi 2.0, and the background of ETH national debt The secondary utilization of interest-earning assets provides a feasible path for DeFi 2.0.
3.1 Asset reuse stable currency
Whether it is an existing stablecoin protocol or a lending protocol, a large number of valuable assets need to be pledged. Since the value storage and use functions of assets are not separated, these assets cannot be used, and the utilization efficiency of assets is not high. After ETh Merge, a large amount of ETH was pledged, and the pledger got the pledge certificate. The value storage and use functions of ETH are separated, and the pledge certificate, as a high-value and high-liquidity collateral, can be used in large quantities to mint stable coins or carry out asset lending. The emergence of new stablecoins with ETH pledge certificates as collateral or ETH pledge certificates occupying a larger share in the MakerDAO public will be a high-certainty thing.
3.2 DEX protocol based on superfluid pledge
Allowing token holders to stake their tokens and simultaneously provide liquidity (and thus enjoy both returns) not only increases the security of the network, but also maximizes capital efficiency.
The implementation method on ETH is as follows: ETH is used as the trading pair of all tokens, the protocol is priced in xETH, and then 50% of the ETH is put into pledge, the user is xETH in swap: ETH is exchanged according to 1:1, add and When removing liquidity, the dynamic interest rate is implemented according to the current real content of ETH.
3.3 Bond Discount Agreement
Similar to the reverse repurchase of government bonds and the discount of large-denomination certificates of deposit in real financial interest rates, the essence of Curve's stETH pool is a bond discount agreement, which can also be implemented by agreement acceptance.
3.4 Fixed Income Securities & Interest Rate Derivatives
A product similar to the U.S. bond market is likely to emerge.