“the scarcest commodity in crypto is long-term thinking” @punk4156
TL/DR: Migration of Ethereum to POS has created a massive ETH financing market as ever more Validators need to finance (and earn/share yields) on increasing valuable (in fiat terms) 32 ETH Validator stakes. Liquid Staking Tokens (LSTs) have emerged to fill this need, starting from the run-up to enabling withdrawals with the Shanghai upgrade. PowerPool believes that PowerAgent automated, broadly-diversified ~10+ LST PowerBaskets like $LSTETH will offer higher yields, less risk and better liquidity compared with holding/farming any individual LST. These structured investment PowerBaskets can become highly-liquid, composable tokens broadly held as low volatility (in ETH terms) real-yield bearing pristine collateral for additional farming and/or minting stablecoins for payments.
At this stage of the technology wave associated with adoption of cryptography-based distributed ledgers/blockchains and digital assets, the crypto DeFi market is still relatively unconnected to financial flows relating to real world assets. The last cycle of the crypto market was akin to a multiplayer virtual reality game where fiat ‘flight capital’ digitised as stable coins like USDT and USDC flooded in, fleeing a savage, globally hyper-inflationary and politically hostile fiat currency investment environment. In a world of effectively zero interest rates for savers, this ‘hot money’ was trying to navigate the un-regulated world of crypto DeFi in search of some kind of yield and capital appreciation.
Originally, Bitcoin (BTC) absorbed most of the value fleeing fiat, but BTC offers almost no native yield, encouraging (wrapped or proxy) BTC value to flow towards Ethereum DeFi. Wrapping and leveraging Bitcoin has been the source of significant DeFi crypto investment liquidity, and periodic liquidations of often highly-leveraged positions can cause huge price declines across the whole crypto asset class, detering defensive-minded institutional and smaller investors at risk from liquidation from participating.
Ethereum developed the leading cluster of DeFI activity, but with often illusory staking/LP ‘APY’ token rewards offered to attract liquidity to nascent DeFi protocols. During the peak of the last bull market, various popular mania like social media-driven cult/meme (slow-motion Ponzi) token activity like DOGE et al. and minting of ‘status symbol’ image-linked NFT tokens resulted in transaction volumes that frequently overwhelmed Ethereum’s ability to scale, with surge pricing driving gas fees sky-high in times of stress compared to other alternative Layer 1 (ALTL1) blockchains.
The Ethereum L1 blockchain developer community is engaged in a truly epic, multi-year struggle to scale Ethereum L1 relative to overwhelming demand, and to tame unpredictable runaway/surging gas costs due to the 'liquidity wars' rewards bonanza, rampant meme coin trading, gas-bidding ‘bot’ arbitrage wars and miner front-running in the public ‘dark forest’ mempools. There is still no end in sight for recurring relatively high fees on Ethereum L1.
Ethereum’s continuing scaling struggles encouraged a plethora of pretender ‘ETH-killer’ alternative (ALT)L1s and a number of different ETH-based L2-scaling solutions. Persistent high gas fees on Ethereum L1 are antithetical to DeFi for small retail transactions, so proven DeFi primitives sensitive to gas fee levels began moving towards lower-cost, faster execution environments, usually either alternative L1 chains (ALTL1s) or Layer 2 (L2) sidechains/roll-ups running alongside/on top of Ethereum. L2s contribute transactions fees to Ethereum, whereas ALTL1s do not.
Ethereum’s L1 blockchain often hit its capacity in 2022. As a result, other ALTL1s exploded 50-100x in value as investors bet on crypto development to parallelize across new ecosystems and absorb the excess demand.
But rather than focus only on scaling, the Ethereum Community decided to convert from proof of work (POW) to proof of stake (POS). Rather than the original energy-based POW concensus methods based on Bitcoin, future Ethereum operation following the 2022 Merge will depend on Validators/Stakers risking their ETH deposits to ensure steady and effective chain operation.
POS rewards/fees paid to ETH Validators/Stakers have created a new form of native, sustainable intrinsic yield on staked ETH, likely average about 5% in 2023. Given that Ethereum is expected to be deflationary by about 2% per year, the real rate of return on staked ETH is expected to be closer to 7%. Those who forgo other uses and stake their ETH will benefit more than those who merely HODL ETH.
The last bull market came to an end when Covid and war-related global economic disruptions began to drive significant inflation in fiat currencies, prompting central banks central banks to begin sustained increases in interst rates, from 0% to over 5% in the span of only 6-8 months.
LUNA, 3 Arrows, Celsius, BlockFi and Voyager, FTX, Genesis/DCG, BUSD, USDC.
Ethereum (ETH) - Financial statement | Dashboard | Token Terminal
The Ethereum ETH staking market is fed by the currently $200 million per quarter of supply-side plus token incentives fees, irrespective of whether any of the corresponding chain activity has any long term value at all. As long as Ethereum runs at this level, virtually assured by the volume of VC investment already made in DApps on L2s etc., the 'trickle down' to stakers/validators will be about $800 million per year...probably more and sustainable. Will an equivalent of Moore's Law be revealed for blockchains, driving them to become exponentially faster, cheaper, bigger and more secure until they become 'world computers'? No one knows.
But despite the scaling issues and need to develop a complementary scalable L2 eco-system, Ethereum is already proving to be both profitable and deflationary. This combination will continue to chip away at Bitcoin dominance, and encourage more and more SOV value to migrate from Bitcoin towards Ethereum, which will also always have greater future optionality to capture ever more value at a profit.