“Shanghai” will change ETH economics forever[Column]| coindesk JAPAN | Coindesk Japan

A major upgrade of the Ethereum blockchain, “Shanghai,” has been completed. Shanghai will eventually be remembered as a positive event for Ethereum (ETH).

However, many of the world’s leading ETH quant traders, who have so far earned higher yields than ETH’s staking yields, are now able to withdraw their staked ETH at last, resulting in a significant increase in ETH circulation. In the short term, we believe that the price will be neutral or head to the downside.

Influence of “Shanghai”

In the long run, a full move to Proof of Stake (PoS) on the Ethereum blockchain will only benefit the network and ETH price. We may be able to dethrone Bitcoin (BTC), the market capitalization leader.

My firm, Amphibian Capital, goes a step further and predicts that ETH will reign as one of the world’s top three most valuable assets in the next decade. The “Shanghai” upgrade is a crucial step towards that, and could also increase ETH’s liquidity and trading volume, drawing more institutional capital into the crypto economy.

First, the “Shanghai” upgrade will make it easier for users to participate in the Ethereum blockchain validation process. Staking will become more accessible and efficient. The Beacon Chain mechanism democratizes the staking process and expands participation in the network. This is a bullish factor leading to increased network security and decentralization.

The Ethereum blockchain has already transitioned to a PoS consensus system with the “Merge” upgrade. And with EIP (Ethereum Improvement Proposal) 1559, ETH became a deflationary asset. EIP1559 introduced a predictable and stable transaction fee mechanism, allowing the burning of a portion of transaction fees. ETH will continue to be deflationary and increase in value over time.

Investment fever of institutional investors

All of this lays the groundwork for increasing adoption of crypto assets among institutional investors. We are already seeing increased interest in ETH from institutional investors looking to diversify their portfolios and hedge against inflationary pressures. The PoS transition by merging has resolved the ESG (Environmental, Social and Governance) concerns of the Ethereum blockchain that have kept many institutional investors away.

With the ability to withdraw staking, institutional investors will be able to stake and earn yield in a manner similar to fixed-rate instruments such as bonds in traditional capital markets. After the Shanghai implementation, the staking yield could be comparable to the “risk-free rate” traditional capital markets use to price assets.

Investors will be alarmed by the prospect that Shanghai may trigger a large-scale sale of ETH, including ETH that has been staked since 2020. But the data show that such an analysis is exaggerated.

About 10.3 million ETH, or 60% of the staking ETH, currently has unrealized losses, according to CryptoQuant. Meanwhile, Lido DAO, the largest staking organization, holds 30% of staking ETH with an average unrealized loss of $1,000.

Generally, when investors have big profits, there is selling pressure, but that is not the case with staking ETH today. This means that selling pressure in the ETH market could be limited in the short term.

Moreover, as reported by market intelligence platform Santiment, about 90% of all ETH supply is self-custody. Holders are increasingly moving toward self-custody after September 2022.

The trend accelerated after cryptocurrency exchange FTX collapsed in November, with ETH stored on exchanges dropping significantly. With investors taking a wait-and-see approach, immediate selling pressure is expected to ease, and future sales are expected to be limited.

various strategies

As crypto assets evolve, investors are constantly looking for new ways to collect more ETH. Lido, a liquidity staking company, currently yields 5.4% annually. There is also the option of becoming a validator on the Ethereum blockchain, but that requires 32 ETH.

Some investors opt for specialized investment systems that offer big returns in exchange for high risk and high fees, such as investing in ETH-denominated quantitative hedge funds.

All of these strategies have pros and cons, and are ultimately a matter of personal preference and risk tolerance. It is important to conduct thorough research and understand the potential risks and rewards before making an investment decision.

In any case, Amphibian Capital remains extremely bullish on ETH’s long-term prospects, both from an ecosystem standpoint and from a price and market cap standpoint.

Mr. James Hodges: Managing partner of Amphibian Capital, an ETH-based fund of funds.

｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
｜Image: Shutterstock
｜Original: Ethereum’s Shanghai Upgrade Will Permanently Alter ETH Economics