Wanted to pose this discussion with you all. Objective is to really think hard about how good of an investment the eth token is.
Most agree that Ethereum is the preferred layer 1 in the crypto space and many people assume that means you should buy it. However, you can be bullish on the project but not the token. There is obviously a lot of bullishness around eth being “ultra-sound money” and deflationary over time but I see two issues:
Vitalik openly says he wants more layer 2 adoption. If say Matic controls most of the volume in a few years and is heavily adopted, what really happens to the demand for the eth token? Currently, even with POS, it actually generates protocol revenue which goes straight to miners (POW) or is burned (POS) to cause it being more valuable. If Matic abstracted all that demand away, why should eth token be much more valuable than it is today?
POW vs POS. In a POW model, things were expensive but people didn’t care with a strong bull market so there was real revenue creation but a good economic model. In POS, the tokens get burned instead. This seems great at first glance but its hard for an economy to function without inflation. Ethereum is still trying to be “money” and not a security after all.
The best thing I found on this was a hackernoon article discussing some of this:
https://hackernoon.com/ethereum-tokenomics-2021-impact-of-eth2-eip-1559-and-l2-scaling-solutions-on-demandsupply-gx5034tw
“Dampening effect: less on-chain activity and transactions per ‘unit’ of dApp activity leads to less base fee burnt under EIP 1559, dampening EIP 1559’s deflationary effects. Counterbalance effect: lower fees provided by scaling solutions attracts new price-sensitive users, increasing dApp participation. This increase arguably counter-balances the effect of less base fee burnt per ‘unit’ of dApp activity. Overall, the ‘true demand’ on the Ethereum network may remain roughly the same.
New activity effect: it can be argued that the nature of some scaling solutions would make the movement of new types of economic activity on Ethereum feasible. For example, state channels could be used for micro-recurring payments which is otherwise illogical with high Layer 1 fees. In bringing new types of activity onto Ethereum that still eventually pays some fees that gets burnt, supply could further reduce.”
From this, it seems like it’s just a guess that eth will gain enough popularity to become so valuable its deflationary, even with layer 2s. Even so, how will deflation impact the actual startup projects that are building on the layer 1 or layer 2s in this new eth economy?
TLDR: Eth token itself seems like it’ll be less valuable over time to me but I want to know what others have to say beyond that it’ll be deflationary. This is my first post so hope its productive and thanks in advance!
