Do you hold eth or are you considering Picking up some well then this is a Video you don't want to miss you'll get A breakdown of what's currently going on In the ethereum ecosystem I'll analyze The Bull and Bear cases for eth and give You some predictions for what might Happen over the next few months so sit Tight and enjoy Full disclosure guys I hold eth in my Personal portfolio and if you want to Know what else I Hold sign up to my Weekly Newsletter Now it's been four months since my last Ethereum update and a lot has happened Since both for ethereum and crypto in General my last video landed just after The completion of the merge ethereum's Biggest update ever which went off Without a hitch no downtime no Cataclysmic collapse or validator Attacks just a well-planned and Meticulously executed hard Fork and you Wouldn't have immediately noticed that There was anything different with the Blockchain that's because the update Didn't have an impact on its scalability It was a change to ethereum's consensus Mechanism and not a scalability Improvement more about that later indeed Given the lack of drama post merge it Turned out to be a sell the news event Where the price of eth retraced shortly Afterwards but concerns did arise in the
Wake of the merge and they centered Around regulation and centralization so Regarding regulations there were Concerns around whether the SEC would View the new proof-of-stake eth as a Security that's because SEC chairman Gary Gensler was reported as saying that The staking model ticked one of the Boxes of the Howie test quote From the coin's perspective that's Another indicia that under the Howie Test the investing public is Anticipating profits based on the Efforts of others Now for those unfamiliar the Howie test Is what the SEC uses to determine Whether an asset is a security link is Below if you want to learn more about it So this was clearly a concern for eath Holders as there's no doubt that a Security designation would have Cataclysmic impacts for the ecosystem And speaking of ethereum and the SEC one Of the reasons why eth was once thought Not to be a security was because Ethereum was quote sufficiently Decentralized however the move to proof Of stake may have now called that into Question due to validator centralization That's because in the wake of the merge Research by nanson analytics showed that 64 of staked eth was controlled by just Five entities Now this centralization can be a big
Problem for a number of reasons which I Won't go into here you can watch my Video on decentralization which will be In the description The tldr though is that validator Centralization means that it makes it Easier for a small number of validators To ultimately control the network and We've had a flavor of that in the way Certain validators have chosen to censor Transactions that involve the tornado Cash Smart contract which was sanctioned Last year by the office of foreign Assets control or ofac That means that the blockchain is not Censorship resistance something that is Essential for broader Trust as you can See over here on Mev watch the vast Majority of blocks that have been Propagated since the merge have been Ofac compliant in other words validators Who use Mev boost relays are choosing Those that automatically censor any Transactions that involve the tornado Cash Smart contract right now at least 71 percent of all blocks are ofac Compliant why does this matter Well there's the slippery slope argument For one if validators are willing to Bend the knee to these requirements from Ofag does that mean they'll do the same For future enforcement actions will they Ever take a principled stance So it's clear that the merge threw up a
Few challenges but measured against Those things that could have gone wrong These were minimal however the next big Ethereum update is almost upon us and it Could make or break the network Now despite the fact that ethereum made The transition to proof of stake the Merge itself did not allow validators to Withdraw their staked eth not only that But they also could not withdraw any Staking rewards either This will only be possible after the Shanghai upgrade Formerly called EIP 4895 this is Tentatively scheduled to take place in March I say tentatively because there Was recently disagreement from a vocal Minority of ethereum core devs who Claimed that the upgrade could be moving Too quickly now this happened on an all Core developers call a week ago link Below if you want to have a listen The heart of the issue it seems is the Decision to forego a technical Adjustment to Shanghai that will expose Ethereum to unnecessary quote technical Debt that is devspeak for potential Future headaches created when Prioritizing speed over the release of Perfect code in this case it was the Decision to not make eth withdrawals Compatible with simple serialize SS said Which has been called the quote future Of ethereum encoding I'll leave a link
To the docs on SS said in the Description on the other side of the Debate meanwhile were some devs who Questioned whether it was certain that Ethereum would be moving towards SS said In the end though it appears that the March timeline is still in mind the Developers are mindful of the fact that The community especially those who've Been staking would like the opportunity To withdraw some of their eth The release of the public test net is Also likely to give an indication of how The upgrade is going to go down it is Scheduled for some time in February Developers have also created a shadow Fork of the beacon chain and are testing Numerous different withdrawal conditions Now one of the big concerns around the Upgrade is that it will mean that all The eth that's been locked up will hit The market Since the staking smart contract Launched in December 2020 16 million eth Worth over 25 billion dollars has been Deposited into it at the time of the Beacon chain launch eth was trading at 600 meaning there will be a lot of early Stakers who may want to take profits There's also a strong chance that many Of those who have staked are facing Financial difficulty they may be forced To exit their eth positions the moment They can to meet liabilities as you know
The worst kind of seller is a forced Seller so will this selling pressure Crash the price of eth Well not necessarily and that's because Not everyone will be able to withdraw Their initial staked eth immediately It's a bit of a misconception that the Eth devs have addressed over here in the FAQ section of the merge if you want an Even more in-depth technical overview of The withdrawal process then there is Also this FAQ drawn up by core Dev Tim Baco essentially there are two types of Withdrawal requests the first is a Partial withdrawal which is withdrawals Of any eth earned as staking rewards but Leaving the initial 32 each state to Become a validator in place basically Withdrawing the earned interest but not The initial deposit then there are full Withdrawals which will see validators Withdrawing all of the eth they've put Up in the staking contract plus the Rewards it has accrued Now those partial withdrawals are due to Happen automatically assuming that the Correct withdrawal credentials are used These will happen as a quote round robin Which will average One Sweep a week The amount that's swept in these partial Withdrawals is unlikely to have that Much of an impact on the markets Moreover the withdrawals have been Designed so as not to place too much of
A burden on the network however what Most people are worried about are those Full validator exits well these will be Rate limited by the protocol this is Done in order to ensure that there isn't Too much of a change in the validator Set before the APR can adjust moreover It prevents a situation where a Validator commits a slashable offense And tries to exit their entire stake Within the same Epoch before being Slashed now the rate limit itself varies Depending on how many validators there Are you can see this very helpful table Over here by Tim in his FAQ Currently there are around 504 000 validators meaning that the rate Limit is seven validators per Epoch Given that an Epoch is about every 6.4 Minutes that means there can be a Maximum of 1575 validators exiting per day That means a Max rate of 50 400 each per Day So what all of this means is that the Max selling pressure that eth could Endure should all these validators want To exit is about 80 million dollars per Day assuming a price of sixteen hundred Dollars per eth now the broader question Is whether such sustained selling Pressure is likely to move eth's price Lower well the CMC Market data for eth Shows the market depth across a number
Of different exchanges the negative two Percent depth averages out to about 10 Million on the top 10 exchanges by Volume that means if all those Validators were to dump their eth on one Exchange at the same time on exit that Theoretically could lead to a fall in Price however this relies on several Pretty dubious assumptions firstly you Must assume that they all sell at the Same time unlikely and that they will All use the same exchange very unlikely Moreover you'll have to assume that none Will use OTC desks something that nearly Anyone with significant size will want To do specifically because of the Aforementioned Market impact and finally This all assumes that it's not going to Be met by equal or even greater buying Pressure Let's not forget that one of the ways in Which the ethereum protocol maintains a Stable validator set is by staking Rewards that is APR adjusting up when The number of validators drops rapidly So if the reward rates start picking up This could act as a counterbalance force That could at the very least entice some Validators to stay however it's equally Likely that it encourages those not Staking to buy eth in order to deposit Into the staking contract There's also the argument that a lot of Users have been sitting on the sidelines
That's because if you were to compare The staking ratio percentage staked of Ethereum to those of many other layer Ones it's much lower it's sitting at About 14 compared to 72 for cardano 70 For Solana and 62 for Avalanche so Shanghai could give all those users that Had been sitting on the sidelines the Confidence to finally start staking Their eth they know that they'll have The ability to finally withdraw and Hence won't have to deal with the Uncertainty of having their eth locked Up for an extended period of time This is especially the case for those Institutions that have been looking for Opportunities for Native yield on Crypto's predominant layer 1. if there Is enough institutional Capital that has Been waiting for this moment then it Could help to counteract those who may Be looking to withdraw as an aside this Could be a massive Boon for those liquid Staking derivative projects that's Because these projects give those users Who don't have 32 each the opportunity To still stake and earn a return more About those in the description Now it's not just the potential staking Rewards and Native yield that could Drive institutions to invest in eth There are other really important changes That have happened as a result of the Merge which add to the investment case
When it comes to institutional Investment cases for eth much could stem From the fact that proof-of-stake Ethereum is a lot more environmentally Friendly than proof of work was by some Estimates post merge ethereum is using 99.5 percent less energy than before now Energy use has long been a source of fud That has likely caused many ESG Focus Investors to hold off on deploying their Capital more about ESG in the Description however when it comes to a Proof-of-stake ethereum no such argument Can be made it is a lot more green than Any sort of proof of work blockchain That requires miners to Hash blocks so All those ESG conscious investors may be Sitting on the sidelines waiting for More stability in the crypto Market Before they start allocating to those Assets that they think have better Ratings Beyond investment mandates another Reason why eth could be an attractive Asset is its updated monetary economics In case you missed it eth issuance has Been negative over the past few weeks I.E deflationary that is thanks to EIP 1559 which introduced base fee Burns to The ethereum protocol now I've talked About this in much greater detail in Previous videos and they are of course Linked to below now since about two Weeks ago there has been sustained
Deflation of about .007 per year I.E the supply is Shrinking at an annual rate of 0.7 basis Points for context bitcoin's inflation Rate is averaging around 1.7 right now Yes that will Trend towards zero over Time but it will never go deflationary That's not a slight on bitcoin of course It's still hard money with a protocol Defined Supply but it's quite different From eth's current monetary dynamic Amex This deflation is important because of The fundamentals of supply and demand If there is less of a valuable asset to Go around then the price of said asset Is likely to have to adjust upwards if Demand stays the same or increases And to the best of my knowledge there Are no monetary assets that currently Exist which are deflationary that's why So many people have called East Ultrasound money speaking of which I Encourage you to take a look at the site Ultrasound Dot money it has tons of Information about the current burn rates And also allows you to adjust those Rates and see what impact it has on a Number of other staking variables it is Pretty lit As you'll see the burn rate is driven by Two main factors the staking percentage And base gas price higher staking Participation means a higher issuance While a higher Base gas fee means a
Higher burn however the latter generally Has a greater impact than the former now You can see what that looks like over Here The base gas price is dynamic and will Adjust based on previous block size and I'll link to the eth docs below so you Can read a bit more about it if you want To but the tldr is that the more Network Demand there is on ethereum the higher The base gas fee and so the higher the Burn so if you're of the view that the Ethereum network is likely to continue Expanding over the coming years then you Can also assume that the burn rate will Pick up as well This may be counteracted somewhat by the Proliferation of ethereum layer twos Which is set to continue in 2023 however As long as these l2s have to settle on The main chain there will be Network Fees payable quite simply eth burn rates Are likely to continue exceeding Issuance in the longer term ultrasound Indeed All right then so when Moon Well it's a lot more nuanced than that Unfortunately that's because there are a Number of risks that lie ahead firstly There's the general crypto and macro Environment as impressive as ethereum's Upgrades are they won't move the price If the broader environment is in the Toilet although markets have improved
More recently I think it's a bit Premature to expect this rally to Continue unabated There are the broader concerns around East's regulatory status too well I Think that a security designation is Unlikely it's a tail risk we have to Account for And another tail risk is of course Centralization while many seem to have Dismissed the sanctioning of the tornado Cash Smart contract we cannot ignore the Potential for nefarious manipulation by The powers that be that's why it's vital That once withdrawals are enabled more Independent validators get on board the Future of ethereum's decentralization is In our hands and I'm also not oblivious To the fact that ethereum has Competition from other layer ones many Are well-funded and are growing out Their ecosystems The proliferation of evm compatible Chains means that they are able to Easily capture devs and dapps from the Ethereum ecosystem So there are a lot of risks for eth2 the Downside however despite all of this I Remain a long-term Heath bull There is a reason that it makes up such A large proportion of my portfolio and Is my predominant layer 1 play I for one Don't think that the thud created around The withdrawals is warranted as I've
Shown we would have to rely on numerous Assumptions around those withdrawing and Selling for the theory of a market dump To make sense it's just incredibly Unlikely that all of these assumptions Will play out indeed I think that we're More likely to see more Capital flooding Into eth as a result of the enabled Withdrawals remember that the staking Percentage is relatively low compared to Many other layer ones All that capital is waiting to be Deployed in unrestricted staking but I'm Looking beyond the Shanghai upgrade we Are only at the first stage of Ethereum's ambitious roadmap next up is The surge which will take scaling to the Next level with Shard chains All of these updates will help to Supercharge Network use leading to Higher burn rates and a more Deflationary currency beyond that Ethereum's developers are constantly Looking for solutions to help overcome Some of its biggest challenges for Example more recently vitalik proposed Potential solutions to the quote largest Remaining challenge for ethereum and That is privacy the concept of stealth Transactions could help anonymize eth And make it much more of a real Anonymous peer-to-peer digital cache so All of these improvements to ethereum's Protocol will encourage broader Network
Use leading to more eth Burns in the Long run in terms of price predictions I'm not going to give you any false hope I don't control the macro environment And I don't want Jay Powell and his Buddies at the FED to rug me however I Think it's likely we will see a higher Eth price by the end of the year and in The throes of the next Bull Run it seems Entirely realistic that deflation should Force eth above its all-time Highs but Remember these are just my own opinions Folks and I know financial advisor dyor It will set you free and that is it from Me for today lots of cool stuff down in The description though do check it out Thanks so much for watching and I'll see You next time
