ETH Supply Turns Net Deflationary Since the Merge

🌅 Welcome!

Nike will allow users to create and collect virtual items on their new web3 community platform. Meanwhile, CZ wants to form an association of large crypto players to communicate with regulators worldwide.

Today, we examine ETH supply turning net deflationary and our Research team dives deep into Pyth, a new player in the oracle sector.

This is the Delphi Daily. Let’s dive in.

🚨 In Case You Missed It

• Nike launches .SWOOSH, a community platform that allows users to collect and co-create virtual items.
  
• Circle announces that Apple Pay users can now pay with USDC using Circle’s API integration.
• Changpeng “CZ” Zhao, the CEO of Binance, wants to set up an association of the largest crypto players to communicate with regulators worldwide.
• BlockFi denies rumors that majority of its funds were held on FTX. Withdrawals continue to be paused.
• Visa announces that it will end its debit card program with FTX.

📊 ETH Supply Turns Net Net Deflationary Since the Merge

• Total ETH supply has turned net deflationary since the Merge occurred on Sep. 15. Since then, total ETH supply has reduced from 120.521M to 120.515M, after reaching an all-time high of 120.533M on Oct. 8.
• Median gas prices on Ethereum have remained at elevated levels after spiking to reach 35 Gwei on Oct. 10. This was the highest level reached since the beginning of July.
• Significant market events such as the popularity of the XEN token mint, Vitalik’s tweets that spurred multiple meme tokens, and the collapse of FTX have led to increased on-chain activity and gas prices.
• This has led to more ETH being burned than minted. Over the last 30 days, the total ETH supply has reduced at an annualized rate of -0.14%. Prior to the Merge, the annual inflation rate was approximately 4.1%.
• While recent market events have spurred significant on-chain activity, they do not compare with the exuberance typically experienced during a bull market. During 2021, gas prices were frequently over 100 Gwei.
• Many have pointed to the deflation caused by recent market events as evidence that a sustained increase in on-chain activity during the next bull market can lead to massive deflation in ETH.

⚡ The Oracle of Pyth

• Pyth is a newcomer to the Oracle sector, launching last year and focusing on Solana. Recently, Pyth has started branching out to other chains.
• Pyth takes a different and innovative approach to oracles, getting information only from first-party sources, without the use of data aggregators in the middle.
• Trading firms, market makers, and exchanges are among a small group of users that have access to timely and material market information. Pyth has these participants publish prices directly to Pyth themselves.
• By doing this, Pyth removes the costs that come from data aggregation and significantly reduces the latency from off-chain price discovery to on-chain reporting, leading to more-timely and higher-quality prices.
• Other oracles like Chainlink do have some first-party run nodes, but they also rely on aggregators such as CoinMarketCap and CoinGecko.
• Pyth also introduces the concept of confidence intervals which gives protocols more information on price uncertainty, a tool particularly important in times of high volatility/low liquidity.
• Using confidence intervals requires additional considerations from DeFi protocols, but offers advantages. Protocols can choose which level of conservativeness or aggressiveness they’re comfortable with by determining their own confidence intervals.
• To illustrate, say the aggregate price of ETH is $1,500 +/- $5. A range between $1,485-$1,515 equates to a 99.7% probability of being true.
• A conservative borrow/lend protocol may value collateral at the lower end of the range ($1,485), reducing the amount users can borrow when taking out a loan.
• Alternatively, a more aggressive lending protocol can value the collateral at the higher end ($1,515) to avoid unnecessary liquidations. Pyth has 3 main stakeholders: consumers, publishers, and delegators.

• Consumers are users of price feeds, predominantly smart contracts and DeFi protocols. In Pyth v1 on Solana, protocols receive price feeds for free.
• For protocols outside Solana, they pay small “on-demand” fees to retrieve prices from Pythnet (v2) through Wormhole. Consumers will be able to pay insurance fees once the PYTH token is live.
• Publishers publish prices and receive PYTH token rewards and 20% of data fees. They will need to stake PYTH tokens for products they price, and their stake will be subject to slashing if they produce an error.
• Delegators will stake PYTH tokens to price feeds to determine publishers’ weights and earn insurance fees from consumers. They can be slashed if the feed they stake on produces an error.
• Delegators play an important role in determining the aggregate prices Pyth reports. Delegators weigh specific publishers which affects how much influence a publisher has on a price feed. In return, delegators earn 80% of the fees consumers pay.
• Different markets will have varying levels of risk and thus fee income/yield. It is up to delegators to decide which markets to stake on.
• For more on Pyth, Delphi members can read our Delphi Pro report here.

🐣 Notable Tweets

History of FTX

The Definitive Thread on FTX

I met SBF before FTX started, and witnessed their rise and fall. I can’t stand @nytimes’s puff piece.

If anyone wants to know what happened, send them this.

-Jason Choi (@mrjasonchoi) Nov 15, 2022

Tips for Proper Due Diligence

As an LP in a few funds and a GP myself, I am becoming disgusted by the *due diligence* being done by folks. I continue to meet investors who lack the basic knowledge of what diligence should be. Here are a few things my time at Skadden, @KKR_Co, and GS taught me re: diligence…

-stevieis… (@steviemctweets) Nov 14, 2022