Will ETH Remain Inflationary Despite The Merge?

SEP 26, 2022 • 4 Min Read

Andrew Krohn

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🌅 Welcome!

Apple, Walmart, and Disney are all in the news for their future plans involving NFTs. Happy Metaverse Monday!

A crypto regulation bill gets vetoed in a major US state, ETH remains inflationary despite the Merge, and our Research team examines the role of liquidity cascades in financial markets.

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


🚨 In Case You Missed It

  • Apple will allow users to buy or sell NFTs via apps listed on the App Store, subject to the standard 30% fee.
  • Walmart forays into the metaverse with plans to release two experiences on the gaming platform Roblox.
  • Disney plans to hire a corporate attorney to work on transactions involving NFTs and DeFi.
  • Sifu, Co-Founder of failed crypto exchange QuadrigaCX, launches UwU Lend, a fork of Aave.
  • Crypto regulation bill in California is vetoed by Governor Gavin Newsom.

📊 Will ETH Remain Inflationary Despite The Merge?

  • In the week leading up to the Merge, the daily average ETH issued (as PoW rewards) was ~12.7K ETH. After the Merge, the daily average has reduced by 93% to ~818 ETH issued (as PoS rewards). Despite this, ETH continues to be net inflationary. Why?
  • After the Merge, the amount of ETH issued is dictated by the amount of ETH staked and the total network activity. In short, more ETH staked = more ETH issued as rewards. But, higher network activity = more ETH burned due to higher gas prices.
  • As of today, nearly 14M ETH have been staked, generating 1.7K ETH in daily issuance. On the flip side, the average gas price over the last week has only been 10-12 gwei. At those levels, only 1-1.2K ETH gets burned per day.
  • The average gas price since 2020 has been 76 gwei. Using this average, the amount of ETH burned would jump to 7.6K ETH per day. This would turn ETH net deflationary as the supply would reduce by 5.9K ETH per day, assuming the amount of ETH staked remains unchanged.
  • Many have speculated that ETH’s new supply dynamics would alleviate massive sell pressure, prompting an immediate positive impact on market price. But even with the Merge erasing nearly $20M of sell pressure, this theory has yet to materialize.
  • Outside of macroeconomic influences, ETH’s recent woes can also be attributed to factors derived from Merge hype. The front-loading of demand, market positioning of traders, exchange inflows, and decreased on-chain activity are also driving factors.
  • For more on ETH’s post-Merge fallout, Delphi members can read our latest Market Insights report here.

⚡ Liquidity Cascades & The Evolution of Financial Markets

  • Markets have continually changed throughout history. From the ticker tape readers of the early 1900s, to the now infamous rise of high-frequency trading, only the ever-evolving nature of financial markets has remained consistent.
  • As markets and the dynamics at play continue to evolve with advances in technology, many of the most prominent frameworks for thinking about these markets are now becoming redundant.
  • Perhaps one of the most important changes over the last two decades has been the frequency in which sudden drawdowns (also known as liquidity cascades) have impacted financial markets.
  • Financial markets have always had risks of sudden sell-offs. Many have theorized that as markets get more mature and greater in size, they will tend to exhibit lower volatility profiles. However, this has not been the case.
  • We have seen an increase in the frequency of liquidity cascades occurring within financial markets – a direct contradiction to prevailing theory. But even while experiencing more frequent liquidity cascades, equity markets have benefitted from one of the strongest bull markets in history. So how do we make sense of this?
  • Many people attribute this behavior to three main factors:
    • Increased use of accommodative monetary policy,
    • The rise and prominence of passive investing and its implications, and
    • Fickle liquidity in the face of increasing margin requirements.
  • Interestingly, the common denominator behind all of these risk factors is liquidity. These three factors come together to form the “Market Incentive Loop.” This refers to a real-world application of the reflexive feedback loops discussed in our previous report on reflexivity and the fall of the Efficient Market Hypothesis.
  • For more on liquidity cascades, Delphi members can read our Delphi Pro report here.

🐣 Notable Tweets

Exchange Deposit Volume as an Indicator

Expirable Futures on Contango

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