The Merge is a substantial change in supply / demand forces most people underestimate.
Multiple $Ms of daily sell pressure on $ETH will be replaced by buy pressure. Every day we will need new sellers to prevent the price from going... up!
Let that sink in.
More details: 🧵👇
If The Merge happened today, ~$10M of daily sell pressure on $ETH would be replaced by ~$8M of buy pressure.
While we now require ~$10M of new money every day to keep the price flat, we would need ~$8M of existing holders to sell their ETH to prevent the price from going up.
Before we get to these calculations, let's clarify what we are doing and how.
Objective: We want to see the impact of The Merge, if it happened today.
Parameters: There are facts and assumptions.
If you want to skip the theory, just scroll down until you see a table with data.
Facts:
F1. ETH Issuance in PoW
F2. ETH Issuance in PoS
F3. Daily Fee Revenue on Ethereum
F4. % of Fee Revenue that Gets Burned due to EIP-1559
Assumptions:
A1. % of Daily Issuance Sold by Miners (PoW)
A2. % of Daily Issuance Sold by Stakers (PoS)
F1. ETH Issuance in PoW
Every day ~13,200 ETH is issued to miners on PoW chain and ~1,590 ETH to stakers on PoS chain. ~14,790 new ETH daily corresponds to 4.5% annual issuance rate.
At the Merge block, both chains 'merge' into one and PoS era begins.
F2. ETH Issuance in PoS
After the Merge the issuance rate is dramatically reduced as PoW is removed from Ethereum and only stakers are rewarded for producing blocks.
The drop from ~14,790 ETH to ~1590 ETH represents 90% issuance reduction. It's equivalent to 3 $BTC halvings.
F3. Daily Fee Revenue
All the Ethereum users pay transaction fees - they represent the revenue of the Ethereum protocol.
Daily Fee Revenue varies depending on the activity on Ethereum (manifested in gas fees). The daily average based on last 7 days is about $10M.
F4. % of Fee Revenue that Gets Burned
A part of total fees paid by users go to block producers and a part gets burned (EIP-1559).
Regardless of the analysed time period, the burn percentage has been pretty consistent - it's about 85% of the total fees.
A1. % of Daily Issuance Sold by Miners
Miners are usually businesses aiming to generate a profit from operations and not to accumulate more crypto. They also have high fixed costs like electricity, rent and hardware so they are often forced sellers.
They sell ~80%?
A2. % of Daily Issuance Sold By Stakers
Stakers don't have any substantial expenses to cover. They are also required to stake ETH which means they most likely have conviction in this asset. Their motivation to stake is usually to accumulate more ETH.
They sell ~10%?
Having covered facts and assumption, let's now discuss how they impact the price of ETH.
In short, it's all about supply and demand that repeat consistently - @NorthRockLP calls them 'structural' forces and makes a strong case why they drive prices in the long term.
What are structural supply and demand for ETH?
S. Supply: Sell Pressure from Miners / Stakers
It's simple. They get new ETH issuance and sell a portion of it consistently.
S. Demand: Fee Revenue Burned
It's trickier. Why would burned fees represent structural demand?
Fees paid on Ethereum come from users who need to periodically buy their tokens back to maintain their allocation to ETH and/or to continue using Ethereum.
If we assume status quo in terms of investors in ETH and usage of Ethereum, total fees = total buyback.
But total fees don't represent structural demand.
A portion of fees go to miners / stakers and they sell them on the open market. The users' buyback in this case is just a change of hands: users => block producers => users.
A story changes dramaticaly with the fee burn.
Fees that get burned are removed from the supply. The users' buyback is no longer a change of hands because burned ETH can't be bought back.
Therefore, a portion of total fees that gets burned is equivalent to new money flowing into a system.
Burned Fees = structural demand.
Let's confront structural supply and structural demand on daily basis.
PoW:
Daily Sell Pressure: $19M
Daily Buy Pressure: $8.5M
Net: $10.5 of SELL PRESSURE every day
PoS:
Daily Sell Pressure: $0.3M
Daily Buy Pressure: $8.5M
Net: $8.2M of BUY PRESSURE every day
If The Merge happened today, ~$10M of daily sell pressure on $ETH would be replaced by ~$8M of buy pressure.
While we now require ~$10M of new money every day to keep the price flat, we would need ~$8M of existing holders to sell their ETH to prevent the price from going up.
"But ser, assuming that miners sell 80% of their issuance and stakers only 10% is just cherry-picking to confirm your thesis".
I made calculations for other %s too. The outcome of the Merge is always a net buy pressure even if stakers decide to sell 100% of their issuance.
Summing up, the Merge has a tremendous impact on structural demand and supply forces.
Multiple $Ms of daily sell pressure get replaced by buy pressure. This fundamental shift can drive price appreciation over the long term even without new buyers flowing in.
This whole analysis focuses only on fundamentals. Some will respond in comments that it doesn't matter because narratives drive prices more than fundamentals.
But remember: as long as Ethereum is used, there is a daily net buy pressure on ETH.
It's a good narrative, isn't it?
I will soon share some sensitivity analysis to see the impact of the higher fee revenue or the amount of staked ETH.
If you like this type of content, follow me to not miss it.
Do you want to learn more about the Merge? Read this: twitter.com/korpi87/status/1513459657381068812