1/ At @PanteraCapital we’ve observed that crypto is one of the most fast-moving and multidisciplinary technologies today. In such a complex sector, data-informed decision-making is critical.
2/ However, something that’s often overlooked in crypto is Demand Elasticity—how user behavior changes with price shifts. Let's put our ECON 100 hats on and dive into why this matters. 🎩🧵
3/ In governance forums, Arbitrum DAO has recently debated “flipping the fee switch.” However, the big question on everyone’s mind is: will users stay or leave? 🤔
Understanding demand elasticity helps us predict users’ reactions.
4/ Measuring demand elasticity isn't easy. Price fluctuations happen due to supply and demand changes, making it hard to determine what's influencing what. Economists often say "you don’t reason from a price change alone." 📈
Instead, we need natural experiments—🔍
5/ Pantera Research Lab and Dongryeol Lee, a Pantera Catalyze Fellow, explored an experiment for Arbitrum.
They found that Arbitrum users showed a price elasticity of -1.11. For every 1 unit gas fee increase, demand fell by 1.11 units. This suggests users are "unit elastic." 📉
6/ But there's more! The EIP-4844 implementation slashed gas fees for Layer 2s by 10-100x. Such drastic changes likely alter elasticity
So Pantera Research Lab tested if post-EIP-4844 demand elasticity differed; Lee's estimate is now a lower bound, not precise. 📊
7/ Although it might seem disappointing that empirical work on elasticities becomes a "lower bound," this is part of good analysis! Continuous research and updates are vital. 🔄
8/ Stay updated with Pantera Research Lab's latest findings. Follow our Head of Research @stephensonhmatt and Research Engineer @0xallyzach who are pushing the boundaries of crypto research! 🧠🚀
9/ Check out the full article for an in-depth look at evidence-based pricing in crypto: 📖
open.substack.com/pub/veradiverdict/p/demand-elasticity-on-arbitrum