How the Ethereum Security Model Will Make It a Unique Asset

Ethereum is making the headlines this week as the highly anticipated Merge is deployed on Ropsten for final testing phases. The future of the network and underlying asset after this event will put it in a unique position.

Ethereum’s security and monetary model could make it the most unique asset on Earth after the Merge. That is according to Ethereum analyst ‘@econoar’ who has delved into the post-Merge figures and network economics.

ConsenSys co-founder Joe Lubin first mentioned Ethereum’s supply and issuance properties in 2014 when he described it as a “disinflationary currency.”

The balance comes with network security which will soon be governed by staking. There has to be enough reward for stakers for them to continue securing the network. Presently, around 4.8 million ETH are issued per year under proof-of-work which is the cost of securing the network, the researcher noted.

Ten years in the making

The introduction of EIP-1559 in August 2021 was a revolutionary step to bring down issuance inflation by burning some of the network fees. At the time inflation was around 4%, today it is 2.8% but often falls below that when more ETH is being burnt.

The shift to proof-of-stake, which could happen as early as August, has been the focus of the Ethereum community since it launched. “It’s much easier to calculate how much “security budget” is needed under proof of stake, as stakers are putting up ETH itself to secure the network,” the researcher noted.  

With 12.8 million ETH currently staked, it will be paying out around 600,000 ETH per year, instead of 4.8 million under the current PoW model – which is around “88% less in sell pressure,” he added. On top of that, stakers are currently earning around 4.3% APY.

A simulated Merge situation calculates that Ethereum issuance will shrink by 1.3% per year at the moment. This is a dynamic figure that will increase (decrease in terms of ETH supply) under heavy demand as more fees are being burnt.

“This security model has been 10 years in the making, over countless discussions among community members. ETH will soon be deflationary while the network is sufficiently secure.”

The question was asked whether there was another deflationary asset that yields 4-5% per year and is fully secured – there doesn’t appear to be one making Ethereum quite unique.

ETH price outlook

At the moment, nothing is reversing the crypto market downtrend with more red across the boards. Ethereum has fallen marginally on the day to trade at $1,792 at the time of press.

ETH has consolidated over the past fortnight but is down 23% over the past month and now sits at 63% off its November peak.

In all likelihood, ETH prices will fall further if a ‘capitulation wick’ flushes out the last of the weak hands as it has done in previous bear markets.