Bernstein: Small Economic Recovery Would Make Ether's Tokenomics Favorable

ETH could reach 4% deflation at peak user activity, a report from Bernstein said.

AccessTimeIconNov 1, 2022 at 11:11 a.m. UTC
Updated Nov 1, 2022 at 1:38 p.m. UTC
10 Years of Decentralizing the Future
May 29-31, 2024 - Austin, TexasThe biggest and most established global hub for everything crypto, blockchain and Web3.Register Now

Ether (ETH), the native token of the Ethereum blockchain, needs “very little recovery in economic activity for the token economics to turn favorable,” Bernstein said in a research report, and that creates a strong story for the cryptocurrency’s “asymmetric growth model.”

Ethereum’s transition to proof-of-stake (PoS), a software upgrade that was called the Merge, substantially improved ether’s tokenomics with around 90% lower emissions, possible deflation and more than 5% staking yields, according to the report published Monday.

With the success of layer 2 blockchains, ether can position itself as a category leader within the digital-assets market, the report added.

The Merge was the first of five upgrades planned for the blockchain and involved the shift from a proof-of-work (PoW) method of validating transactions and securing the network to a more energy-efficient PoS consensus mechanism. Layer 2s are separate blockchains, built on top of layer 1s that reduce bottlenecks. A layer 1 network is the base layer, or the underlying infrastructure of a blockchain.

Bernstein estimates that ETH’s deflation could reach about 4% annually, noting that current burn activity is being led by decentralized finance (DeFi), non-fungible-token (NFT) exchanges and token transfers.

The broker estimates that the break-even level of daily fees needed to fully offset gross ETH issuance is around 2,100 ETH, which is where current levels stand, meaning that there is a small reduction in the supply outstanding.

“Ethereum’s modular approach to scaling will improve transaction speed and affordability,” the note said, and lower fees will allow more users to come onto the blockchain.

The layer-2 scalability road map will lead to the launch and adoption of Ethereum-compatible zero-knowledge (ZK) rollups, and Bernstein forecasts monthly active users for the Ethereum stack will jump to about 500 million by 2032 from around 8.5 million now.

ZK-rollups are Ethereum layer 2 protocols that process transactions separately from the main network to help increase speed and lower fees.

Disclosure

Please note that our privacy policy, terms of use, cookies, and do not sell my personal information has been updated.

CoinDesk is an award-winning media outlet that covers the cryptocurrency industry. Its journalists abide by a strict set of editorial policies. In November 2023, CoinDesk was acquired by the Bullish group, owner of Bullish, a regulated, digital assets exchange. The Bullish group is majority-owned by Block.one; both companies have interests in a variety of blockchain and digital asset businesses and significant holdings of digital assets, including bitcoin. CoinDesk operates as an independent subsidiary with an editorial committee to protect journalistic independence. CoinDesk employees, including journalists, may receive options in the Bullish group as part of their compensation.

Author placeholder image

Will Canny is CoinDesk's finance reporter.


Learn more about Consensus 2024, CoinDesk's longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to consensus.coindesk.com to register and buy your pass now.