- According to Adam Cochran, Ethereum 2.0 will attract large investments from institutions and retail investors due to the attractiveness of the staking rewards.
- The high demand for Ethereum will trigger a supply shock that will drive up the ETH price.
Analyst and former marketing director of Dogecoin, Adam Cochran, published an article on the potential of Ethereum 2.0., arguing that Ethereum 2.0 will be the engine of unprecedented “economic change” once it is launched.
As CNF reports, Ethereum is currently in a transition phase to move its consensus algorithm from the proof of work to the proof of stake. A few days ago, the “Topaz” testnet was launched which will be active for about 3 months and is supposed to be the last big milestone (besides a multi-client testnet) before the ETH2 launch. Topaz is using the same configuration that the Ethereum 2.0 Mainnet will probably have when it is launched. If the results of the network test are positive, Phase 0 is expected to be released on July 30th, although the date is currently pending.
Ethereum will suffer a supply shock due to high demand
Cochran claims in his article that the start of phase 0 will be the catalyst for the “next economic change”. According to him, there are 7 reasons that will drive this change. One is that large investors will be attracted by the benefits of staking as the rewards are stable and will have a profit margin of 3% to 5%.
To reach this level, Cochran says, the validators will have to invest between 10 and 30 million ETH. However, Cochran considers it unlikely that this will be the case in the early phase of Ethereum 2.0. As Vitalik Buterin recently explained, the rewards could be even higher if the participation in the initial phase is rather low and interest rates will be even higher as a result. Regarding this, Cochran said:
(…) roughly 10% — 30% of all circulating Ethereum would need to be locked up before the network is below the return rate that is targeted by large rent seeking whales.
When the ETH level starts to increase, according to Cochran, a supply shock will occur. Therefore, there will be a direct impact on the price of Ether (ETH). A supply shock is typically bullish for the price of an asset. A shortage of the asset is generally causing a rise in its price.
According to Three Arrows Capital’s CEO, Su Zhu, this could even occur before the launch of Ethereum 2.0 phase 0. Zhu believes that if the EIP-1559 proposal will be approved, so that the supply shock will occur due to the burning of ETH with every transaction processed. Then, investors will want to invest more money in ETH to increase their profits by staking. This will create a FOMO effect:
That creates FOMO among the retail investors who typically react late to any investing stimulus (they buy part way up the up-swing, and sell part way down the down-swing). Retail investors, especially those in FOMO mode tend to be heavy-handed and over-extended. They’ll hammer in market buys to make sure they don’t miss out.
Cochran claims that unlike the FOMO effect of the 2017 bull market, this time it will happen faster. Investors will not have to go through the usual trade controls (KYC/AML). In the short term, Cochran expects the supply shock to join a demand shock due to ETH’s that will be locked in as part of the Ethereum 2.0 launch. The price will then go to the moon, according to Cochran.
Ethereum 2.0 in the long term
On the other hand, Cochran is finding bullish reasons for the Ethereum in the long run. The analyst believes that the new features of the Ethereum 2.0 will improve the interoperability of the network. By improving its scalability, in addition to the possibility of staking, there will be more developers willing to build dApps on the Ethereum network. Developers will be able to deliver a higher-capacity product with greater commercial viability. As a result, whales will seek to enter the market and buy more ETH:
This means each time a whale adds a node they are diluting the potential earnings of all the other rent seekers, who if they want to continue to earn the same rate also need to stake more. This creates a race condition. Where rent seekers have to buy more to maintain their earnings rate. But, this in turn creates scarcity, increasing the price, which in turn results in more whales buying to stake.
All in all, Cochran’s outlook is highly bullish. However, the success will also depend on the progress made by the testnet and the subsequent advances that will allow a smooth launch of Ethereum 2.0. In the past, Ethereum had to deal with a lot of delay which were criticized harshly be the crypto community.