Staking Will Turn Ethereum Into a Functional Store of Value
(Source: coindesk.com)

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(Original link: coindesk.com)

Please consider using a different web browser for better experience. Please enable JavaScript in your browser for a better site experience. Staking Will Turn Ethereum Into a Functional Store of Value May 20, 2020 at 12:03 UTC Updated May 20, 2020 at 15:53 UTC opinion Osho Jha Staking Will Turn Ethereum Into a Functional Store of Value Osho Jha is an investor, data scientist and tech company executive who enjoys finding and analyzing unique data sets for investing in both public and private markets. With the halving capturing the attention of most investors in the cryptocurrency space as well as some mainstream press, the changes at Ethereum have gone largely unnoticed in the broader crypto community. While BTC has become an investment option for those seeking strong money principles in a time of central bank balance sheet expansion, ETH also represents strong money principles. Ethereum 2.0 has been plagued by delays – a natural part of the software development process but a primary cause of negative sentiment towards ETH. However, Ethereum 2.0 seeks to change from a PoW infrastructure to a PoS infrastructure and the magnitude of this shift, I believe, is not reflected in the price of the token. ETH deflation - A look at supply-side dynamics Before diving into the impact that staking could have on ETH, it is important to understand how the ETH “money supply” currently works. As we know, BTC has a fixed supply of 21 million coins and the rate at which these coins are released into the money supply decreases over time. ETH does not have a fixed supply but, like BTC, it has a declining inflation rate: Source: Ethereum white paper There is a fixed issuance of new ETH annually. As the money supply grows, that fixed issuance becomes a smaller portion of the total money supply. As with BTC halvings, ETH over time has reduced the block reward for miners. The transition to Ethereum 2.0’s staking mechanism is set to reduce the inflation rate of ETH to 0.5%-2.0%, putting it in the same company as BTC and gold in terms of supply inflation. I look at ETH as the fiat to BTC’s gold. Despite negative connotations in the crypto community, fiat currencies aren’t inherently bad and the main advantage of an unfixed total supply is flexibility to adjust supply during different economic climates. Central banks have taken this flexibility to an extreme in recent years, and, while ETH’s supply is not fixed, its projected long term inflation may be a happy middle ground between fixed supply and unbridled money printing. ETH staking - A look at demand-side dynamics In many ways, ETH trades like a venture investment. Investors believe Ethereum will be the underlying technology for the future of decentralized apps and they buy ETH in the same way they would shares. I find this troubling because, by its very nature, ETH is not a stock and these investors are taking on a bigger risk than they might think. Staking is the key to making ETH function as a value store. At its core, staking incentivizes holding ETH in a node that can then be used by the network to verify transactions. The greater the number of nodes, the faster the network can function and the more secure it becomes. Staking is not new. Projects ranging from Hedera Hashgraph to Facebook Libra have some sort of staking mechanism built in. But they don’t have the advantage of being the de facto network decentralized app developers lean on.
The magnitude of this shift, I believe, is not reflected in the price of the token. For investors, there are incentives to staking tokens in a node, including rewards similar to earning interest on a bank deposit. While the staking rewards vary based on network performance and utilization, target returns are close to 10% annually . Though actual returns will vary as the network gets up and running, the possibility of earning returns on coins that would otherwise be in a wallet should entice ETH holders to stake. In a global low-rate environment, these returns are certainly attractive. And staking may be the killer app that allows ETH to become a “positive carry asset.” In other words, it generates a positive return for holding it as opposed to, say, gold, which is negative-carry, as it incurs storage costs. Long term, positive carry stimulates demand and creates an incentive to borrow cash to purchase and earn yield. Overall, positive-carry assets increase stability of price movements by creating long term holders and widening the investor base. Investors are becoming aware of this dynamic. To stake a node, there is a minimum required 32 ETH (thought staking pools can allow staking to be done with as little as 1 ETH). The following chart shows the growth in Ethereum addresses holding 32 or more ETH tokens: Address with at least 32 Eth Source: Glassnode Usage – Stablecoins and DeFi While generating interest income from staking will certainly be positively received by investors, network usage is ultimately what will create a sustainable system a...