As demand for Ethereum (ETH) continues to rise, the amount of ETH available on exchanges has plunged to a two-year low – now representing just 13% of the total circulating supply. Huge swathes of ETH continue to flow into the ETH 2.0 staking contract, as well as DeFi protocols, where coins can be locked in and accrue interest over time. Activity in the NFT market also continues to rise, despite network congestion and persistently high gas fees.
Simultaneously, the recently implemented EIP-1559 network upgrade is constricting supply even further by eliminating thousands of ETH per day. With all of these catalysts in play, some have speculated that a building liquidity shortage could spur Ethereum prices higher in coming months.
Related ETF & Digital Assets: Amplify Transformational Data Sharing ETF (BLOK), Bitcoin (BTC), Ethereum (ETH), Wrapped Ether (wETH), WAX (WAXP)
According to Deloitte’s “2021 Global Blockchain Survey,” 81% of the financial services industry (FSI) executives believe that blockchain technology is “broadly scalable” and has achieved mainstream adoption. Surely, a huge amount of enthusiasm among financial service providers is the buildout of decentralized financial infrastructure in DeFi and NFT markets.
The growth of those markets has largely been facilitated by the development of Ethereum (ETH), a decentralized, open-source blockchain featuring smart contract functionality and serving as the largest platform for other tokens to be built out on top of. It is also the second largest cryptocurrency by market cap, following Bitcoin (BTC).
Just yesterday, Glassnode data showed that the balance of ETH on Exchanges just reached a 2-year low of just about 15 million ETH, equivalent to just about 13% of the total circulating supply – the lowest level on record – and down from more than 17 million when Ethereum’s price last hit an all-time high in May. On Monday alone, AMBCrypto notes that $1.6 billion worth of ETH left exchanges.
Strategists like Ki Young Ju, CEO of on-chain analytics service CryptoQuant, have highlighted the potential for a building “liquidity crisis” that could mark the next leg up for ETH.
Wallets of all sizes continue to accumulate more coins. The number of addresses holding 0.01+, 0.1+, and 1+ ETH each hit an all-time high yesterday. Addresses holding 10+ ETH and 32+ ETH hit 4-month and 3-month highs, respectively.
Ethereum 2.0 Staking Contract Sucking Up Supply
The 32+ ETH wallet size is a key metric since it marks the minimum level of ETH required to become a validator when Ethereum 2.0 launches, taking the asset’s network from a proof of work model (one that requires miners to generate computing power for the network and validate transactions) to a proof of stake model. Proof of stake (PoS) eliminates the need for mining and will use software downloaded by validators to store data, process transactions, and add new blocks to the blockchain.
To become a validator, ETH holders are committing at least 32 ETH to the Ethereum 2.0 staking contract. The incentive to commit these funds to the network comes from a certain rate of interest that will be paid out to validators – currently about 6% APR – that will essentially supplant miner fees. Per Glassnode, more than 7 million ETH is now locked into the contract (equivalent to more than $22 billion) and cannot be unlocked until the ETH 2.0 enters phase 1.5; the period when the Ethereum 1.0 and Ethereum 2.0 blockchains are merged. No exact date has been set for that part of the upgrade.
Smaller investors who do not have the required 32 ETH to become validators are not being left out in the cold, however. Staking pools, a sum of small deposits combined to exceed the 32 ETH threshold, have been set up across the crypto space, allowing virtually any amount of ETH to be staked into the contract. The pool then pays out fractional levels of interest, reflective of each participant’s share of the pool.
Lido is one of the most popular decentralized staking pools, comprising 12% of the entire staked supply last week at 815,000 ETH. Lido deposits are worth $2.44 billion.
At the same time, a separate network upgrade, EIP-1559, went live on August 5 and has already burned nearly 84,000 ETH – removing them from circulation and further constricting available supply. Since Ethereum has no capped supply like Bitcoin does, the upgrade is expected to dampen the expansion of the ETH supply. Per Decrypt, the EIP-1559 hard fork allows the blockchain to use Ethereum transaction fees (known as gas) to buy ETH on the open market and then destroy it, reducing ETH’s overall supply. Tim Ogilvie, CEO of Staked, an Ethereum infrastructure services company, has described this process like a stock buyback, driving up the value of remaining ETH in circulation by burning 1% – 4% of the supply each year.
Ethereum and ERC-20 in Decentralized Finance
Another huge drain on the supply of ETH on centralized exchanges has been decentralized finance (DeFi) and non-fungible tokens (NFTs). As AMBCrypto notes, value locked in DeFi protocols across the Ethereum network has risen by $62 billion, with the total value locked (TVL) now touching $157 billion.
One of the top applications in the DeFi space are automated money markets (AMM).
Compound.finance, for instance, uses an algorithmic, autonomous interest rate protocol built for developers, to unlock a universe of open financial applications. Their primary service is providing a series of decentralized interest rate markets that allow users to supply a liquidity pool of ETH and Ethereum-based tokens that…
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