Triple Halving and the Bull Case for Ethereum

Despite all assets pulling back from their contract highs in recent weeks, ETH continues to want to test new highs. One of the reasons touted for this is the theory about the potential “triple halving” that’s in play and due to have its impact from early 2022. This is a quick look at that theory and where the numbers are coming from.

In a halving event on BTC, for example, miner pressure to sell BTC drops by 50% every 4 years as the BTC rewards for winning a race to validate the next block reduces. It was reduced to 6.25 BTC in May 2020 and in 210,000 blocks time from then (approximately 4 years), it will halve again. These are often seen as bullish events for coins as it means less and less new coins are available for sale in the market by miners.

Some Ethereum fans are super bullish ETH as they contend that we are in the midst of not one but three halving events that come together from early 2022. They contend that the amount of new ETH coming onto the market will drop by 90% which equates to a “triple halving”.

Where are these supply reductions coming from?

Firstly, they contend that there will be a significant reduction in supply due to the implementation of Ethereum Improvement Protocol (EIP 1559), which went live in August 2021, where gas fees per block are fixed and any fees above that are burned. This has resulted in over 1M ETH being burned since this feature went live.

Secondly, the transition from proof of work to proof of stake, will result in another significant reduction in supply. Currently, 2 ETH is the minimum fee that is released by each block and is the revenue number used to incentivize the validators to secure the network. Under ETH 2.0, due to the move to proof of stake, this number is estimated to be about 0.2 ETH.

This lowering (2=>0.2) in new ETH supply per block is where the approximation of 90% reduction is being heralded by ETH maxis under the “triple halving” headline.

EIP 1559 is an add on to this and that is estimated to make the supply issuance negative at about 3% a year once proof of stake is active. This percentage will depend on how many validators there are and of course, on chain demand for gas.

Is this the bull case for ETH?

It might well be the case from a new supply perspective as it is super deflationary and as such presents a convincing bull case for ETH which has continued to touch all time highs despite BTC pulling back from its recent highs.

Against this, questions are still raised by BTC maxis about the huge amount of ETH that was pre-mined with the genesis block & how much was actually owned by non-insiders given the unusual distribution pattern of the sale, allocations to insiders and the foundation (link to article below).The ownership of ETH is very whale heavy and does that mean that under proof of stake, Vitalik could decree new changes to supply rules in the future that will be automatically accepted as gospel by the network? Remember that unlike BTC & BCH with a fixed 21M supply, there is an unlimited supply of ETH that can be mined.

So in the short term this feels like a very bullish scenario for the price of ETH, however it remains to be seen if it would be the same for the ETH network which still commands impressive network leader effects around developers and financial resources but despite EIP 1559, we still have:

  • Very high gas fees are still seen to send digital assets on ETH and it very much remains the rich man’s network. Stablecoins like USDC & USDT have both seen huge uplifts in usage via other blockchains (SOL, Tron)
  • Other EVM compatible smart chains gaining traction versus ETH, such as BSC, Avax, Polygon (Matic POS side chain) and smartBCH.

The question of ETH’s future dominance, or not, is currently being played out in the ETH/BTC price which is probably the most important pair to watch in all of crypto at the moment.

Sources:

https://www.coindesk.com/markets/2020/07/11/sale-of-the-century-the-inside-story-of-ethereums-2014-premine/

Cofounder, CoinFLEX. All opinions my own.