Ethereum, the Triple Halving
On May 7, 2021, Jeremy Schwartz, Global Head of Research at WisdomTree and regular host of the Behind the Markets podcast, was joined by Guest Host Corey Hoffstein, Co-Founder and CIO of Newfound Research, to talk to Nikhil Shamapant (@squishchaos) about a new research paper on Ethereum, specifically a series of events that he views as a “Triple-Halving.”
What is “Halving”?
The Guests noted that the cryptocurrency world was introduced to the concept of “‘halving”’ as part of the bitcoin protocol. It is well known from the bitcoin white paper that there will be a limited supply of 21 million bitcoins. The mechanics of how this is achieved comes through a consistent reduction in the reward paid to bitcoin miners over time. At rough intervals of four years, the rewards paid to miners for securing the network with proof-of-work to verify transactions, the specific reward paid to miners is cut in half. What is “Halving”?
Even though the halving is known well ahead of time, Nikhil noted a belief that there are interesting supply–demand dynamics that tend to play out in real time in the bitcoin marketplace. Mining bitcoin is very cash intensive—the computing hardware is expensive, the electricity is expensive, and there is not a high profit margin left after mining is complete. To pay for these activities, Nikhil expects that miners will tend to sell most of the bitcoin they earn from the mining process. On the day after the halving, miners may sell less bitcoin on the market than on the day before. While demand on those exact days may fluctuate, if demand stays even close to stable, but the supply from miners is reducing, Nikhil indicated that prices may be pushed upward. The most recent halving occurred in May 2020.
Upcoming Events on the Ethereum Network
Nikhil also discussed how different upcoming events on the Ethereum network could be interpreted in the same way as “halving,” even if there is no finite supply of ether and the Ethereum protocol does not have the same provisions as the bitcoin protocol. With the Ethereum network, it is not guaranteed that such events will actually occur.
Proof of Work to Proof of Stake
Within the bitcoin protocol, miners are solving cryptographic problems that require a lot of electricity and computing power to secure the network. Currently, the Ethereum network is also using POW, but Nikhil indicated that the Ethereum network is being positioned to potentially transition to a proof of stake (POS) model in the future.
As described by Nikhil, instead of miners needing to secure expensive computer resources and burn lots of electricity to solve problems, the POS approach could mean that users could shift to using regular, even inexpensive computers to secure the network. If a user wanted to participate in POS, they could put an amount of ether at risk in order to gain the ability to potentially verify transactions. Instead of solving the difficult cryptographic problem with lots of electricity under the POW model, the miners who are doing the staking are incentivized to simply do things properly because if they do not, the ether they have at risk would be reduced. Nikhil noted that an attacker would tend to see the ether they have at risk reduced, such that it would potentially be harder and more costly to continue to try to act in a malicious way.
The Rise of Decentralized Finance Applications (DeFi)
Developers are creating more and more applications on the Ethereum network. Some of these are in the finance space. As there are more of these applications and each one becomes more popular, the Guests theorized that more ether will be used.
Building an Ether Thesis
Nikhil noted a belief that over time, there are certain aspects that could make ether particularly interesting and more usable:
- Ether could be a store of value: The Guests noted that certain predictions indicate that the peak supply of ether, even though it is not precisely defined as is the case with bitcoin, will be 120 million units, and then from there will drop roughly 2% per year, leading to a deflationary supply.
- Ether may be viewed a consumable commodity in and of itself within different decentralized applications and smart contracts.
For full context, please listen to the conversation below.
Important Risks Related to this ArticleThere are risks associated with investing, including the possible loss of principal. Crypto assets, such as bitcoin and ether, are complex, generally exhibit extreme price volatility and unpredictability and should be viewed as highly speculative assets. Crypto assets are frequently referred to as crypto “currencies,” but they typically operate without central authority or banks, are not backed by any government or issuing entity (i.e., no right of recourse), have no government or insurance protections, are not legal tender and have limited or no usability as compared to fiat currencies. Federal, state or foreign governments may restrict the use, transfer, exchange and value of crypto assets, and regulation in the U.S. and worldwide is still developing. Crypto asset exchanges and/or settlement facilities may stop operating, permanently shut down or experience issues due to security breaches, fraud, insolvency, market manipulation, market surveillance, KYC/AML (know your customer/anti-money laundering) procedures, noncompliance with applicable rules and regulations, technical glitches, hackers, malware or other reasons, which could negatively impact the price of any cryptocurrency traded on such exchanges or reliant on a settlement facility or otherwise may prevent access or use of the crypto asset. Crypto assets can experience unique events, such as forks or airdrops, which can impact the value and functionality of the crypto asset. Crypto asset transactions are generally irreversible, which means that a crypto asset may be unrecoverable in instances where: (i) it is sent to an incorrect address, (ii) the incorrect amount is sent or (iii) transactions are made fraudulently from an account. A crypto asset may decline in popularity, acceptance or use, thereby impairing its price, and the price of a crypto asset may also be impacted by the transactions of a small number of holders of such crypto asset. Crypto assets may be difficult to value, and valuations, even for the same crypto asset, may differ significantly by pricing source or otherwise be suspect due to market fragmentation, illiquidity, volatility and the potential for manipulation. Crypto assets generally rely on blockchain technology, and blockchain technology is a relatively new and untested technology that operates as a distributed ledger. Blockchain systems could be subject to internet connectivity disruptions, consensus failures or cybersecurity attacks, and the date or time that you initiate a transaction may be different than when it is recorded on the blockchain. Access to a given blockchain requires an individualized key, which, if compromised, could result in loss due to theft, destruction or inaccessibility. In addition, different crypto assets exhibit different characteristics, use cases and risk profiles. Information provided by WisdomTree regarding digital assets, crypto assets or blockchain networks should not be considered or relied upon as investment or other advice, as a recommendation from WisdomTree, including regarding the use or suitability of any particular digital asset, crypto asset, blockchain network or strategy. WisdomTree is not acting and has not agreed to act in an investment advisory, fiduciary or quasi-fiduciary capacity to any advisor, end client or investor, and has no responsibility in connection therewith, with respect to any digital assets, crypto assets or blockchain networks.
Jeremy Schwartz has served as our Global Chief Investment Officer since November 2021 and leads WisdomTree’s investment strategy team in the construction of WisdomTree’s equity Indexes, quantitative active strategies and multi-asset Model Portfolios. Jeremy joined WisdomTree in May 2005 as a Senior Analyst, adding Deputy Director of Research to his responsibilities in February 2007. He served as Director of Research from October 2008 to October 2018 and as Global Head of Research from November 2018 to November 2021. Before joining WisdomTree, he was a head research assistant for Professor Jeremy Siegel and, in 2022, became his co-author on the sixth edition of the book Stocks for the Long Run. Jeremy is also co-author of the Financial Analysts Journal paper “What Happened to the Original Stocks in the S&P 500?” He received his B.S. in economics from The Wharton School of the University of Pennsylvania and hosts the Wharton Business Radio program Behind the Markets on SiriusXM 132. Jeremy is a member of the CFA Society of Philadelphia.