Perspectives | ETH, trillions of dollars worth of economic bandwidth

Ladies and gentlemen in the chain, if you subscribe to our daily newspaper, you must already know the concept of economic bandwidth-but have you analyzed the relevant data? If DAI becomes a mainstream currency, what impact will it have on the price of ETH? How much will a protocol like Synthetix drive for ETH? Why does the market value of ETH need to reach trillions of dollars? I love this simple thought experiment. We should have reservations about these data-yes, the pledge rate may change, and the reality will not be as simple as the assumptions made in this article. But aside from these trivial details, the point remains: building a trustless economy requires trillions of dollars in economic bandwidth. What does this mean for ETH? —— RSA

Bullish Expectations for ETH: Becoming an Economic Bandwidth Empowering a Trustless Economy

There is increasing demand for financial protocols built on Ethereum. In the past year alone, the total value locked in Decentralized Finance (DeFi) has reached more than $ 700 million.

Projects such as MakerDAO and Compound leverage Ethereum's license-free financial infrastructure to build a new global financial paradigm. Users around the world can use MakerDAO to obtain trust-free and stable value, and use Compound to obtain a higher interest rate on loan funds.

These projects all underscore a theme: all of these financial agreements need to inject access-free, trust-free values ​​to run. So where do these values ​​come from?

The answer is: neither from the US dollar nor Bitcoin, but from Ethereum.

In short: Ethereum is a trust-free value that provides economic bandwidth for Ethereum's license-free financial protocol.

Over the past few years, these financial protocols have consumed more and more Ethereum economic bandwidth. In the second half of 2019, the economic bandwidth of Ethereum consumed by decentralized finance (DeFi) has increased significantly, and it has now reached about 3% of the total economic bandwidth.


By the beginning of 2020, decentralized finance has locked 3 million ETH. Let's just say that DeFi's use of Ethereum's trust-free economic bandwidth only rose after the ETH skyrocketed in January 2018. However, although the price of Ethereum continues to decline in 2019, the amount of Ethereum locked by decentralized finance is still increasing today.


Scramble for bandwidth

Before 2019, decentralized finance consisted mainly of two projects: MakerDAO and Bancor. Since then, dozens of new types of financial protocols have appeared on the market, each opening up territory in this new economic field. Although MakerDAO still dominates the license-free financial sector, consuming more than 2% of the total bandwidth, we have found that other lending protocols, derivatives, decentralized exchanges, and decentralized financial products are in terms of Ethereum economic bandwidth Competition is getting fiercer.

We have seen explosive growth in Compound, Uniswap, and InstaDApp, each offering license-free mechanisms for lending, currency exchange, and zero-friction asset management.

All these projects are enjoying Ethereum's trust-free economic bandwidth. As of January 2020, the bandwidth consumed by Compound, InstaDApp, and Uniswap accounted for 0.34%, 0.29%, and 0.10%, respectively. There is also a license-free financial agreement, Synthetix, which has also seen phenomenal growth this year. Synthetix is ​​a license-free synthetic asset distribution protocol built on Ethereum. Although the total value locked by the agreement has reached $ 160 million, we do not list the agreement in the figure because it does not use Ether as a trustless value to pledge to generate synthetic assets. In any case, it's not there yet-it's detailed below.


Although the competition for the use of Ethereum's trust-free economic bandwidth is becoming increasingly fierce, we have only seen the tip of the iceberg. Historically, in 2016, the total value of ETH was $ 1.1 billion, and The DAO consumed 150 million, accounting for 13.3% of the total economic bandwidth at that time.

The Ethereum community is currently in the early stages of development. The popularity of an application can be measured by the consumption of Ethereum's economic bandwidth. If license-free finance is commonly driven by the value of ETH, then it shouldn't be a surprise that several of the largest financial protocols in global finance eat up 5 to 10% of the economic bandwidth.

After all, successfully building a license-free and trust-free global financial system requires a lot of economic bandwidth to support it.

The importance of trustless economic bandwidth

To build a trust-free economy, you need trust-free value. Trust-free value means that there is a decentralized cryptographic native asset that can complete settlement without trusting an institution. BTC and ETH can be considered trustless assets in their respective networks.

The total flow value of these trustless assets is the trustless economic bandwidth of the network. In other words, the total economic bandwidth (in USD) of Ethereum is the liquid market value of Ethereum.

High economic bandwidth is critical to the success of Ethereum's license-free finance. The higher the economic bandwidth, the more financial assets the network's underlying trust-free asset can support. If the value of Ethereum (in U.S. dollars) increases by 10 times, Ethereum can be used as a collateral for financial assets that are 10 times worth.

However, the current total bandwidth of Ethereum is only 16.2 billion U.S. dollars, which cannot even support the economy of a small country, let alone the global economic system.

Potential market for economic bandwidth

Fortunately, there is no shortage of potential markets. The global debt scale is $ 250 trillion, the derivatives market size is $ 542 trillion, and the total value of the stock market is nearly $ 90 trillion. The volume of traditional capital markets is very large.

Let's take a look at how much Ethereum economic bandwidth is needed to get a small cup of puppet from the traditional economic market.

DAI's demand for Ethereum bandwidth

MakerDAO's smart contract leader Mario Conti aims to have 1 billion DAI in circulation by 2020.


Assuming that this goal is achieved, and other factors of the system remain the same. MakerDAO's pledge rate is around 250%, the price of Ether has been maintained at around $ 150, and the current supply is around 108 million Ether. In addition, for simplicity, we assume that Ethereum constitutes 100% of Dai's pledged assets.

If Dai's circulation is to reach 1 billion at current prices, as of 2020, 15.34% of Ether's circulation must be locked in order to provide sufficient economic bandwidth for Dai and achieve Conti's goals, which is at the peak of 2016's The DAO At the time, it was a few percentage points higher.

Now, suppose the price of Ethereum is very good, the price has risen to 500 US dollars, but less than half of the highest price in history. Assuming that the pledge rate is still about 250%, only 4.6% of the Ethereum circulation needs to be locked in the MakerDAO system, which doubles the current 2% share, and accounts for the bandwidth consumption of the entire decentralized financial market. Than flat.

Speak with actual data

Ethereum aims to be the infrastructure of license-free finance, that is, a digital native financial system supported by trust-free assets. Since Dai is a stable ether and is regarded as the main exchange medium for license-free finance, we can essentially treat Dai's potential market as a market for fiat currencies and their money supply.

What would happen if Dai became widespread in Argentina?

Now, let us assume that Conti's home country, Argentina, began to accept Dai as the main trade currency, while the demand for the Argentine peso was declining. According to reports, Argentina's M1 money supply was US $ 26.64 billion in October 2019. (Note: M1 refers to all assets and funds available for payment in an economy. These assets and funds include physical banknotes and coins, demand deposits, traveller's checks and other deposits.)

Given the current state of Argentina's financial system, it is assumed that Dai has achieved great success, accounting for 51% of Argentina's M1 supply, that is, Dai's circulation reached 13.58 billion.

Assuming the pledge rate is still 250% and the current price of Ether is around $ 150, to make Dai's total supply reach 13.58 billion, the MakerDAO system needs to lock 226.4 million Ether (accounting for 208.4% of the total current supply) ).

According to Ethereum's distribution plan, this is obviously impossible, but it does reflect the importance of economic bandwidth.

The only practical way for MakerDAO to generate so many Dais is to increase the economic bandwidth of Ethereum by several exponential levels. (Or, by increasing the proportion of trust assets in the pledge, the price is that the Dai system requires more trust).

Therefore, in order for Argentina to obtain a sustainable economic bandwidth as its main medium of exchange, the price of Ether needs to reach 2500 (locking 12.5% ​​of Ethereum's mobile supply) or even 10,000 (locking 3.13% of Ethereum's mobile supply) ).

1580382551308 According to different Ethereum prices and pledge rates, the amount of Ethereum to be locked in to reach 51% ($ 13.58 billion) of M1 supply in Argentina

The above discussion is only for Argentina

Although the circulation of 13.58 billion Dai seems to be astonishing, it is only a small part of the global license-free economic system that will be established in the future. After all, the total value of traditional capital markets is as high as several trillion US dollars.

Let's reason further, assuming that Dai starts to compete with the US dollar and become a form of global trade currency. It is known that the dollar's M1 money supply reached 4,034 billion yuan, assuming that Dai accounted for 10% of it, its circulation reached 40,34 billion yuan.

Assuming a pledge rate of about 250%, how much Ethereum economic bandwidth is needed to mint so many Dais? Even if it is calculated at the historical highest price of Ethereum USD 1,400, 663.1% of the total mobile supply needs to be locked in order to provide sufficient bandwidth for 403 billion Dai circulation.

We need more economic bandwidth.

Assuming 46.42% of the total current supply is locked in MakerDAO, 3.5 times higher than the peak of The DAO in 2016, the price of Ethereum must reach US $ 20,000 to provide sufficient economic bandwidth for hundreds of billions of Dai circulation.

If only 18.57% of the current Ethereum supply is locked, the price of Ethereum will reach $ 50,000.

Finally, if Ethereum is locked in accordance with the current consumption rate range, about 3.7% of the total bandwidth will be locked. The price of Ethereum must exceed $ 250,000, which means that the total trust-free economic bandwidth (mobile market capitalization) must be To $ 27 trillion. According to today's market value of 16.02 billion US dollars, a 1665-fold increase is enough.

1580382586047 According to different Ethereum prices and pledge rates, the amount of Ethereum to be locked in order to reach 10% of the US M1 supply (403.4 billion U.S. dollars)

Wait, more than that …

We have only outlined MakerDAO, a financial agreement that enables license-free and trust-free stable value. However, there are dozens of emerging financial protocols competing for economic bandwidth, and all are targeting different potential markets.

Derivative bandwidth requirements

At present, the largest capital market is the derivatives market. As of June 2019, its nominal contract value has reached USD 640 trillion. With this data, let's assume that Ethereum's license-free finance will absorb 0.1% of global derivatives in the future, with a nominal contract value of $ 640 billion.

So far, the pledge rate (security) of derivatives based on ether has not been fully tested. Therefore, we cannot rely on circulating market data and can only assume pledge rates. With this in mind, we can make relatively fair assumptions about pledge rates based on different financial agreements in the market today. MakerDAO's average pledge rate is 250%, while the derivative issue agreement Synthetix (its native asset is SNX) has an average effective pledge rate of 714%.

Given that derivatives are inherently more volatile than MakerDAO's license-free stable value system, and Ether is essentially more liquid than SNX, we can assume that the pledge rate required to generate tokenized derivatives is 250% -750%. Therefore, let's assume that the underlying pledge rate of a derivative contract that uses trust-free liquid assets such as ether as a collateral is 350%.

If tokenized derivatives using Ether as collateral to reach $ 640 billion (approximately 18.67% of Ethereum's current supply), Ethereum needs to provide a total economic bandwidth of $ 12 trillion, each Ether The price is going to reach $ 100,000.

Let's further assume that Ethereum captures 1% of the value of existing derivatives ($ 640 trillion). Based on a pledge rate of 350% and a current supply of 18.67%, the price of Ethereum will eventually reach $ 1 million in order to provide sufficient economic bandwidth for $ 640 billion worth of derivatives.

Synthetix bandwidth requirements

From the current value, we can imagine that it is almost impossible for Synthetix to rely on its native token SNX to successfully capture enough value to provide sufficient economic bandwidth for the existing capital market. The agreement must add other types of mobile pledges to expand its economic bandwidth.

As more than 86% of the token circulation has been used as collateral for synthetic assets, the agreement is gradually reaching saturation. There is almost no room for other tokens. Therefore, the agreement can only rely on SNX price increases to expand its potential economic bandwidth. However, if Ethereum is used as a trust-free pledge, the total bandwidth of the protocol will be expanded by more than 100 times, thereby creating a series of brand-new assets.


In September 2019, the Synthetix community began discussing whether to add Ether as a pledge for the agreement. In general, given the chart above and its impact on the economic bandwidth of the protocol, this should be a wise choice. (RSA Note-Synthetix is ​​planning to include Ethereum in its pledge type by January 30)

In short, once more liquid trustless collateral types such as Ether are introduced, Synthetix can issue more assets.

In order to achieve this goal, the Synthetix community must first figure out how to consolidate the economic model of new pledges and ensure that the value of SNX tokens will continue to increase during the Synthetix protocol's use of different types of pledges to issue synthetic assets. increase.

in conclusion

If Ethereum intends to create a new economic system that is both license-free and trust-free, then the future demand for Ethereum's economic bandwidth will be strong. If you have enough patience, decentralized finance and license-free finance are bound to usher in amazing growth in the next 20 years. This financial system will benefit billions of people worldwide.

I hope this article inspires readers to think about the bandwidth of a trust-free economy and its importance in a trust-free economy. Of course, in the process of thinking, you should not blindly believe in specific data.

In short, if a decentralized smart contract platform is to create a world with both license-free and trust-free economy for its world through its native assets, its native assets must provide trillions of dollars in economic bandwidth . There is currently no cryptographic asset that can provide enough economic bandwidth to meet this challenge (even if all cryptographic assets do not add up).

Therefore, on the road to a decentralized future, we still have a long and wonderful road to go before we can make a breakthrough.


Original link: Author: Lucas Campbell Translation & proofreading: Min Min & A sword