Is part of the new Ethereum drive around Ethereum 2.0 going to lead to lower liquidity for the coin?
That’s a question posited by Coindesk’s Omkar Godbole and Sebastian Sinclair today in a piece that talks about the change from proof of work to proof of stake design.
As the authors point out, many of the traditional proof of work systems basically award validation according to computing or mining power.
Proof of stake is starting to be seen as a more efficient way to validate and deliver rewards, typically consuming less resources than a proof of work model.
“Under Ethereum’s multi-year upgrade now underway, the network would shift to a ‘proof-of-stake’ model, where investors validate transactions by staking ether on the blockchain in exchange for token rewards,” Godbole and Sinclair write.
“It’s a bit like depositing dollars into a bank account for interest, paid out in dollars.”
However, analysts warn that widespread staking of the cryptocurrency, which involves holding assets in a digital wallet, may lock up too much of the coin to present wide liquidity opportunities, as authors immediately mention:
“A possible consequence… is the new staking system could soak up as much as 30% of the ether tokens in circulation… An address needs to stake at least 32 ether tokens, worth about $12,400 at the current price, to become a validator in the proof-of-stake model.”
The answer? Derivatives.
“As an alternative to selling voucher tokens, holders could deposit ether as collateral on decentralized lending and borrowing platforms,” the authors suggest.
On the face of it, introducing derivatives in this type of scenario seems like a responsible play: if derivatives are ever appropriate, one would think it would be when necessary platform changes lower liquidity in these kinds of ways. The challenge will be for the engineers and the wider community to avoid the kinds of “monkey business” that the world has seen in Wall Street’s use of derivatives tools, which in some cases, have led to something that looks suspiciously like a global casino.
If you have trading interest in Ethereum, it will be important to watch this trend to see where it goes, and what kinds of derivatives develop as a market response.
