Quantifying Supply Flow Dynamics in Token-Enabled Networks
Scarcity Rent is a concept that was formally introduced in 1931 by Harold Hotelling. The concept forms much of the core economics for nonrenewable resources and acts as one of the most important theoretical frameworks used by economists to understand the long-run price and supply for nonrenewable resources. The concept is defined:
Net price must rise at the rate of interest as a condition of equilibrium; otherwise, the present value of the net price that could be received from selling in some periods would be higher than in other periods.
In essence, mine owners care about when to extract and sell their resources as a result of inter-temporal arbitrage. While the prices of crypto assets certainly have not appreciated at the rate of interest, this understanding — that miners sell reserves when they believe prices will fall and hold reserves when they believe prices will rise — is a fundamental market dynamic.
We may export this concept of scarcity rent and apply it as a lens to evaluate the market behavior of miners (and other types of validators) within token-enabled blockchain networks. By examining the net transaction flow of miners, who both exert primary control over the supply dynamics in proof-of-work networks and also represent a more educated market constituency, investors may be more informed of the future direction of price.
We present an exposition of Miner Net Flow to demonstrate a type of analysis enabled by Boltzmann’s data solution. We examine the net flow of assets of tens of thousands of wallets connected to mining pools in the Ethereum Network and analyze their transactions activity with respect to price to illustrate potential feature generation for investment strategies. For the purpose of visualization, we have applied two-week smoothing to both our price and metric values.
Figure 1 examines the inverse relationship between the aggregate value of Ether flow from a composite of miner wallets plotted against price over time. Miner Net Flow is banded between positive and negative 60,000 ETH per day. As miners become more optimistic about future prices, the aggregate withdrawal value declines causing a spike in Miner Net Flow and a subsequent increase in price. The relationship between the aggregate value of Miner Net Flow and price could inform an actionable trading strategy.
Further, the relationship between transaction count and value illustrated in Figure 2, could provide insight into anomalous miner activity. Strong deviations between transaction count and aggregate value could suggest more pronounced signals. In particular, if normalized transaction volume positively deviates from normalized transaction count this could suggest that miners are more strongly opinionated about the future price direction of ETH.
Contextualized with Miner Net Flow, these deviations could be strong indicators and help crypto asset investors hedge against the dilution risk presented by miners.
Boltzmann provides investors with a suite of metrics that proxy supply, demand, and flows within token-enabled blockchain networks to enhance risk management strategies in today’s markets.
