ETH value mechanism analysis: Supply and demand logic in 2020-2021

Vitalik 2025-11-23 18:16 65615人围观 ETH

Introduction From January 2020 to November 2021, the price of ETH rose from approximately US$130 to US$4,800, with a cumulative increase of nearly 3,600%. During the same period, BTC increased by approximately 200%. This significant relative performance

introduction

From January 2020 to November 2021, the price of ETH rose from approximately US$130 to US$4,800, a cumulative increase of nearly 3,600%. During the same period, BTC increased by approximately 200%. This significant relative performance difference prompts discussion about the drivers of ETH’s value.

The market generally attributes this phenomenon to speculative sentiment. However, data-level analysis shows that there is a high correlation between ETH prices and on-chain economic activities during this period. Understanding this mechanism has reference significance for judging the value logic of similar assets.
1. Analysis Framework: Application of Quantity Theory of Money

In traditional monetary economics, the quantity theory of money describes the relationship between money supply and economic activity: MV = PQ, where M is the money supply, V is the velocity of circulation, P is the price level, and Q is the transaction volume.

Apply this framework to the on-chain economy: ETH supply × circulation speed = total economic value on the chain.

Key changes for 2020-2021:

Supply side: ETH’s annual growth rate is approximately 4.5%, which is relatively stable and predictable.

Demand side: DeFi’s total value locked (TVL) has grown from approximately US$10 billion to more than US$200 billion, an increase of more than 20 times.

When the scale of the on-chain economy expands 20 times and the supply of "currency" as a medium of exchange remains almost unchanged, price becomes the main adjusting variable. This is the core logic for understanding ETH’s performance during this period.
2. Demand-side analysis: three main driving factors

The growth in demand for ETH comes from several key areas of on-chain economic activity.

DeFi Gas Fee Requirements

All on-chain operations on Ethereum require Gas fees, which can only be paid with ETH. This creates rigid requirements:

At the beginning of 2020, DeFi’s average daily gas consumption was approximately 500 ETH. By the second quarter of 2021, this number reached a daily average of approximately 15,000 ETH, a 30-fold increase. Based on the ETH price of $3,000 at the time, the equivalent of approximately $45 million in ETH being used for transaction fees every day.

Additionally, DeFi protocols’ liquidity pools require large amounts of ETH to be locked. Uniswap’s ETH liquidity grew from approximately $1 billion to $5 billion. In lending protocols such as Aave and Compound, the size of ETH as collateral has grown from approximately US$500 million to US$15 billion.

NFT settlement requirements

The NFT market will explode in 2021, with the vast majority of transactions settled in ETH. OpenSea’s monthly trading volume reached approximately $3.4 billion in the third quarter of 2021, almost all denominated in ETH.

The pricing benchmarks of blue-chip NFT projects such as Bored Ape Yacht Club and CryptoPunks are ETH. Participants need to hold ETH to participate in primary market minting or secondary market trading.

Data shows that during the NFT active period in 2021, the average daily NFT transaction consumption exceeded 10,000 ETH. This is another important source of demand besides DeFi.

pledge lock

In December 2020, the ETH 2.0 pledge contract was launched. Users who pledge 32 ETH can become a validator and receive annual returns of approximately 4-7%. The key is that the pledged ETH is locked and cannot circulate in the market.

By the end of 2021, approximately 9 million ETH was staked, accounting for approximately 7.5% of the total supply. At current prices, the equivalent of approximately $27 billion in liquidity was removed from the market.

The combination of these three factors has resulted in a substantial reduction in circulation on the supply side and continued purchasing pressure on the demand side.
3. Supply-side constraints: inflation mechanism and destruction

Unlike traditional currencies whose supply can be regulated, ETH issuance follows established rules:

Each block generates a miner reward of approximately 2 ETH, and the annual inflation rate is approximately 4.5%. This ratio is relatively fixed and cannot be quickly adjusted according to demand.

In August 2021, the EIP-1559 proposal was implemented and a basic fee destruction mechanism was introduced. Part of the gas fee for each transaction is permanently destroyed and no longer circulates.

Data after implementation:

The average daily destruction amount is about 5,000-10,000 ETH. During periods of high network congestion (such as the minting of large-scale NFT projects), the daily destruction amount can reach 15,000 ETH.

This has brought real inflation down from 4.5% to close to 0%, and in some periods there has even been net deflation.

At the same time, staking and DeFi lock-up further reduce the amount of tradable ETH in the market. ETH balances on exchanges continued to decline during this period, indicating that holders tended to move ETH to DeFi protocols or staking contracts.

The actual supply of freely tradable ETH is far smaller than the total nominal supply.
4. Price transmission mechanism

Combining demand and supply factors, one can understand the logic of price changes.

Assume that at the beginning of 2020, the scale of the on-chain economy is US$100 billion, and there are 100 million ETH in circulation. Each ETH supports approximately US$1,000 in economic activity, and the price is approximately US$1,000.

By 2021, the scale of the on-chain economy will expand to approximately US$2 trillion (20 times), but the supply of ETH will only increase by 4.5% to approximately 104.5 million pieces.

Under the assumption that the velocity of circulation remains unchanged, the economic activity that each ETH needs to support increases from US$1,000 to approximately US$19,000. This corresponds to a proportional increase in the price of ETH.

The actual price ($4,800) did not reach the theoretical extreme due to:

Circulation velocity increases. The same ETH can be used multiple times in different scenarios.

Stablecoins began to share some of the pricing and settlement functions, diverting some of the currency demand.

There are lags and deviations in market pricing.

Despite this, ETH price exhibits a high correlation with on-chain activity indicators. Empirical analysis shows that the correlation coefficient (R²) between ETH price and DeFi TVL exceeds 0.8, and the correlation coefficient with Gas consumption exceeds 0.75.

This means that more than 75% of price changes can be explained by changes in on-chain economic activity. From a statistical perspective, this is not a purely speculative bubble, but a demand-driven price discovery process.
5. Comparison with BTC

During the same period, BTC increased by approximately 200%, which was significantly lower than ETH. This reflects the different demand-driven logic of the two assets.

The main narrative of BTC is that of "store of value." Its demand mainly comes from institutional allocation needs and long-term holders' stored value needs. This type of demand is relatively stable and the growth is relatively gentle.

The main functions of ETH are "transaction medium" and "unit of account". Its demand comes directly from on-chain economic activities - every DeFi transaction and every NFT minting requires the consumption of ETH. When on-chain activity explodes, demand for ETH explodes simultaneously.

At the data level, the ETH/BTC price ratio has increased from about 0.025 at the beginning of 2020 to about 0.08 at the end of 2021, and the value of ETH relative to BTC has increased more than three times.

This difference reflects the different growth curves of "usage-driven" and "stored-value driven". The rapid expansion of DeFi and NFT has created marginal demand for ETH that far exceeds that of BTC.
6. Limitations of the mechanism

The above mechanism worked well in 2020-2021, but ETH's performance weakened significantly after 2022. Understanding this transformation requires recognizing the inherent limitations of the original mechanism:

Volatility issue: ETH's intraday fluctuation range often reaches 20-40%. For DeFi protocols that require stable units of account, this creates liquidation risks and user experience issues.

Multi-chain competition: Public chains such as Solana and Avalanche are mature and divert developers and users. Ethereum’s market share in DeFi TVL dropped from approximately 95% in 2020 to approximately 55% in 2024.

Stablecoin replacement: Stablecoins such as USDC and USDT provide price stability that ETH cannot provide. As these stablecoins become compliant, they gradually replace ETH in pricing and settlement functions.

Data shows that the proportion of stable coins in DEX trading pairs has increased from less than 30% in 2020 to more than 60% in 2024. Almost all new DeFi protocols prioritize stablecoins as their pricing unit.

This means that ETH is returning from "currency" to "asset". It is still the "fuel" of the Ethereum network (payment of Gas), but it is no longer the main "unit of account" and "measure of value".
7. Investment inspiration

To understand the value mechanism of ETH in 2020-2021, several general revelations can be extracted:

Distinguish between currency attributes and asset attributes: The value of encrypted assets that perform currency functions not only comes from fundamentals, but also from the network effect as a medium of exchange. It is necessary to separate these two sources of value when evaluating.

Pay attention to the supply and demand mismatch: When the supply of an asset grows much slower than the growth of economic activity it supports, there is an economic basis for rising prices. This is fundamentally different from a speculation-driven rally.

Be wary of structural changes: currency status is not permanent. The compliance of stablecoins and the intensification of multi-chain competition are structural factors that will change the logic of value capture.

Verification indicators: The correlation between price and on-chain activity indicators can be used as a reference to judge the sustainability of the increase. A high correlation means there is fundamental support.

Specific to the current market, ETH has lost the "perfect currency trap" of 2020-2021: its monopoly has been broken, its currency functions have been diverted by stablecoins, and the multi-chain pattern has led to dispersed demand.

However, ETH still retains its rigid demand as the "fuel" of Ethereum and its important position as DeFi collateral. Its value logic has changed, but it has not disappeared. Investors need to reassess based on the new framework.
Conclusion

ETH's price performance in 2020-2021 is essentially an imbalance between supply and demand between fixed supply and demand explosion. At the heart of this mechanism is ETH's unique status as the economic "currency" on the chain.

But the effectiveness of this mechanism is based on certain conditions: Ethereum’s dominance, the lack of a stable alternative unit of account, and the rapid growth of on-chain activity. When these conditions change, the original value capture logic also changes.

For institutional investors, it is important not to simply copy the investment logic of the past, but to understand the underlying mechanisms that drive value and recognize when these mechanisms are still effective and when they have failed.

In the crypto market, understanding "why it went up" is more important than "how much it went up." Because only by understanding the mechanism can we judge whether this increase is sustainable and when we need to adjust our strategies.

This article is research analysis and does not constitute investment advice. Crypto asset prices fluctuate greatly, and investments need to be carefully evaluated for risks.