- Amber Group has presented a scenario that could ruin the Ethereum economy.
- The strategy is based on a scheme created by billionaire George Soros.
The investment firm Amber Group has revealed in a report a strategy that could endanger Ethereum‘s DeFi sector and the entire network. Amber’s strategy, similar to that of billionaire George Soros in the 1990s, when he made billions of dollars by shorting the British Pound, is essentially to increase the scarcity of an asset or coin for the benefit of an individual.
In its report, the Amber Group highlights how transaction fees in the Ethereum network have increased in recent months. Data from the Gasnow platform, cited by the Amber Group, shows that the standard transaction fee in the Ethereum network has risen to $4.50 and 482 gwei, an all-time high. Although it has dropped to almost half of this figure at the time of publication, the fees and the congestion of the Ethereum network remain a major problem.
In that sense, Amber Group has affirmed that the average block utilization in the Ethereum network is at 95%, which means an increase of more than 30% with respect to the beginning of the year. The current state of the network may lead to a “positive feedback loop” in which the rates could continue to rise. This could occur, according to the report, if an entity takes advantage of the situation and purchases large quantities of tokenized gas.
Tokenized gas and its role in Ethereum’s destruction
The Amber Group explains that gas tokens are “essentially tokenized block space“. They benefit from a mechanism in the Ethereum network known as storage refund”. By this, the token user can reserve this space when transaction fees have a certain price and release it when fees are higher. In this way, the token user saves gas:
This is particularly useful for on chain arbitrage, deploying smart contracts and any sort of batch transaction which otherwise would consume a lot of gas. Active network participants can mint/buy gas tokens when gas is cheap, and releasing it at high prices in order to smooth out average fee spend over time.
Within this positive feedback loop scheme, as mentioned above, an entity or individual could accumulate a large amount of block space in gas tokens. Thus, the block space becomes scarcer and the token prices increase significantly to the benefit of one actor.
As fees continue to increase, demand for gas tokens increase, pushing prices higher, which in turn creates more minting. The minting process consumes more block space…which results in higher gas fees…and so on.
The most liquid gas token is currently 1inch (CHI), followed by GasToken (GST2). The investment firm predicts that the prices of these tokens could increase if current activity in the network is maintained or a significant drop on ETH price occurs. With a market capitalization of less than $5 million, gas token prices are, as Amber Group claims, relatively easy to manipulate. In addition, the Amber Group draws another dangerous scenario:
But as more aggregators, arbitrageurs and protocols enter the market, the usage of gas tokens are only going to go up. Now *imagine* if yield farms were to add $GST2 or $CHI as LP assets for liquidity mining. This is where things could completely spiral out of control…