1. Battery Cost Declines are Driving “Good Deflation” in the Auto Industry
ARK’s research features regularly the “good deflation” associated with technologically enabled innovation. Battery cost declines, for example, are central to our electric vehicle (EV) forecast. This week, Nissan provided a great example of good deflation when it unveiled its 2022 Leaf EV. As background, Nissan priced its 30 kilowatt-hour (kWh) Nissan Leaf at ~$39,000 in today’s dollars in 2016. Five years later, it has priced the 2022 40 kWh Leaf at $27,400, $11,600 less for an additional 42 miles of range.
Another source of auto deflation – “bad deflation” – could be brewing in the used vehicle market. The Manheim Used Vehicle Index appears to have peaked in May, the decline accelerating during the last few weeks of July, as shown here.
While we believe the decline in battery costs is likely to translate into lower prices, boosting EV sales, the drop in used car prices could be signaling weakening demand for traditional gas-powered cars. Auto manufacturers have attributed the 20% drop in US sales from 18.5 million at a seasonally adjusted annual rate (SAAR) in April to 14.75 million in July to supply chain shortages, particularly chips. At the margin, the Manheim Index seems to be telling a different story. If underlying auto demand is beginning to weaken, traditional automakers could be in a difficult position.
2. Deere Buys an Autonomous Tractor Company
In its push to build fully autonomous farm machines, Deere acquired Bear Flag Robotics, an autonomous tractor company. Bear Flag builds autonomous systems that retrofit existing tractors so that a single operator can control a fleet of tractors remotely.
Autonomous machinery should boost farm productivity, much like the original tractor did, lowering labor’s share of farming costs, while boosting real farm wages. Indeed, automation can turn “non-market” activity into real GDP. A farm owner who currently operates her own tractor, for example, could pay for autonomous tractor service per acre, lowering her own time in the field, time for which she may not be paid explicitly.
As autonomous electric technology transforms machines of all types, ARK expects a proliferation of form factors. While they build tractors that conform to human drivers today, Deere and other companies could transform autonomous tractors and other machines into many shapes and sizes depending on their use cases. Bear Flag’s system fits into existing tractors today, but we wonder if autonomous tractors will be smaller machines working in tandem with drones and other robots in the future.
3. US Infrastructure Bill Proposes Burdensome Regulation on Crypto Ecosystem
In the 2500+ page bipartisan infrastructure bill now before the Senate, a crypto-specific provision aimed at raising taxes broadened the definition of brokers, stirring great controversy. Specifically, the provision redefines a “broker” as “any person who is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person’’ and would mandate compliance with IRS reporting requirements.
The crypto industry has pushed back aggressively against this definition because it would subject most stakeholders in the crypto ecosystem — miners, validators, smart contracts, open-source developers, among others — to burdensome reporting obligations. An analogy to this draconian provision during the early days of the internet would have required any email software developer in the US to collect and report the social security numbers of all users, those sending and receiving email with this software.
In response to the provision, Senators Ron Wyden, Patrick Toomey, and Cynthia Lummis proposed an amendment narrowing the definition of a broker, specifically exempting miners, validators, wallet providers, and open source developers. Within a day, Senators Mark Warner and Rob Portman countered and proposed a competing amendment exempting only proof-of-work miners and hardware wallet providers, and still subjecting software developers, proof-of-stake validators, and non-custodial DeFi participants to broker status.
As of this writing, the Senate has not voted on the amendments. ARK believes that, if passed, the more onerous provision could push most crypto-related innovation offshore, negatively impacting its adoption in the US. ARK will be monitoring this unfolding drama closely.
4. Ethereum's Long-Awaited EIP-1559 Update Is Live
Ethereum recently underwent a network upgrade as part of the London hard fork which will improve the pricing of transaction fees and introduce a new dynamic to Ether’s monetary policy.
The most significant London update was Ethereum Improvement Proposal (EIP) 1559. Prior to this update, an eBay-style first-price auction determined the fee a user paid to confirm a transaction on the network. Users posting the highest bids would see their transactions confirmed first but would be charged the full amount even if a lower bid would have sufficed. With no bidding transparency, the auctions resulted in unnecessary and highly volatile transaction fees.
Shifting the bidding from users to the protocol itself, the new approach seeks to smooth out the volatility in transaction fees. Instead of guessing what price would be necessary to include a transaction in the next block, users now pay a “base fee” which the network scales up and down based on demand relative to supply, reducing unnecessary payments. Users also can pay a “priority fee” to speed up the most time sensitive transactions.
A notable component of EIP-1559 is that the new “base fee”, paid in ether, is burnt, or permanently removed from circulating supply instead of being transferred to miners. This implementation design prevents miners from gaming the new fee system and, like a share buyback program, ties network demand directly to value accrual in ether. By lowering ether’s net-issuance rate, EIP-1559 reduces the number of ether issued per block.
Long term, with this change and the upcoming migration to Proof-of-Stake, some have forecasted that, subject to demand on the network, ether could become a deflationary asset. In the first 24 hours, about 5,000 ether valued at $14 million were burnt.