Grayscale Research
Grayscale Research analyzes the current state of Ethereum from various aspects and believes that the launch of spot ETFs will greatly help the public understand “smart contract public chains.” Despite Ethereum’s current valuation being higher than when Bitcoin ETFs were launched in January (with limited room for further increase), Grayscale remains optimistic about both prospects. However, Grayscale specifically mentions Solana and believes that SOL is most likely to capture Ethereum’s market share.
Table of Contents
Toggle
L2 Active Users Account for 2/3 of Total Activity
L2 Leads to Decreased Ethereum Mainnet Revenue
Ethereum Mainnet Revenue Needs to Increase
Ethereum Spot ETF
50% of ETH Supply is Long-Term Locked
Solana Will Capture Ethereum Market Share
L2 Active Users Account for 2/3 of Total Activity
After undergoing significant upgrades in March, Ethereum is promoting the transition to a modular network architecture. Through modular design, different types of on-chain infrastructure are designed to work together to provide the best end-user experience. Over time, Ethereum L2 is expected to see more activity.
L2 settles and publishes transaction records to L1, benefiting from the security and decentralization of the mainnet. Grayscale Research points out that this is in sharp contrast to blockchains with an integrated design concept, such as Solana, where all key operations (execution, settlement, consensus, and data availability) occur on a single L1.
Advertising – Continue scrolling for the rest of the article
[image]
[image]
[image]
[image]
From the perspective of on-chain activity, the upgrade has been successful, with a significant increase in the number of active addresses on L2, currently accounting for about two-thirds of the total activity in the Ethereum ecosystem.
(What impact does the Cancun upgrade have on users? Key points from offline meetup Ramble Bar by Chainnews)
[image]
[image]
Significant Growth in Ethereum Layer 2 Activity
L2 Leads to Decreased Ethereum Mainnet Revenue
However, the shift of on-chain activity to L2 also affects Ethereum’s token economy.
When Ethereum’s on-chain revenue is higher, the amount of tokens burned often exceeds the speed of new coin issuance, resulting in a decrease in the total supply of ETH. However, as on-chain activity transitions to L2, the fee revenue on the Ethereum mainnet decreases, and the ETH supply begins to increase again.
Although L2 still requires fees to publish data to L1 (known as “blob fees” and other transaction fees), the amounts are often relatively low.
(Vitalik discusses the impact of multidimensional gas pricing to improve Ethereum’s fee standards)
[image]
[image]
Due to lower mainnet revenue, ETH supply has recently increased
Ethereum Mainnet Revenue Needs to Increase
Grayscale Research believes that in order for ETH to rise over time, the Ethereum mainnet will likely need to see an increase in fee revenue. This can be achieved by:
Moderate growth in L1 activity, paying higher transaction costs,
Significant growth in L2 activity, paying lower transaction costs.
Grayscale Research expects both on-chain activities in L1 and L2 to continue growing for Ethereum to benefit, possibly in a combination similar to L1 (low-frequency, high-value transactions) and L2 (high-frequency, low-value transactions).
Currently, approximately 70% of tokenized US government bonds are on the Ethereum chain (see chart below), and higher-value NFTs are also likely to remain on the Ethereum mainnet due to their high security and decentralization, with relatively fewer transfers. (For similar reasons, Bitcoin NFTs are also expected to continue growing.)
[image]
Ethereum holds the majority of tokenized government bonds
Ethereum Spot ETF
The launch of an Ethereum spot ETF will help increase ETH demand and price.
Based on Grayscale’s comparison of BTC and ETH exchange-traded products (ETPs) outside the United States, Ethereum ETPs account for approximately 25%-30% of Bitcoin ETPs. Therefore, it is also expected that the net inflow of an Ethereum spot ETF will be 25%-30% of the $13.7 billion net inflow of Bitcoin since January.
Although ETH futures in the US market only account for about 5% of BTC futures, Grayscale Research believes that this does not represent the potential relative demand for an Ethereum spot ETF.
[image]
Ethereum ETPs account for approximately 25%-30% of Bitcoin ETPs
50% of ETH Supply is Long-Term Locked
Grayscale lists that approximately 50% of circulating ETH is in a long-term locked state:
27%: Staked
11%: Locked in multiple smart contracts
6%: Not transferred for over five years
3%: Held in ETH ETP form
0.7%: Held by Ethereum Foundation, Mantle, Golem Treasury
Grayscale Research states that the above limits the available supply for an Ethereum spot ETF, and future net purchases of ETH will come from the remaining circulating supply. Therefore, any increase in demand may have a greater impact on the price.
[image]
Net purchases of Ethereum spot ETF will come from the remaining circulating supply
Solana Will Capture Ethereum Market Share
The report concludes with two points that are less favorable to the ETH price.
Grayscale references the MVRV-Z indicator, which shows that when Bitcoin spot ETFs were launched in January, its MVRV-Z score was relatively low, indicating moderate valuation and potential for significant upside. In contrast, Ethereum was overvalued, and the potential upside after ETF approval may be smaller.
[image]
[image]
Ethereum’s MVRV-Z valuation is higher than when Bitcoin ETFs were launched
Grayscale Research also mentions that crypto investors may pay more attention to the competition between ETH and other smart contract public chains, especially the SOL/ETH exchange rate, considering that Solana is the second-largest project in the market. Grayscale believes that SOL has the best long-term opportunity to capture market share from Ethereum.
Last year, SOL outperformed ETH significantly, and the SOL/ETH price ratio is currently approaching the previous high. In the short term, Grayscale expects the SOL/ETH exchange rate to stabilize, and an Ethereum spot ETF will support the price of ETH. However, in the long run, the SOL/ETH exchange rate will depend on the growth of both chains’ on-chain revenue.
[image]
[image]
SOL/ETH exchange rate is approaching the previous cycle high
BTC
ETH
MVRV-Z
Solana
Grayscale
[image]
[image]
Further reading
Will ETH Enter a Bull Market? Analysis: ETF Daily Average Net Outflow Could Reach $110 Million
Grayscale CEO Michael Sonnenshein Steps Down, Former Goldman Sachs Executive to Take Over