Grayscale Research
Grayscale Research analyzes various aspects of the current state of Ethereum and believes that the launch of spot ETFs will greatly help the public’s understanding of “smart contract public chains”. Although the valuation of ETH is currently higher compared to when the Bitcoin ETF was launched in January (with limited room for further increase), Grayscale remains optimistic about the prospects of both. However, Grayscale specifically mentions Solana and believes that SOL is most likely to capture market share from Ethereum.
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L2 Active Users Account for 2/3 of Total Activity
L2 Leads to Decrease in Ethereum Mainnet Revenue
Ethereum Mainnet Revenue Needs to Increase
Ethereum Spot ETF
50% of ETH Supply is Long-term Locked
Solana to Capture Ethereum Market Share
L2 Active Users Account for 2/3 of Total Activity
After the major upgrade in March, Ethereum is facilitating the transition to a modular network architecture. Through modular design, different types of on-chain infrastructure work together to provide the ultimate user experience. Over time, it is expected that there will be more activity on Ethereum L2.
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 stark contrast to blockchains with an overall design concept, such as Solana, where all key operations (execution, settlement, consensus, and data availability) occur on a single L1.
From the perspective of on-chain activity, the upgrade has been successful, as the number of active addresses on L2 has significantly increased, currently accounting for about two-thirds of the total activity in the Ethereum ecosystem.
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Significant Growth in Ethereum Layer 2 Activity
L2 Leads to Decrease in Ethereum Mainnet Revenue
However, the shift of on-chain activity to L2 also affects the token economy of Ethereum.
When on-chain revenue on Ethereum is high, the amount of tokens burned often exceeds the rate of new coin issuance, leading to a decrease in the total supply of ETH. However, as on-chain activity transitions to L2, 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 (referred to as “blob fees” and other transaction fees), the amounts are often relatively low.
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Due to lower mainnet revenue, the 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 that both L1 and L2 on-chain activity need to continue growing for Ethereum to benefit, possibly in the form of a combination of L1 (low-frequency, high-value transactions) and L2 (high-frequency, low-value transactions).
Currently, about 70% of tokenized US Treasury bonds are on the Ethereum chain (Figure below), and higher-value NFTs may also 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 to grow).
Ethereum Custodies Majority of Tokenized US Treasury Bonds
Ethereum Spot ETF
The launch of an Ethereum spot ETF would help increase demand for ETH and its price.
Based on Grayscale’s comparison of BTC and ETH exchange-traded products (ETPs) outside the United States, Ethereum ETPs account for about 25%-30% of Bitcoin ETPs. Therefore, it is also expected that the net inflows into Ethereum spot ETFs will be 25%-30% of the $13.7 billion net inflows into Bitcoin since January.
Although ETH futures in the US market account for only about 5% of BTC futures, Grayscale Research believes that this does not represent the potential relative demand for an Ethereum spot ETF.
Ethereum ETPs account for about 25%-30% of Bitcoin ETPs
50% of ETH Supply is Long-term Locked
Grayscale lists that approximately 50% of circulating ETH is in long-term locked states:
27%: Staked.
11%: Locked in multiple smart contracts.
6%: Not transferred for over five years.
3%: Held in the form of ETH ETPs.
0.7%: Held by Ethereum Foundation, Mantle, Golem vaults.
Grayscale Research states:
The above limits the available supply for an Ethereum spot ETF, and future net purchases of ETH will come from the remaining circulating supply, so any increase in demand could have a greater impact on the price.
Net purchases of Ethereum spot ETF will come from the remaining circulating supply
Solana to Capture Ethereum Market Share
The report concludes with two points that are less favorable for the price of ETH.
Grayscale cites the MVRV-Z indicator, which shows that when the Bitcoin spot ETF was launched in January, its MVRV-Z score was relatively low, indicating moderate valuation and potential for greater upward movement. In contrast, ETH was overvalued, and the potential for upward movement after the ETF approval may be smaller.
Ethereum MVRV-Z valuation is higher than when the Bitcoin ETF was launched
Grayscale Research finally mentions that crypto investors may be more concerned about 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 that 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 now approaching its previous high. In the short term, Grayscale expects the SOL/ETH exchange rate to stabilize, with the Ethereum spot ETF supporting the price of ETH. However, in the long run, the SOL/ETH exchange rate will depend on the growth of their on-chain revenue.
SOL/ETH exchange rate is approaching the previous cycle high
BTC
ETH
MVRV-Z
Solana
Grayscale
Further Reading
Will ETH Enter a Bull Market? Analysis: ETF Daily Average Net Outflow May Reach $110 Million
Grayscale CEO Michael Sonnenshein Steps Down, Former Goldman Sachs Executive to Take Over