Report source: Grayscale Investment
Translation: Amy Liu
Grayscale Investments released a report on the value of Ethereum on the afternoon of February 3rd, Eastern Time, which aims to outline the important considerations for evaluating Ethereum. The report explores three evaluation methods and their related indicators: ETH as a currency, ETH as a consumer product, and ETH as an interest-bearing asset . Grayscale was founded in 2013 and is a subsidiary of Digital Currency Group. It is the world's largest digital asset management company. The following is the text: Ethereum has garnered much attention as the second-largest blockchain network since its launch in 2015. Although the network has grown into a powerful settlement layer for billions of dollars in P2P value transfers, investors often find it difficult to identify the investment case. Ethereum’s powerful network ensures that applications run according to their coded logic, without the need for third parties and with little likelihood of interference. Ethereum and Bitcoin have a symbiotic relationship, attracting liquidity from the outside world. Bitcoin is the preferred store of value in the digital ecosystem, while Ethereum has become the leading financial infrastructure, settling more than $12 billion per day . 01
ETH as Currency ETH is the native asset of the emerging decentralized financial system and the primary source of funding for applications built on Ethereum. ETH plays the role of a new-age digital currency on the Ethereum network. Whenever a user deploys a smart contract on the Ethereum network, provides liquidity for an application, or trades on a decentralized exchange, ETH must pay network fees. If investors do consider ETH to be money, it is worth exploring its relative value to other currency competitors. At current prices, can ETH gain market share from competitors at a reasonable price? ETH market capitalization as a percentage of other currencies The use of ETH as collateral continues to expand in the decentralized finance ecosystem. However, the increased use of stablecoins (digital currencies primarily pegged to the US dollar) and Bitcoin as collateral for Ether could challenge ETH's position as the ecosystem's go-to collateral . WBTC is a synthetic version of Bitcoin on Ethereum that enables Bitcoin to be transferred on the Ethereum network. USDT and USDC are the largest USD stablecoins on Ethereum. The chart below shows the growth of WBTC, USDC, and USDT. Although the growth of alternative assets on Ethereum could challenge the use of ETH as collateral, the increased use of Ethereum as a settlement network is a positive trend . Bitcoin and USD on Ethereum 02
ETH as a consumer product ETH is an integral part of the Ethereum network. Every transaction on the network incurs a fee, which is denominated in ETH. As demand on the network increases, so do the fees. As a commodity, the price of ETH will fluctuate based on supply and demand in the market. Fortunately, the Ethereum blockchain is transparent and we can analyze user activity to interpret the potential market price of ETH. We can examine the total transaction fees collected on the Ethereum network each day to measure demand, as shown in the chart below. Since ETH is the commodity used to pay these fees, high fees drive demand for ETH, just as increased travel may drive demand for gasoline. Notably, total transaction fees in January 2021 were almost 5 times the peak fees in January 2018. Yet, the price of ETH is roughly equivalent to the 2018 peak price . Total daily transaction fees Transaction fees are the total amount of transactions paid on the Ethereum network. Another way to think about the value of ETH is to compare the historical price of ETH to sales (fees) on the network. The following chart illustrates this relationship as a "price to sales" ratio: The lower the ratio, the higher the revenue generated by the network relative to the historical market value of ETH. ETH price to sales ratio 03
ETH as an interest-bearing asset Ethereum has begun moving into the next phase of the protocol’s development, Ethereum 2.0 . Ethereum 2.0 is designed to be a scalable proof-of-stake blockchain. This means that holders can stake their ETH as collateral to become validators on the network. This is another key shift in the value of ETH. Ethereum 2.0 transforms ETH from a commodity to what we describe as a productive commodity , where holders will be able to generate interest by pledging ETH. This asset structure is different from any other asset structure in the real world. In Ethereum 2.0, ETH can be consumed as a commodity or pledged as a claim on cash flow, similar to equity. Its initial value comes from its commodity use and the supply and demand dynamics of the market. Those who are confident in the future price prospects of ETH can earn returns on their collateral by pledging their assets. This could further reduce the floating supply of ETH. If a large amount of ETH is pledged, this will reduce the supply available for consumption, which may act as a positive feedback loop for the price of ETH. See the table below to understand how value flows through the Ethereum 2.0 network. Ethereum Economy 04
Other ETH related indicators Daily active addresses are an important indicator of network growth. Metcalfe’s law states that the value of a network is proportional to the square of the number of users, a law that has been used to value Facebook. Currently, Ethereum has nearly 700,000 daily active addresses . Ethereum Active Addresses Likewise, the hash rate on Ethereum, which measures the computer power used by miners to verify transactions, has also reached a new high . Since it takes time for miners to recoup their initial investment, this shows that miners are confident that Ethereum will continue to generate high transaction fees. If miners believe that transaction fees will fall, they will be reluctant to allocate resources to mining. Ethereum Hash Rate 05
in conclusion Ethereum is younger than Bitcoin and its protocol is constantly changing. Therefore, the methods for valuing ETH are also constantly changing. Viewing ETH as a currency, a consumer good, and an interest-bearing asset allows investors to consider a range of possible outcomes when assigning value to the asset. The Ethereum community is very excited about the high level of activity on Ethereum and the scalability that Ethereum 2.0 will bring. We can observe from the data that the price of ETH tends to move with the activity on the network. As discussed throughout this report, multiple metrics including active addresses, hash rate, and network fees are reaching new highs, which is a positive sign for investors. This article is transferred from the official account [BitpushNews] Risk warning : The content of this article is only the author’s personal opinion, does not represent the views or position of Zhikuang University, and does not constitute any investment opinion or recommendation.
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