CoinShares Report: Concerns About Long-Term Value of Ethereum, Reveals Key Drivers Behind Ether

The digital asset management company CoinShares recently released a report exploring the adoption rate of the leading altcoin Ethereum and its impact on the long-term supply and demand of ETH. The report also reveals that the main factor driving the value of Ethereum is the demand for transactions, i.e., how much users are willing to pay for the services provided by the Ethereum network. Furthermore, CoinShares expressed concerns about the long-term value of Ethereum as most transaction demand is concentrated in speculative applications.

A Small Fraction of Speculation Dominates the Majority of Transactions, CoinShares Laments Ethereum's Remaining Speculative Applications

"There has been a significant shift in Ethereum's usage since its inception. Initially, Ethereum was primarily used as a simple asset transfer platform, but now it is more focused on more complex interactions such as DApps and infrastructure," said CoinShares analyst Matthew Kimmel.

The original design of Ethereum was as a world computer, but Matthew Kimmel stated that Ethereum has evolved into a global speculative venue. The report reveals that Ethereum has seen an expansion in its utility since 2018, with transaction fees expanding from simple transfers and managing basic smart contracts to now encompassing DApps, digital identity systems, and operational business activities such as: on-chain withdrawals. This trend continues, with Mattew Kimmel specifically mentioning the financial and gambling sectors.

Infrastructure emerged in 2020, with cross-chain bridges, MEV, oracles, Layer 2, and even staking protocols arising from PoS falling under this category. Mattew Kimmel affirmed the impact of infrastructure on Ethereum's demand: "At first glance, Ethereum can continue to provide higher utility through more complex transactions, which is positive for ETH demand. However, the harsh reality is that a small portion of services occupy the majority of Ethereum's usage, and these services mainly revolve around speculation or simple value transfers, not necessarily the originally envisioned real-world utility."

90% of Transaction Fees Come from DEX, Infrastructure Revolves Around Arbitrage Trading

Currently, 90% of Ethereum's transaction fees occur on decentralized exchanges, with Uniswap alone accounting for 15% of network fees in the first half of 2024. In contrast, the NFT trading market, which was very popular during the last bull market cycle, is not as enduring as decentralized exchanges. The network fees spent on OpenSea in the first quarter of 2022, amounting to $433 million, exceeded the total sum of approximately $296 million from the second quarter of 2022 to the third quarter of 2024.

The majority of infrastructure transaction fees are related to the Maximum Extractable Value (MEV), which is often associated with arbitrage opportunities. Half of the infrastructure costs are related to MEV, corresponding to the argument that "the majority of Ethereum's usage revolves around speculation."

It is also noteworthy that with the passage of EIP-4844, settlement fees on Layer 2 have significantly decreased. In February, the settlement fees on Layer 2 were $41 million, but after the passage of EIP-4844, the settlement fees in April were only $1.6 million.

Stablecoins Fight for Market Share, ETH May Lose Application Scenarios as a Result

The introduction of the ERC-20 standard in 2017 lowered the difficulty of issuing on-chain assets. Tether (USDT) began to attract attention in 2019, and the issuance of USDC in 2020 further boosted the market share of stablecoins. The report points out that at times, the transfer fees for stablecoins even exceed those for ETH transfers.

It is interesting to note that some cryptocurrency enthusiasts claim that cryptocurrencies have the characteristic of de-dollarization, but many on-chain transactions still rely on stablecoins pegged to fiat currencies. This also reflects some of the regrets of this cycle for Ethereum, lacking native on-chain applications. Looking back at the last cycle, we can see the demand for ETH when purchasing NFTs, while ETH is used only as a gas fee when acting as an intermediary in stablecoin transactions, diminishing its value in many applications.

Is Layer 2 the Ethereum Killer? Decreased Trading Volume Makes Ethereum Inflationary

Ethereum's scaling solution is primarily focused on Layer 2, but Mattew Kimmel pointed out a highly debated issue this year. While EIP-4844 effectively reduces settlement fees on Layer 2, it goes against the economic design advantages of EIP-1559. EIP-1559 separates Ethereum transaction fees into base fees and tips, with the base fee being burned. After implementing this proposal, we can observe the amount of ETH burned and the ETH produced through PoS to determine whether the current state of Ethereum is in a deflationary or inflationary state.

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As it stands currently, Ethereum maintains an annual inflation rate of 0.23%, indicating an inflationary state. The design of this proposal, determining whether Ethereum is inflationary or deflationary, is closely related to on-chain transaction demand. However, Layer 2's scaling solutions have diverted many transactions that could have occurred on the Ethereum mainnet, with the EIP-4844 proposal significantly reducing settlement fees on Layer 2. As a result, many attribute the decrease in Ethereum transaction demand to Layer 2 or even EIP-4844.

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The World Computer Is More Than Just Finance; Ethereum Needs Meaningful Long-Term Value

Mattew Kimmel suggests that Ethereum developers should not solely focus on expansion but rather on meaningful long-term value. He believes this is the core of the basic ETH investment strategy – which Ethereum services will drive long-term, sustainable user demand?

The DeFi Summer brought significant demand to Ethereum. However, returning to the ideal of the world computer, despite the alignment of blockchain with financial attributes, computer applications encompass more than just finance. Perhaps we should indeed consider what value we can create beyond speculation, apart from financial considerations?

Ethereum developers discuss development dilemmas, revealing that Ethereum has deviated from the right path