Is there still hope for Ethereum? Grayscale says don’t give up yet, as the overall adoption rate of public chains is sti

Original article from Grayscale Research

Compiled by Odaily Planet Daily Golem ( @web3_golem )

Core arguments:

• Smart contract platforms are the core infrastructure for decentralized applications and blockchain-based finance. As such, they are central to the vision of public blockchains to provide a new architecture for financial markets and digital trade.

• Grayscale Research believes that the trend of smart contract adoption in applications will accelerate in the next 1-2 years, partly due to regulatory changes and upcoming legislation in the United States.

• Ethereum is the largest smart contract platform based on market cap, the size of its application ecosystem and developer community, and the value of on-chain assets. However, it has recently lagged behind some competitors, including Solana, in fees (revenue) and other on-chain activity metrics.

• Ethereums differentiating features are a culture that emphasizes decentralization, security, and neutrality, which will help it continue to attract a large number of users, developers, and transaction fees in the smart contract platform space even as some newer blockchains take market share. Therefore, ETH should be considered an important component in a diversified crypto portfolio.

• The outlook for smart contract platform fees is highly uncertain, in part because we don’t know how much pricing power platforms like Ethereum will be able to maintain in the long term. However, in this report, Grayscale research suggests that Ethereum has the potential to grow total fees to over $20 billion (annualized growth of approximately $1.7 billion over the past six months) by executing its scaling strategy and maintaining pricing power.

Ethereum will continue to occupy a large share of on-chain activities in the future

Along with Linux, Python, and a handful of other examples, Ethereum is considered one of the most important open source software projects ever created. Despite being less than 10 years old, the Ethereum network today consists of more than 11,000 nodes, processes 35-40 million transactions per month, is valued at approximately $46 billion, and is supported by more than 2,100 full-time developers. The broader Ethereum ecosystem, comprised of interconnected blockchains, now processes approximately 400 million transactions per month.

Despite its prominent position in the crypto industry and the launch of a spot-based exchange-traded product (ETP) last year, ETHs market cap has lagged significantly behind BTC. In fact, the ETH/BTC exchange rate has fallen to levels last seen in mid-2020. From a market cap perspective, ETHs market cap has grown by about $90 million since the end of 2022, while BTCs market cap has grown by about $1.35 trillion (about 15 times). ETHs recent performance has also lagged behind certain other smart contract platform tokens, such as Solana and Sui.

ETHs performance has been underperforming BTC for more than two years

Continued underperformance has led some observers to question the outlook for Ethereum network activity and the value of ETH. While there is uncertainty about the outlook for every crypto asset, we continue to believe that ETH should be an important component of a diversified crypto portfolio.

Ethereum is not directly comparable to Bitcoin. The Bitcoin network is a monetary system, with Bitcoin primarily used as a medium of exchange and storage of value. In contrast, Ethereum is an application platform, with ETH providing utility to users of those applications. Despite the promise of smart contract technology, we have yet to see mass adoption of decentralized applications based on smart contracts, with many early success stories (including the growth of stablecoins), but current adoption rates are low compared to the vision of smart contract platforms, which aim to bring much of traditional finance on-chain.

Grayscale Research believes that the development of smart contract-based applications will accelerate in the next 1-2 years, partly due to regulatory changes and upcoming legislation in the United States. The Trump administration has made changes to federal crypto policies that allow the industry to invest and thrive in the United States. In addition, a bipartisan group of senators has proposed the Guiding and Establishing National Innovation for Stablecoins in the United States (GENIUS) Act, which builds on the efforts of the previous Congress and aims to provide a comprehensive regulatory framework for the issuance of payment stablecoins. Clearer regulation should help increase investment and adoption of blockchain-based applications, thereby increasing on-chain activities (such as transactions and fees) and ultimately realizing the value accumulation of smart contract platform tokens.

In addition to having the first-mover advantage, Ethereum now faces competition from other smart contract platforms. However, Ethereum still has differentiation features that are particularly valuable for financial use cases, including a large amount of on-chain capital, a cultural choice that emphasizes decentralization and neutrality. Therefore, we expect Ethereum to account for the majority of future on-chain activity, which in turn will drive ETH up.

Ethereum – The World Computer

Ethereum is the first mainstream smart contract blockchain. Similar to Bitcoin, the Ethereum blockchain can be used to send and receive transactions. However, with the addition of smart contracts, Ethereum can also run decentralized applications. These applications can be anything from decentralized lending platforms to identity solutions to video games. Because Ethereum is the infrastructure for applications, it is considered a software-based computer and is sometimes called the world computer.

Today, Ethereum has thousands of applications and more on-chain assets (e.g., stablecoins and tokenized assets) than other smart contract blockchains, but has recently lagged behind other blockchains in terms of metrics such as on-chain activity. Solana is the second-largest network by market cap among smart contract platforms, with more active addresses, transactions, and fees in the past 30 days, but its market cap is only 30% of Ethereum’s.

Top 10 Smart Contract Platforms

The investment logic for smart contract platforms is that new applications will bring more users and transactions, and ultimately more fees to the underlying protocol. We estimate that transaction volume for smart contract platforms has risen from about 20 transactions per second (TPS) five years ago to about 1,200 TPS today, an annualized growth rate of about 130%. In contrast, the Visa network processed about 7,400 TPS in the 12 months ending September 30, 2024. If smart contract blockchains can continue to grow in digital payments, and if they can build a competitive moat and maintain pricing power, both fee income and token value could rise in the future.

Smart contract blockchain processes ~1,200 transactions per second

ETH has performed roughly in line with its peers, as measured by the FTSE/Grayscale Smart Contract Platform Crypto Industry Index. The crypto smart contract space currently includes 70 tokens with a total market capitalization of $428 billion. Since the beginning of 2024, the Smart Contract Platform Index has fallen 22%, while the price of ETH has fallen 18%. In contrast, the price of Solana has risen 18% and the price of Bitcoin has risen 90%.

ETH’s performance is roughly in line with the index

Ethereum network fees

Ethereum profits from network activity through transaction fees (called “gas fees”), which are payments from users when they execute transactions or interact with smart contracts. Unlike Solana and many other blockchains, activity in the Ethereum ecosystem occurs on both the L1 Ethereum mainnet and the L2 network. This is how Ethereum intends to scale to millions of users, as L1 on its own cannot scale sufficiently without sacrificing decentralization. If working in harmony, this layered structure should give users the choice of high throughput and low transaction costs on L2, while retaining the security and decentralization of L1.

L2 networks such as Arbitrum One and Base also charge transaction fees. Since they rely on the Ethereum L1 network for final settlement and security, L2 is able to charge lower transaction fees and process more transactions per second, but L2 still remits a portion of the fees to L1 as payment for settlement and security services. Last year, Ethereum underwent the Dencun upgrade, which introduced blob transactions, making it cheaper for L2 to publish its data to L1. The upgrade successfully increased the number of users and transactions on L2.

Significant growth in activity on Ethereum L2

However, the introduction of blob transactions also affects the fee level and distribution of the entire network. Blob transactions reduce the fees that L2 pays to L1, which makes some observers think that L2 is parasitic on Ethereum because L2s success in the short term comes at the expense of L1. However, if L2 benefits from the Ethereum ecosystem (such as security guarantees and other network effects), then in the long run, the large L2 ecosystem will eventually bring more value to the Ethereum network and ETH.

Ethereum L2 now pays lower fees to L1

Future Ethereum upgrades will continue to expand L1 and L2. The Pectra upgrade is scheduled for April 2025, combining Prague (execution layer) and Electra (consensus layer). For expansion, Ethereum Improvement Proposal 7691 optimizes blob storage, targeting 6 blobs per block, doubling Dencuns blob capacity. Looking ahead, Ethereums expansion potential may increase significantly with the implementation of a concept called Full Danksharding.

Future Ethereum upgrades will significantly increase L2 capacity

The future of Ethereum fees

The outlook for smart contract platform fees is highly uncertain, in part because the technology is in its early stages and we don’t know how much pricing power platforms like Ethereum will be able to maintain over time. Smart contract platforms compete with each other and with centralized systems, and in order to maintain pricing power in the long term, they need to provide differentiated features to prevent users from migrating to cheaper (centralized or decentralized) systems. Although the Ethereum blockchain is slower and more expensive than many of its competitors, Grayscale Research believes that its unique advantages (including high-value on-chain assets and an emphasis on decentralization and security) will aid its adoption and network effects and ultimately provide Ethereum with a degree of pricing power.

The following chart shows how Ethereum can increase fees by increasing capacity and maintaining pricing power. We assume that the average transaction fee for L1 is $5, while the average fee since 2019 is $6.3. In the long run, L1 will probably be used mainly for high-value transactions and transactions that require high security assumptions. For L2, we assume an average transaction fee of $0.05. If we further assume that Ethereum L1 can handle 100 TPS and Ethereum L2 can handle 25,000 TPS together, these assumptions can be achieved in the next 3 to 5 years under Ethereums expansion roadmap.

Ethereum fee revenue can grow with scaling and pricing power

Under these assumptions, total fees on Ethereum L1 will grow to $20 billion, despite an annualized growth rate of approximately $1.7 billion over the past six months. While the outlook for fees is highly uncertain, if Ethereum executes on its scaling strategy and maintains some pricing power, it should theoretically be able to significantly increase fee revenue. To track progress, investors should consider tracking the fundamental variables in this simplified model, namely L1 and L2 TPS and L1 and L2 average execution fees.

Make the cake bigger first

In the last crypto bull run, BTC and ETH appreciated in near lockstep, and even in 2021, ETH’s price rose faster, ultimately peaking in November 2021 with a price return roughly double that of Bitcoin. Some cryptocurrency investors may be expecting the same thing to happen in the current cycle, with ETH significantly outperforming other tokens as the cycle matures, though recent results have been disappointing.

ETH finally outperformed Bitcoin in the last crypto cycle

But Grayscale Research believes that ETHs poor performance shows that the crypto market is still focusing on fundamentals, which is a healthy sign. In Grayscales analytical framework, the Crypto market mainly distinguishes the value of smart contract platforms based on fees. Although fees do not translate into the accumulation of token value in the blockchain in exactly the same way, they are usually passed on to token holders, and fees can be said to be the most directly comparable measure of blockchain activity.

In the smart contract platform space, both Ethereum and Solana have relatively high fees and market capitalization. Since the end of 2023, Solana has increased its fee income and market share in the smart contract platform space, while Ethereum has lost its dominant position in fee income and market capitalization. In other words, the market has appropriately repriced the relative value of Ethereum and Solana due to changes in fundamentals. As shown in the figure below, Solana has moved up and to the right, while Ethereum has moved down and to the left, and its valuation today may be higher than its fee income.

ETH Underperforms Solana Due to Weak Fee Growth

These small differences in competitive position, while important, are less important than the potential growth of the category as a whole, with all smart contract platforms still in their early stages of adoption. For example, Ethereum today has only about 7 million monthly active users, while Facebook parent Meta Platform reported 3.35 billion “daily active users” in a December 2024 report.

As adoption increases, smart contract platforms are expected to benefit from compounding network effects, driving not only higher transaction volumes and fee revenues, but also accelerating developer activity, liquidity depth, and interoperability across the ecosystem. This strengthening of adoption and utility could amplify value capture across the field.

The networks that ultimately win the race are likely to be those that collect the most transaction fees over time and have favorable structural supply and demand conditions for their native tokens. Solana, SUI, and a few other smart contract platforms will have high throughput, low transaction costs, and a good user experience as “common characteristics.” But Ethereum is unique because of its large and diverse ecosystem of applications and developers, a large amount of on-chain capital, and a culture that prioritizes decentralization, security, and neutrality. We expect these features to continue to attract many users to the Ethereum ecosystem, and that Ethereum will account for a large share of economic activity on smart contract platform blockchains in the future.

This article is sourced from the internet: Is there still hope for Ethereum? Grayscale says don’t give up yet, as the overall adoption rate of public chains is still in its infancy

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