Grayscale: Value Assessment of Ethereum

灰度

21-02-04 11:24

Read this article in 12 Minutes

AI summary

View the summary

Original title: "Grayscale: Ethereum Value Evaluation Report"

Original source: BitpushNews

Grayscale Investment, established in 2013, is a subsidiary of the Digital Currency Group and is the world's largest digital asset management company.

This report is the latest value evaluation report on Ethereum released by Grayscale, which aims to outline the important considerations for evaluating Ethereum. The report explores three valuation methods and their associated metrics: ETH as a currency, ETH as a consumer product, and ETH as an interest-bearing asset.

The following is the text:

Since its launch in 2015, Ethereum has become the second largest Blockchain networks are getting a lot of attention. Although the network has grown into a robust settlement layer for multibillion-dollar P2P value transfers, investors often find it difficult to determine the investment case.

Ethereum's robust network ensures that applications run according to coded logic, without the need for third parties and with little chance 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 over $12 billion per day.

ETH as currency

ETH is the native asset of the emerging decentralized financial system, And is the main source of funding for applications built on top of Ethereum.

ETH plays the role of a new era digital currency on the Ethereum network. ETH must pay network fees every time a user deploys a smart contract on the Ethereum network, provides liquidity to an application, or trades on a decentralized exchange.

If investors do see ETH as a currency, it is worth exploring its relative value versus other currency competitors. At current prices, is ETH able to gain market share from competitors at a reasonable price?

ETH market capitalization as a percentage of other currencies

In the decentralized financial ecosystem, the use of ETH as collateral continues to expand. However, the increased use of stablecoins (digital currencies primarily pegged to the U.S. dollar) and Bitcoin as collateral for Ether could challenge ETH’s status as the ecosystem’s collateral of choice. WBTC is a synthetic version of Bitcoin on Ethereum, which 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 may challenge the use of ETH as collateral, the increased usage of Ethereum as a settlement network is a positive trend.

Bitcoin and USD on Ethereum

ETH as a Consumer Good

ETH It is an integral part of the Ethereum network. Every transaction on the network incurs a fee, denominated in ETH. As demands on the network increase, so do fees.

As a commodity, the price of ETH will fluctuate according to the supply and demand in the market. Fortunately, the Ethereum blockchain is transparent and we can analyze user activity to explain the underlying market price of ETH.

We can check the total transaction fees collected by the Ethereum network on a daily basis to gauge demand as shown in the graph below. Since ETH is the commodity that pays for these fees, high fees drive demand for ETH in the same way that increased travel might drive demand for gasoline. It is worth noting that the total transaction fees in January 2021 were almost 5 times the peak fees in January 2018. However, the price of ETH is roughly equivalent to the peak price in 2018.

Total transaction fee per day

The transaction fee is 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 graph below illustrates this relationship in terms of a "price to sales" ratio: a lower ratio indicates that the network is generating higher revenue relative to ETH's historical market cap.

ETH price-to-sales ratio

ETH as an interest-bearing asset

Ether Ethereum has already started moving on to the next phase of the protocol's development, Ethereum 2.0. Ethereum 2.0 aims to be a scalable proof-of-stake blockchain. This means 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 into what we describe as a productive commodity, and holders will be able to generate interest by staking ETH. This asset structure is unlike any other asset structure in the real world. In Ethereum 2.0, ETH can be consumed as a commodity or mortgaged 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 collateral income by staking their assets. This could further reduce the floating supply of ETH. If a large amount of ETH is staked, this will reduce the supply available for consumption, potentially acting as a positive feedback loop on the price of ETH. See the table below for how value flows through the Ethereum 2.0 network.

Ethereum economy

Other related indicators

Daily active addresses are network growth important indicators. Metcalfe's Law, which states that the value of a network is proportional to the square of the number of users, has been used to value Facebook. Currently, Ethereum has nearly 700,000 daily active addresses.

Ethereum active address

Similarly, the hash on Ethereum Hashrate, a measure of the computer power miners use to verify transactions, also reached new highs. 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. Miners will be reluctant to allocate resources for mining if they think transaction fees will drop.

Ethereum Hash Rate

Conclusion

Ethereum is better than Bitcoin Young, its protocols are constantly changing. Therefore, the method of valuing ETH is also constantly changing. Viewing ETH as a currency, a consumable, and an interest-bearing asset allows investors to consider a range of possible outcomes when assigning value to the asset.

The large amount of activity on Ethereum, and the scalability brought about by Ethereum 2.0 has made the Ethereum community very excited. We can observe from the data that the price of ETH tends to change with the activity on the network. As discussed throughout this report, several metrics including active addresses, hash rate, and network fees are reaching new highs, which is a positive sign for investors.

Image source: Grayscale Investment