Grayscale Ethereum valuation report: currency, consumer goods, interest-bearing assets
Grayscale Investment issued a valuation report on Ethereum on the afternoon of February 3rd, Eastern Time, aiming to outline the important considerations for evaluating Ethereum. The report discusses three evaluation methods and related indicators: ETH as currency, ETH as consumer goods, and ETH as an interest-bearing asset.
Grayscale was established in 2013 and is a subsidiary of Digital Currency Group. It is the world’s largest digital asset management company.
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Since its launch in 2015, Ethereum has attracted much attention as the second-largest blockchain network. Although the network has developed into a powerful settlement layer for multi-billion-dollar P2P value transfer, investors often find it difficult to determine investment cases.
Ethereum’s powerful network ensures that the application runs according to the coded logic, without the need for a third party, and it is unlikely to be disturbed.
Ethereum and Bitcoin have a symbiotic relationship, which attracts liquidity from the outside world. Bitcoin is the preferred store of value in the digital ecosystem, and Ethereum has become the leading financial infrastructure, with more than $12 billion in daily settlements.
ETH as currency
ETH is a local asset of the emerging decentralized financial system and the main source of funding for applications built on Ethereum.
ETH plays the role of a new era of digital currency on the Ethereum network. Whenever a user deploys a smart contract on the Ethereum network, provides liquidity for applications or conducts transactions on a decentralized exchange, ETH must pay network fees.
If investors do believe that ETH is a currency, it is worth discussing its relative value to other currency competitors. At the current price, can ETH gain market share from competitors at a reasonable price?
ETH market value 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 stable coins (digital currencies pegged to the US dollar) and Bitcoin as collateral for ether may challenge ETH’s status as the preferred collateral for the ecosystem. WBTC is a synthetic version of Bitcoin on Ethereum, which enables Bitcoin to be transmitted 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 increase in the use of Ethereum as a settlement network is a positive trend.
Bitcoin and U.S. dollars on Ethereum
ETH as a consumer product
ETH is an indispensable part of the Ethereum network. Every transaction on the network will incur a certain fee, which is priced in ETH. As the demand for the network increases, so does the cost.
As a commodity, the price of ETH will fluctuate according to supply and demand in the market. Fortunately, the Ethereum blockchain is transparent. We can analyze user activity and explain the potential market price of ETH.
We can check the total transaction fees charged by the Ethereum network every day to gauge demand, as shown in the figure below. Since ETH is a commodity that pays for these costs, high fees will drive demand for ETH, just as increased travel may drive gasoline demand. It is worth noting that the total transaction fees in January 2021 are almost 5 times the peak fees in January 2018. However, the price of the ETH is roughly equivalent to the peak price of 2018.
Transaction fees are the total amount of transactions paid on the Ethereum network. Another way to consider the value of ETH is to compare the historical price of ETH with the sales (fees) on the network. The figure below illustrates this relationship with the “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 as an interest-bearing asset
Ethereum has begun to enter the next stage of the protocol development, namely Ethereum 2.0. Ethereum 2.0 aims to be a scalable proof-of-stake blockchain. This means that holders can use their ETH as collateral and become validators on the network.
This is another key shift in the value of ETH. Ethereum 2.0 transforms ETH from a commodity into a productive commodity as we describe it, and holders will be able to generate interest by collateralizing ETH. This asset structure is different from any other asset structure in the real world. In Ethereum 2.0, ETH can be used as a commodity for consumption, or as a mortgage for cash flow claims, similar to equity.
Its initial value comes from its use of goods and the dynamics of supply and demand in the market. Those who are confident about the future price prospects of ETH can earn collateral income by collateralizing assets. This may further reduce the floating supply of ETH. If a large amount of ETH is mortgaged, this will reduce the supply available for consumption and may play a positive feedback loop on the price of ETH. Please refer to the table below to understand how value flows through the Ethereum 2.0 network.
Other related indicators
Daily active addresses are an important indicator of network growth. Metcalfe’s law states that the value of the network is proportional to the square of the number of users. This law has been used to evaluate the value of Facebook. Currently, Ethereum has nearly 700,000 active addresses every day.
Ethereum active address
Similarly, the hash rate on Ethereum has also reached a new high, which is a measure of the computer power used by miners to verify transactions. Since it takes time for miners to recover 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 unwilling to allocate resources for mining.
Ethereum is younger than Bitcoin, and its protocol is constantly changing. Therefore, the method of evaluating ETH is constantly changing. Treating ETH as currency, consumer goods, and interest-bearing assets allows investors to consider a range of possible outcomes when assigning value to assets.
A large number of activities on Ethereum and the scalability brought by Ethereum 2.0 make 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 mentioned throughout this report, multiple indicators including active addresses, hash rates, and network fees are reaching new highs, which is a positive sign for investors.