Ethereum’s adoption of layer-2 networks could cost ETH trillions of dollars in potential market capitalization over the next few years if its associated dynamics remain unbalanced, according to VanEck Head of Digital Assets Research Matthew Sigel.
In a Twitter (aka X) post, the analyst posited Thursday that Ethereum’s “changing fundamentals suggest a model update is in order.” Instead of climbing to $22,000 by 2030, Ethereum’s price projection would plummet 67% to $7,300 if “the current reality” was reflected, Sigel wrote.
VanEck’s model factors in Ethereum’s expected growth in total value locked, reflecting the value of assets used in decentralized finance (DeFi) applications. It also considers the amount of Ethereum consumed by the network—and burned, or removed from circulation—as a result of transaction fees.
Data gathered over the past four months indicates that layer-2 networks are “taking more value from Ethereum” than previously thought, Sigel said. Instead of Ethereum benefiting from the bulk of user activity compared to layer-2 networks, the trend has been vastly reversed.
Uniswap Reveals Plans to Launch Ethereum Layer-2 Network Unichain
Leading Ethereum decentralized exchange Uniswap announced plans Thursday to launch its own layer-2 network called Unichain, which will be built on Optimism tech. Uniswap Labs framed the move as one to cut costs, improve transaction speeds, and boost liquidity across various chains. Created by the primary developer of Uniswap, the largest decentralized exchange (DEX) on Ethereum, the new layer-2 solution will aim to create a network of interoperable networks through its use of the Optimism Superc...
“Our original model assumed [a] 90:10 split on transaction revenue between Ethereum and L2s,” Sigel explained. “The actuals are currently 10:90 in favor of L2s.”
Earlier this year, layer-2 networks helping Ethereum scale got a boost through Dencun. The Ethereum upgrade introduced so-called blobs, providing layer-2 networks with dedicated storage space for posting transactions, which lowered costs for scaling networks. Before, layer-2 networks were forced to post bundled transactions in the form comparatively costly of “calldata.”
As networks like Coinbase’s Base and Optimism continue to attract users and developers, Ethereum’s supply has turned inflationary. Transaction fees had outweighed Ethereum’s issuance in the year prior to Dencun, but the asset’s supply has increased by 318,000 ETH since mid-April, according to ultrasound.money.
While Sigel’s projection showed a jarring drop in Ethereum’s projected price, he later clarified to Decrypt that his post was “simply a sensitivity analysis to show the impact on price, all else equal, if ETH doesn't take back some margin from its L2s.”
Vitalik Buterin Lays Out Grand Vision for Ethereum Layer-2s With ‘The Surge’ Roadmap
Ethereum co-founder Vitalik Buterin has shared detailed plans for the next step in the network’s evolution, known as “The Surge.” In a blog post on Wednesday, Buterin shared key goals on how to increase the blockchain's capacity to handle over 100,000 transactions per second, using layer-2 scaling solutions while ensuring Ethereum remains decentralized and secure. While Buterin didn’t give an exact date for when The Surge would be fully implemented, he did call for sustained progress by balanc...
“We expect the underperforming token price to catalyze the community to tweak ETH’s roadmap in an attempt to reverse some of the declining profitability,” he added. “We are already seeing some evidence this is happening.”
Sigel pointed to potential fee sharing models between Ethereum mainnet and layer-2 networks, which Ethereum co-founder Vitalik Buterin recently advocated for, as an example.
“We need to maintain an ecosystem where Ethereum people feel they are on the same team," Buterin tweeted, "and this has a tech interoperability part, a values/culture part, and an economics part too.”
I do think that the status quo has a problem of variance: 12 months ago the conversation was L1 "extracting rent" from L2s, now it's the other way around. What we don't want is a mixed economy where the tax rate jumps from 5% to 95% depending on weather. If we can design…
— vitalik.eth (@VitalikButerin) October 11, 2024
Buterin published a blog post Thursday outlining his vision for layer-2 networks. Standing by Ethereum’s rollup-centric roadmap, he wrote that a flaw with the current ecosystem is that “it is difficult for users to navigate.”
Critics have argued that having many layer-2 networks fragments users and liquidity, siloing activity and assets. Highlighting the need for “maximum interoperability,” Buterin wrote that “Ethereum should feel like one ecosystem, not 34 different blockchains.”
Among major cryptocurrencies, Ethereum’s performance has lagged peers over the past year. The asset’s price has climbed 65% during that time to $2,591, underperforming against Bitcoin’s 135% rise to $67,000 and Solana’s 517% leap to $148, according to CoinGecko.
Crypto ETFs Still Hot, With Nearly 50% of U.S. Investors Planning to Buy: Charles Schwab
Demand for digital asset exchange-traded funds (ETFs) isn’t slowing down, with nearly half of all investors surveyed for a new report claiming they were planning to invest in the American crypto products. It isn’t just the interested boomers buying via brokerage accounts: millennials are also keen to snap up the new products, according to a Thursday report by Charles Schwab. A total of 45% of respondents said they were planning to invest in digital assets via ETFs over the next year. Last year,...
Ethereum’s relationship with layer-2 networks isn’t the only thing hurting the asset’s price. The crypto’s recent struggles can be partly explained by the performance of spot Ethereum ETFs, Kraken Head of Institutional Tim Ogilvie told Decrypt. Aside from a lack of staking yield for ETF investors, Ogilvie said the thesis around Ethereum isn’t as clear as Bitcoin from an institutional investment perspective.
The concept of Ethereum being a “programmable computer” powered by smart contracts or “ultrasound money” based on burnt fees isn’t as palatable as digital gold, he explained. So far, since launching in July, spot Ethereum ETFs have collectively seen $160,000 in cumulative outflows, according to CoinGlass.
“ETH is in a funky spot right now, that’s for sure,” Ogilvie said. “If you're constructing a portfolio for a pension fund, are you really investing in the future of blockchain as a thing? Maybe some people, but it’s a weird leg to add to things.”
Edited by Andrew Hayward
