Gray Release Ethereum Value Assessment Report

This article is from Bitpush.News, report source: Grayscale Investment, translated by: Amy Liu

Summary: Grayscale Investment, established in 2013 and a subsidiary of Digital Currency Group, is the world's largest digital asset management company. This report is Grayscale's latest valuation report on Ethereum, aimed at outlining the key considerations for evaluating Ethereum.

Grayscale Investment released a valuation report on Ethereum on February 3rd, Eastern Time, which aims to outline the important considerations for evaluating Ethereum. The report explores three assessment methods and their related metrics: ETH as a currency, ETH as a commodity, and ETH as an interest-bearing asset.

Grayscale was founded in 2013 and is a subsidiary of Digital Currency Group, making it the world's largest digital asset management company.

The main text is as follows:

Since its launch in 2015, Ethereum has garnered significant attention as the second-largest blockchain network. Although the network has developed into a powerful settlement layer for P2P value transfer worth billions of dollars, investors often find it challenging to determine the investment case.

Ethereum's robust network ensures that applications run according to encoded logic without the need for third parties and are less likely to be disrupted.

Ethereum and Bitcoin have a symbiotic relationship, attracting liquidity from the outside. Bitcoin is the preferred store of value in the digital ecosystem, while Ethereum has become the leading financial infrastructure, settling over $12 billion daily.

1. ETH as a Currency

ETH is the native asset of the emerging decentralized financial system and serves as the primary source of funding for applications built on Ethereum.

ETH plays the role of a new era digital currency on the Ethereum network. Whenever users deploy smart contracts, provide liquidity for applications, or trade on decentralized exchanges, ETH must be paid as network fees.

If investors indeed consider ETH as a currency, it is worth exploring its relative value against other currency competitors. At current prices, can ETH reasonably gain market share from its competitors?

Proportion of ETH market cap to other currencies

In the decentralized financial ecosystem, the use of ETH as collateral continues to expand. However, the increasing use of stablecoins (primarily dollar-pegged digital currencies) and Bitcoin as collateral for ETH may challenge ETH's status as the preferred collateral in the ecosystem. WBTC is a synthetic version of Bitcoin on Ethereum, allowing Bitcoin to be transferred on the Ethereum network. USDT and USDC are the largest dollar stablecoins on Ethereum. The following chart 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 increasing usage of Ethereum as a settlement network is a positive trend.

Bitcoin and dollars on Ethereum

2. ETH as a Commodity

ETH is an integral part of the Ethereum network. Every transaction on the network incurs a fee, which is denominated in ETH. As demand for the network increases, so do the fees.

As a commodity, the price of ETH will fluctuate based on supply and demand in the market. Fortunately, the Ethereum blockchain is transparent, allowing us to analyze user activity and interpret the potential market price of ETH.

We can examine the total transaction fees collected on the Ethereum network daily to gauge demand, as shown in the chart below. Since ETH is the commodity used to pay these fees, high fees will drive demand for ETH, similar to how increased travel may drive demand for gasoline. Notably, the total transaction fees in January 2021 were nearly five times the peak fees in January 2018. However, the price of ETH was roughly equivalent to its peak price in 2018.

Daily total transaction fees

Transaction fees are the total amount paid for transactions on the Ethereum network. Another way to consider the value of ETH is to compare its historical price with sales (fees) on the network. The chart below illustrates this relationship with the "price to sales" ratio: a lower ratio indicates that the network is generating higher revenue relative to ETH's historical market value.

ETH price to sales ratio

3. ETH as an Interest-Bearing Asset

Ethereum has begun to enter the next phase of protocol development, known as Ethereum 2.0. Ethereum 2.0 aims to become a scalable proof-of-stake blockchain. This means that holders can use their ETH as collateral to become validators on the network.

This represents another key shift in the value of ETH. Ethereum 2.0 will transform ETH from a commodity into what we describe as a productive commodity, allowing holders to generate interest by staking ETH. This asset structure is different from any other asset structure in the real world. In Ethereum 2.0, ETH can be consumed as a commodity or staked as a cash flow claim, similar to equity.

Its initial value comes from its commodity use and the dynamics of supply and demand in the market. Those confident in ETH's future price prospects can earn returns on their collateral by staking assets. This may further reduce the floating supply of ETH. If a large amount of ETH is staked, it will decrease the supply available for consumption, potentially creating a positive feedback loop for ETH's price. See the table below for how value flows through the Ethereum 2.0 network.

Ethereum economy

4. Other Relevant Metrics

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

Active addresses on Ethereum

Similarly, the hash rate on Ethereum has reached new highs, with hash rate measuring the computational power miners use to validate transactions. Since miners take time to recoup their initial investments, this indicates that miners are confident that Ethereum will continue to generate high transaction fees. If miners believe that transaction fees will decline, they will be reluctant to allocate resources for mining.

Ethereum hash rate

5. Conclusion

Ethereum is younger than Bitcoin, and its protocol is constantly evolving. Therefore, the methods for evaluating ETH are also changing. Viewing ETH as a currency, commodity, and interest-bearing asset allows investors to consider a range of possible outcomes when assigning value to the asset.

The significant activity on Ethereum, along with the scalability brought by Ethereum 2.0, has the Ethereum community very excited. We can observe from the data that the price of ETH often fluctuates with activity on the network. As discussed throughout this report, multiple metrics, including active addresses, hash rate, and network fees, are reaching new highs, which is a positive sign for investors.