The rapid emergence of the Bitcoin ecosystem has sparked discussions within the crypto community. While some pathways may overlap with Ethereum's ecosystem, it's essential to understand that both networks offer distinct value propositions. Ethereum's unique architecture and growing ecosystem position it to thrive alongside Bitcoin's expansion.
The current internet era offers boundless opportunities, yet it lacks two fundamental elements:
- Digital property rights for users.
- A trustless, neutral, shared, secure, and permissionless global accounting system to record user states and enable worldwide trade on a shared ledger.
These gaps represent the core value propositions of blockchain technology, signaling an impending revolution in how we interact digitally.
Ethereum’s Architecture Mirrors the Internet’s Development
Bitcoin pioneered the public blockchain. In its early days, creating a new application required launching a separate blockchain. For instance, Namecoin, a peer-to-peer naming system, started as a fork of the Bitcoin network. This era resembled the early internet, where building a website meant hosting your own server.
Ethereum, launched in 2015, was designed as a "geographic city for public blockchains." It enables developers to leverage shared infrastructure for building blockchain-based applications more affordably and efficiently.
However, specialized use cases demand flexibility. The advent of Layer 2 (L2) solutions and application-specific blockchains allowed developers to build execution services on top of Ethereum, using it as foundational settlement infrastructure.
Thus, Ethereum is evolving into a "network of networks," much like the internet. L2 solutions resemble cloud services—they offer scalability and flexibility while maintaining shared infrastructure.
Moreover, L2 scalability enhancements, coupled with zero-knowledge proofs, are introducing privacy to public blockchains—similar to how HTTPS enabled e-commerce by adding encryption to the internet.
Ethereum’s Business Model
Investors should view the Ethereum network through two lenses:
- ETH: The native token that powers the network and creates economic incentives for decentralized operation.
- Ethereum: The computational network and accounting system serving as foundational infrastructure for applications built atop it.
Key Data Insights
Non-Zero Addresses: Exponential growth over the past eight years, surpassing 107 million as of September 30, 2023—a 26% year-over-year increase and 4.9% quarterly growth.
Active Addresses: Averaged around 400,000 daily in Q3, down 4% from the previous quarter. Similar dips occurred during past crypto downturns, but user adoption tends to rebound with market improvements.
Daily Transactions: Slight growth in Q3, with network demand consistently outpacing supply. L2 networks like Optimism, Arbitrum, and Base are handling an increasing share of transactions, highlighting Ethereum’s scalability through modular design.
Core Developers: The number of core developers stabilized in Q3. According to Electric Capital, the Ethereum ecosystem boasts over 5,946 active developers—a 51% increase over two years and triple its nearest competitor.
Gas Usage: Average gas usage, indicating L1 block space demand, rose slightly recently. The gas limit has increased fivefold since Ethereum’s inception to meet growing demand, a trend expected to continue with L2 expansion.
Transaction Fees: Averaged $4.85 in Q3, down 46% from the previous quarter. During high demand, fees spike due to limited block space, but L2 solutions offer transactions as low as $0.01–$0.13. The upcoming EIP-4844 upgrade is anticipated to further reduce fees.
ETH Staking: The staking ratio is crucial for network health. Ethereum is the only public blockchain with a positive real yield (3.6%), reflecting long-term holder confidence.
ETH Price: Highly reflexive, with prices closely tied to on-chain metrics. Historical volatility includes an $83.79 low in 2018 and a 57x peak in 2021.
Trading Volume: Declined 56% year-over-year in Q3, partly due to reduced market-making activity in the U.S. and waning retail interest during the crypto winter.
Total Value Locked (TVL): Ethereum’s DeFi TVL stood at $3.9 billion in Q3, down 12% quarterly but 5.8x higher than its closest competitor. Notably, 32% of ETH is held in smart contracts—a record high indicating robust asset management.
Unit Economics: Daily revenue per active address grew 87% quarter-over-quarter but fell 24.9% year-over-year, aligning with fee trends during network congestion.
With L2 solutions reducing user costs, transaction volumes are poised for exponential growth.
Business Model Analysis
Despite its decentralized economy, Ethereum’s business model is straightforward: it charges minimal computation/settlement fees. As applications scale, the network becomes increasingly profitable.
Revenue: Transaction fees represent total user payments. Future applications may pay fees on behalf of users for services like DeFi loans, NFT minting, or gaming. While Q3 revenue fell 47% quarterly, the network remained profitable.
Cost of Revenue: Repayments to validators for securing the network. 80% of user fees are burned, with the remaining 20% covering priority fees and MEV costs.
Token Incentives: Block subsidies paid to validators. Post-merge, security costs dropped 87%, driving profitability. Token incentives are debated but essentially reward network participation.
Profitability: Net income was $78.7 million in Q3, down 81% from Q2. Ethereum remains the only profitable public blockchain, as user fees exceed token incentives.
Relative Valuation: "GDP" Analysis
Comparing Ethereum to other L1s via "GDP" analysis quantifies network economic opportunity. Here, L1 blockchains are akin to "nations," with their native tokens serving as currency. A token’s strength depends on economic activity, property rights, and demand.
**Ethereum’s annual "GDP" is $2.6 billion**, with industry-specific revenue streams detailed below. It leads in GDP and TVL ($39 billion). As L2 solutions enhance throughput and privacy, economic activity is expected to grow exponentially.
Comparing ETH and Dollar Demand
ETH mirrors traditional currency dynamics. To access Ethereum’s network, users must pay fees in ETH—for DeFi, gaming, NFTs, or staking. Initiatives like Eigen Layer’s restaking solution further boost ETH demand.
In summary, ETH’s utility-driven demand parallels the structural demand for dollars in global trade. If Ethereum continues expanding its global network effects, holding ETH becomes essential for accessing its services.
The Next Cycle Approaches
Crypto cycles are driven by:
- Global liquidity and business cycles (interest rates and monetary policy).
- Innovation cycles (infrastructure and application development).
- Bitcoin halvings (reducing new issuance; next expected April 2024).
Historical patterns show:
- ~80% peak-to-trough drawdowns.
- One year from peak to bottom.
- Two years to reclaim all-time highs.
These cycles align with global liquidity trends, suggesting potential synchronization ahead of the next halving.
On-Chain Gas Consumption Trends
Gas usage data reveals Ethereum’s evolution:
- 2017: DeFi introduction.
- 2019: Stablecoins for payments/collateral.
- 2020: NFTs.
- 2021: Cross-chain bridges.
Future gas consumption will increasingly shift to L2s, driving new use cases through cost compression.
Modular vs. Integrated Blockchains
Ethereum embraces a modular stack—separating settlement (L1) and execution (L2). Solana, by contrast, uses an integrated architecture combining both.
Ethereum resembles Android, prioritizing modularity across diverse hardware. Solana mirrors iOS, offering a seamless, high-performance experience. Both can coexist, catering to different needs.
Catalysts for Ethereum Adoption
Short-term (2–3 years), scalability, privacy solutions, and regulatory clarity will drive adoption. Long-term tailwinds include:
- Open-Source Leadership: Ethereum sets web3 standards, benefiting from a global talent pool and rapid iteration.
- Demographics: generational shifts favor digital-native solutions.
- Global Wallet Distribution: 83% of the global population owns smartphones, enabling permissionless access.
- Value Distribution: Token models redistribute value to users, creators, and suppliers.
- Internet Culture: Decentralized, community-driven growth mirrors Bitcoin’s success.
- Institutional Distrust: Declining trust in traditional institutions creates opportunities for alternatives.
- Macro Trends: Late-stage debt cycles may accelerate societal shifts toward decentralized systems.
- L2 Scaling: Solutions like Arbitrum and Optimism, plus EIP-4844, will boost throughput and user experience.
- Financial Innovation: Projects like EY’s Nightfall could catalyze institutional migration.
- New Business Models: Smart contracts enable novel internet-native economies.
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Frequently Asked Questions
Q1: Does Bitcoin’s growth directly threaten Ethereum?
A: Not necessarily. Both networks serve different purposes—Bitcoin as digital gold, Ethereum as a decentralized computing platform. Their coexistence is likely.
Q2: How do L2 solutions improve Ethereum’s scalability?
A: L2s process transactions off-chain, reducing L1 congestion and fees while maintaining security through periodic settlements.
Q3: What is Ethereum’s staking yield?
A: Current yields average 3–4%, derived from transaction fees and token incentives post-merge.
Q4: Can Solana outperform Ethereum?
A: Solana offers high throughput but trades off decentralization. Both may thrive targeting different use cases.
Q5: How does EIP-4844 reduce fees?
A: It introduces "blob" transactions for L2 data, cutting storage costs and thereby lowering user fees.
Q6: What drives ETH’s value long-term?
A: Network utility, demand for block space, and its role as a base asset in web3 economies.
Conclusion
The crypto market cap reached $3 trillion in 2021. Despite volatility, the industry is in a long-term adoption cycle. If historical patterns hold, the next cycle could yield a $10 trillion market cap, with Bitcoin and Ethereum capturing over 50%. For Ethereum, this implies a potential price range of $8,300–$20,800.
Ethereum boasts robust network effects, transparent value distribution, and post-merge tokenomics. Its ecosystem remains the strongest among smart contract platforms. ETH represents a high-risk-adjusted return potential—an index fund for web3’s growth, akin to how tech giants thrived with internet adoption.
This article is adapted from "The Ethereum Investment Framework."