Ethereumâs 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 Ethereumâs âchanging fundamentals suggest a model update is in order.â Instead of climbing to $22,000 by 2030, Ethereumâs price projection would plummet 67% to $7,300 if âthe current realityâ was reflected, Sigel wrote.
VanEckâs model factors in Ethereumâs 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 networkâand burned, or removed from circulationâas a result of transaction fees.
Data gathered over the past four months indicates that layer-2 networks are âtaking more value from Ethereumâ 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.
âOur original model assumed [a] 90:10 split on transaction revenue between Ethereum and L2s,â Sigel explained. âThe actuals are currently 10:90 in favor of L2s.â
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 âcalldata.â
As networks like Coinbaseâs Base and Optimism continue to attract users and developers, Ethereumâs supply has turned inflationary. Transaction fees had outweighed Ethereumâs issuance in the year prior to Dencun, but the assetâs supply has increased by 318,000 ETH since mid-April, according to ultrasound.money.
While Sigelâs projection showed a jarring drop in Ethereumâs projected price, he later clarified to Decrypt that his post was âsimply a sensitivity analysis to show the impact on price, all else equal, if ETH doesn’t take back some margin from its L2s.â
âWe expect the underperforming token price to catalyze the community to tweak ETHâs roadmap in an attempt to reverse some of the declining profitability,â he added. âWe are already seeing some evidence this is happening.â
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.
âWe 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.â
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 designâŠ
â vitalik.eth (@VitalikButerin) October 11, 2024
Buterin published a blog post Thursday outlining his vision for layer-2 networks. Standing by Ethereumâs rollup-centric roadmap, he wrote that a flaw with the current ecosystem is that âit is difficult for users to navigate.â
Critics have argued that having many layer-2 networks fragments users and liquidity, siloing activity and assets. Highlighting the need for âmaximum interoperability,â Buterin wrote that âEthereum should feel like one ecosystem, not 34 different blockchains.â
Among major cryptocurrencies, Ethereumâs performance has lagged peers over the past year. The assetâs price has climbed 65% during that time to $2,591, underperforming against Bitcoinâs 135% rise to $67,000 and Solanaâs 517% leap to $148, according to CoinGecko.
Ethereumâs relationship with layer-2 networks isnât the only thing hurting the assetâs price. The cryptoâs 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 isnât as clear as Bitcoin from an institutional investment perspective.
The concept of Ethereum being a âprogrammable computerâ powered by smart contracts or âultrasound moneyâ based on burnt fees isnât 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.
âETH is in a funky spot right now, thatâs for sure,â Ogilvie said. âIf 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 itâs a weird leg to add to things.â
Edited by Andrew Hayward
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