The Wolf Den #911 - Ethereum’s Coming of Age
The snowball is gaining speed.
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In This Issue:
Ethereum’s Coming of Age
Trump Acknowledges Bitcoin
Michael Saylor Bought More
IBIT Volume Soars
An Alternative Perspective on Dencun
Ethereum’s Coming of Age
Just a few months ago, Ethereum was unequivocally considered a deadbeat, washed-up, has-been altcoin. Critics labeled it as ‘too slow,’ ‘too expensive,’ ‘uninteresting,’ and ‘outdated.’ These were among the milder insults hurled at Ethereum.
We knew none of this was true.
Since hitting its lowest point in sentiment a few months ago, Ethereum has garnered significant attention and undergone a substantial price reversal, reaffirming its position as the “next” darling of the crypto space.
It’s almost as if ignoring the crowd and being patient works.
In any case, Grayscale recently published a meticulously crafted report on Ethereum I had to share here. The report argues that Ethereum is entering a "Coming of Age" phase, solidifying its position as the leading Smart Contract Platform while also addressing its scalability challenges.
What I appreciate about Grayscale's research is its honesty, fairness, and optimism. Now that Ethereum’s image had returned with a vengeance, we can anticipate more reports on the asset similar to this one. However, since Grayscale was one of the early contributors, they deserve credit and recognition for their insights.
Alright, enough of my takes, let's dive into the alpha. My plan is to share the highlights (spoilers ahead) and add some comments where I think it's relevant. Enjoy!
Ethereum’s Coming of Age: “Dencun” and ETH 2.0
“Ethereum can be seen as a decentralized version of the Apple App Store as it provides the underlying platform for a wide variety of applications. These decentralized applications (called “dApps”) can range from gaming or identity protocols to digital artwork as well as stablecoins and the tokenization of financial assets.”
This coming paragraph is a great summary of the report that includes necessary context.
“In 2023, Ethereum’s performance (+90%) lagged behind the broader Smart Contract Platforms Crypto Sector (+110%), and underperformed certain sector competitors, such as Solana (+916%) and AVAX (+255%). Grayscale Research believes this is indicative of Ethereum going through its proverbial ‘adolescent phase.’ With Ethereum’s planned Dencun upgrade in March, Ethereum is on the cusp of ‘growing up’ through a pivotal transformation aimed at addressing its scalability challenges. We believe that recent price performance reflects the market’s anticipation of this upgrade, as Ethereum (up 26% YTD) has outperformed the broader Smart Contract Platforms Sector (up 3% YTD) since January 1st, 2024.”
Here’s a helpful chart of Ethereum vs everything else.
Ethereum leads in almost every metric in the Smart Contract Platforms Crypto Sector.
I really like this paragraph, explaining the concept of the Ethereum “flywheel.”
“That begs the question: if Ethereum has been performing well on so many different metrics, why then was it outperformed in price by competitors in 2023?”
This is a great question. Let’s see what Grayscale has to say.
“At Grayscale Research, we believe this discrepancy is largely due to Ethereum still navigating its ‘adolescent phase.’ Currently, Ethereum’s performance is hindered by its slow transaction speed, low throughput, and high costs for users. With average transaction fees of $2.3 as of February 22nd, Ethereum is significantly more expensive versus alternatives like Solana. This threatens to drive away end users to other chains (see Figure 3 below). However, the Ethereum community has a plan. Core developers are working to implement ‘Ethereum 2.0’ to address these user cost and scalability concerns through a series of upgrades. With every upgrade, Ethereum is effectively ‘growing up’ and continuing to close its throughput and cost gap.”
I agree with this assessment. Now for the layer 2 conversation.
“As of February 20, 2024, Arbitrum alone leads most Layer 1s including Solana, Avalanche, and Polygon in TVL at $3 billion (Figure 1). Additionally, Layer 2s have helped onboard new users into the Ethereum ecosystem.”
From my understanding of DeFi, Total Value Locked (TVL) stands out as the most crucial metric. While other protocols may occasionally outpace or outperform Ethereum in certain aspects, they never surpass Ethereum in TVL.
Now for some commentary on Dencun, scheduled for March 13.
“This is where the impending Dencun upgrade in March comes in. This software upgrade would provide Layer 2 scaling solutions a designated storage space on Ethereum, reducing their data cost and therefore improving their margins. While unclear exactly how much this will reduce transaction costs for end users of Layer 2s upon implementation, some have estimated it at over 20x.”
It’s bullish that developers continue to choose Ethereum and its L2’s over other chains, even at higher costs. Dencun will only further solidify Ethereum's lead in the space. Last but not least, the Grayscale conclusion.
“Despite increasing conflict with competitors, Ethereum faces a number of tailwinds, including network effects and billions in network revenue, the Dencun upgrade, a flourishing Layer 2 ecosystem, and increasing use cases for its security budget. Moreover, the potential for a spot Ethereum ETF could bring ETH the asset further into the awareness of both institutions and the broader public.”
Truthfully, not much has changed for Ethereum aside from its perception. It’s funny how that works.
“While the future remains uncertain, we believe the Ethereum ecosystem remains well positioned to solidify its place as the preeminent Smart Contract Platform.”
Overall, Ethereum is demonstrating its capacity to mature in response to market demands while maintaining its dominance in the smart contract arena. Alternatives that offer faster or cheaper solutions should not be seen as more mature, but simply alternatives. Asset maturity lies in staying true to your roots, surviving bear markets, and meeting market demands, a feat Ethereum is successfully accomplishing along with Solana too.
These two assets are not equally mature.
Assuming no black swans or market curveballs, Ethereum is poised to surge when Bitcoin cools off, especially if Bitcoin returns to its all-time high soon. This should propel Ethereum to at least 75% of its all-time high, which is at least $3,600. These are rough estimates, but they convey the general idea. Similar logic applies to Solana.
There’s no better feeling than being a bull and being right. Congrats to holders, our time has come.
Trump Acknowledges Bitcoin
During a recent Fox interview, former President Donald Trump was asked about Bitcoin.
Interviewer: Isn't the next logical step for you to embrace Bitcoin?
President Trump: Well, a lot of people are doing it. I always liked one currency. I call it the dollar. A lot of people are doing it. It’s taken a life of its own. You probably have to do some regulation as you know. Many people are embracing it. And more and more I am seeing people want to pay in Bitcoin. You are seeing something that's interesting, so I can live with it one way or the other.
Don't forget, for what it's worth, Donald Trump or his team has used the Ethereum network to issue NFTs. It might be the case that Trump doesn’t have the slightest clue what Ethereum is, but that did happen. We should learn more about how the candidates are feeling about crypto as we close in on the upcoming presidential debates in September and October (if they happen).
Michael Saylor Bought More
An additional 3,000 BTC were purchased at $51,813 each, totaling $155.4 million in cash. This purchase raised the total MicroStrategy stack to 193,000 BTC, valued at $10.2 billion as of yesterday afternoon (higher now). While these figures are intriguing, the most significant number on people's minds is the profit Michael Saylor and MicroStrategy have amassed from their purchases, which has now reached $4 billion gross. The only possible conclusion to make about Michael Saylor is that he will go down as the best investor of our time, period.
IBIT Volume Soars
I have some new thoughts on the ETF. Firstly, IBIT's increasing volume is a remarkable advertisement for both IBIT and Bitcoin. As Eric points out, “$1b/day is big boy level volume, enough for (even big) institutional consideration.” Next, it will be interesting to see in a couple of months how Coinbase’s volume is affected by these ETF issuers. Personally, I think this is a non-issue, but we will have a definitive answer at the next earnings report. Even if Bitcoin creeps up for the remainder of Q1, Coinbase is going to have some incredible figures to report. Lastly, Ethereum isn’t going to come anywhere close to Bitcoin in terms of ETF activity when it is approved, but even capturing a fraction of Bitcoin’s interest will be a strong tailwind. Bitcoin is effectively catching legacy interest now, which will inevitably spill over to Ethereum when that time comes.
FYI, total ETF volume on the day hit $3.24B. WOW. The second highest day, behind launch day at $4.6B. Launch day is going to be beat. One monster day on Bitcoin is all it will take.
An Alternative Perspective on Dencun
Cointelegraph does not seem to be sold on the idea of Dencun. I don’t think Dencun was ever advertised as an upgrade that would put Ethereum on par with cheaper chains, but it will make it cheaper. Also, if the expectation is for Ethereum to reach prices of other chains, I don’t think anyone who believes that will ever be satisfied. I included this article for its alternative perspective for all of you to decide.
“The Dencun upgrade — scheduled to occur on March 13 — is a step in the right direction, but it is only a short-term patch where a sustainable, long-term solution is needed… Capacity is an increasingly concerning issue for Ethereum. While the Dencun upgrade will help the situation by improving efficiency, it is only a band-aid solution. The best way forward in the long-term is to increase capacity, which is best done through multi-chain solutions such as appchains and rollups.”
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The changes with ETH are positive. However, I think the issue with ETH isn't the roadmap, it is the technical debt and complexity that turns the execution of the roadmap into a turtle race. This is the chain around the neck of ETH that will eventually strangle it.