Grayscale established the Ethereum Trust on December 14, 2017, and on October 12, 2020, the Ethereum Trust became a SEC reporting company, which allows a wider range of investors to participate.

Currently, according to official website data, the number of Ethereum holdings in Grayscale exceeds 3 million. If you are interested in comparing ETH 2.0's lock-up amount, DeFi's lock-up amount and other data, it is not difficult to infer that the continuous increase of gray scale and other institutions will have a heavy impact on the Ethereum ecosystem.

Since its launch in 2015, Ethereum has attracted great interest as the second largest blockchain network. Although Ethereum has matured to provide a powerful settlement layer for billions of dollars of P2P transfers, investors often find it difficult to determine the investment case.

It will help us to think about the value proposition of Bitcoin in retrospect. Bitcoin promises to establish a global and verifiable accounting system. This accounting system is supported and protected by the world's most powerful computing network, allowing users to record the flow of value in a highly credible manner.

Similarly, Ethereum also provides transaction verification functions, with a wider range of verification logic and information. In other words, the powerful network of Ethereum ensures that applications can run according to the coded logic, without the involvement of a third party, and without external intervention. Ethereum has created an environment of trust, and historical precedents show that this is a prerequisite for trade prosperity.

Does this mean that Ethereum is better than Bitcoin? Not necessarily-they are different in their respective areas of expertise, and make corresponding choices. Bitcoin's design is fixed and relatively low in flexibility, making people believe that its accounting system will not be changed at will. Ethereum is more adaptable, more flexible, and cultivates an environment of innovation and iteration.

Ethereum and Bitcoin are in a symbiotic relationship, absorbing and capturing liquidity, cognition and value from the external world. Bitcoin is the preferred store of value in the digital ecosystem, while Ethereum has become the leading financial infrastructure with daily transaction settlements exceeding US$12 billion.

With the increasing activity on Ethereum, investors can't help but ask what investment cases are on Ethereum and how to value the native asset of the Ethereum network-ETH.

In August 2020, we released a report on Bitcoin valuation to help investors understand Bitcoin investment cases and how they monitor important evaluation indicators. Similarly, this article is also dedicated to sorting out the important factors that need to be considered when evaluating ETH. Bitcoin is widely known as digital gold. In contrast, the name of Ethereum is not so clear.

ETH as currency

Ether (ETH) is a native asset that supports the emerging decentralized financial system. ETH is used as a collateral to minimize trust when borrowing and lending, and it is also the most important source of funds for building applications on Ethereum. At the time of writing this article, about 7 million ETHs are locked in the DeFi protocol of the Ethereum network, which is worth more than 9 billion U.S. dollars at current prices.

As a new era digital currency, ETH plays a role in many aspects on the Ethereum network. Users deploying smart contracts on the Ethereum network to provide liquidity for DeFi applications, or trading on DEX, all need to pay ETH as a fee for using the network.

The Bitcoin community believes that the money supply should be fixed, while Ethereum believes that the minimum necessary assets should be issued in order to fully guarantee long-term network security. The fixed supply is the main concern of Bitcoin, and the actual utility of ETH in the application of the Ethereum network is the main factor driving ETH as a currency. For Ethereum, this utility promotes its circulation as a currency commodity in the Ethereum network.

The use of Ethereum as collateral in the DeFi ecosystem continues to expand. However, the proportion of stablecoins (digital currencies anchored to USD) and BTC as collateral in the Ethereum network is rising, which will challenge ETH's status as the preferred collateral for the ecosystem.

For example, WBTC is a synthetic BTC asset on Ethereum, enabling Bitcoin to be used in the Ethereum network. USDT and USDC are the most widely used U.S. dollar stablecoins on Ethereum.

ETH as a consumer product

The operation of the Ethereum network cannot do without ETH. Every transaction on the network will incur a certain cost, and these costs are priced in ETH. These transaction fees, or revenue from the network, will be distributed to miners. As network demand increases, fees will increase-different transactions will compete with each other, and the higher price can be packaged into blocks earlier.

Some analysts believe that Ethereum's fee payment may not require ETH, but can be paid in any digital currency of their choice. This is called economic abstraction, and this view will be used to challenge the value of ETH.

Some people also think that ETH is a simple transaction medium asset, and investors may seek to minimize the amount of ETH they hold, only for payment services. In other words, Ether will be used as working capital, because investors may seek to minimize their working capital, so the circulation speed of ETH will increase. According to the exchange formula, M=PQ/V, its value It will be reduced. In other words, this view believes that continuous selling pressure will cause the price of ETH to fall.

However, Ethereum plans to implement a proposal called EIP-1559, which proposes to destroy ETH to pay transaction fees. This is important because it will transform ETH from an asset as a medium of exchange into a consumer product. ETH will be more like gas than currency.

If the EIP-1559 proposal is implemented, it will also establish the status of ETH as the native economic unit on Ethereum. The agreement stipulates that only ETH can be destroyed. This reduces the possibility of economic abstraction mentioned earlier, making assets other than ETH unable to be used to pay transaction fees.

The destruction method mentioned in EIP-1559 can also be regarded as a deflationary mechanism. If the amount of ETH destroyed exceeds the amount of additional issuance, it will enter a deflationary state.

If the activity on Ethereum increases and the supply of ETH decreases due to destruction, changes in the relationship between supply and demand will push ETH to rise. If EIP-1559 is implemented, a consumption mechanism will be established to form a positive feedback loop for the price of Ethereum. As a commodity, the price of ETH will change according to changes in market supply and demand. Fortunately, the Ethereum blockchain is transparent, and we can analyze user activity and analyze the fair price of Ethereum.

We can look at the total daily transaction fees on Ethereum to measure demand, as shown in the figure below.

Since ETH is required to pay transaction fees, high transaction fees will also drive demand for ETH, just as increased travel volume may drive demand for gasoline.

It is worth noting that during January 2021, total transaction fees were almost 5 times the peak fee in January 2018. However, the price of Ethereum is approximately equal to the 2018 peak.

Summary

Compared with Bitcoin, Ethereum is still very new, and the Ethereum protocol is undergoing a major upgrade. Therefore, how to evaluate the underlying asset of the Ethereum protocol—ETH, the evaluation method is not clear and continues to change. The three methods proposed in this article, using ETH as currency, consumer goods, and interest-bearing assets, allow investors to obtain a variety of possible conclusions when assessing the fair value of assets.

The proposal for improvement of the ETH asset structure (EIP-1559) proposes to destroy ETH to pay transaction fees. In this way, using ETH as a consumer product may become a catalyst for the value of Ethereum. Some analysts previously believed that it is possible to remove ETH from the Ethereum ecosystem through economic abstraction. The EIP-1559 proposal determines the status of ETH as the original asset of the Ethereum protocol, reducing the probability of occurrence of the scenarios assumed in these analyses.

Finally, if the Ethereum protocol is successfully upgraded to 2.0, investors will have the ability to use ETH as a productive asset and mortgage the ETH they hold to obtain income.

There are active users on the Ethereum network. EIP-1559 proposes to improve the economic model of Ethereum. Ethereum 2.0 promises to improve scalability. In addition, the Ethereum community has something to be excited about.

It can be seen from the data that the price of Ethereum often changes with changes in the basic activities of the network. As mentioned in this article, many indicators are currently hitting new highs, and many data such as active addresses, mining power, and network fees show that this is a positive signal for investors.