Grayscale Report highlights key considerations for Ethereum’s rise in value

Digital assets management firm Grayscale Investments has outlined the key investment considerations of Ethereum in a new report.

Grayscale Researchs Valuing Ethereum report delves into the details of how investors can truly gauge the value of the second biggest cryptocurrency by market capitalization by outlining three key properties of the blockchain and its token (ETH).

The report highlights the difference between Ethereum and Bitcoin value proposition. The latter is a ‘global verifiable accounting system’ running on the ‘most powerful computing network in the world’ according to Grayscale and draws value from the fact that is ‘hardened and relatively inflexible’ which means that users can trust that the system wont change.

Meanwhile Grayscale describes Ethereum as the opposite – adaptive and flexible. This allows for an environment of ‘innovation and iteration’. The report notes that Bitcoin and Ethereum have a symbiotic relationship, with the former being the ‘preferred store of value in the digital ecosystem’ while Ethereum has ‘emerged as the leading financial infrastructure’ and settles around $12 bln worth of daily transactions.

Grayscales report highlights three metrics that are key in giving the Ethereum blockchain and ETH some sort of accuracy in its valuation. The paper considers Ether as money, a consumable commodity and Ether as an interest-bearing asset.

Ether as Money

The report notes that Ether already acts as ‘new-age’ digital money on the Ethereum network, as it is used to pay network fees for a variety of different functions like deploying a smart contact or making trades on a decentralized exchange.

Grayscale also notes that while the finite supply of Bitcoin is a primary role in its value proposition, Ethers use as money is driven by its use by applications on the Ethereum blockchain.

Ether is also playing a key role as collateral in the Decentralized Finance (DeFi) ecosystem but its dominance is receiving a challenge from stablecoins that are being used as collateral. The report notes that different assets being used as collateral will pose a challenge to Ethers use as money, Ethereum is seeing an uptick in its use as a settlement network.

Ether as a Consumable Commodity

The report also outlines how Ether functions as a consumable commodity within the Ethereum ecosystem. Ether is used to pay for transaction fees to miners that currently secure the network.

The report then explores the possibility of users beginning to pay these fees in the cryptocurrency of their preference, which is known as economic abstraction. Another consideration is that Ether becomes treated as working capital – meaning it would only derive value from its use as a medium of exchange on the blockchain and users would then start minimizing their holdings to just cover their expense requirements on the network.

This could create a situation where investors might sell more Ether to minimize their working capital which would then cause the value of Ether to drop. To counter this, Ethereum is looking to implement proposal EIP-1559, which would see the blockchain destroy Ether that is used to pay for transactions. Grayscale highlights that this is how Ether would transform from a medium of exchange to a consumable commodity.

“Ether would become more like combustible gas than money. If this proposal is implemented, it would also ensure that Ether is the native economic unit on Ethereum – protocol rules would dictate that only Ether could be burned. This would reduce the possibility of economic abstraction – the ability to pay fees in an asset besides Ether.”

The burning of Ether will also have a deflationary effect if the amount of Ether consumed as ‘fuel’ outpaces the amount of Ether being minted by miners, or stakes when the network moves to a proof-of-stake consensus mechanism which is part of the ETH2 transition which is currently underway.

Supply and demand economics would see the value of Ether increase if supply decreases due to burning and network activity increases. Grayscale suggests that a consumption mechanism like this would create a ‘positive feedback loop’ for the price of Ether.

Ether as an Interest Bearing Asset

As Decentralized Finance has already proved, cryptocurrencies can also be used as a way to earn interest off one‘s digital assets. Ethereum’s move to proof-of-stake will expedite its own status as an interest bearing asset.

In a nut-shell, Ethereum will move away from the use of miners and proof-of-work consensus protocol to proof-of-stake, where holders can stake Ether as collateral to become validators for the network.

Validators are then compensated for securing the network and processing transactions by receiving transaction fees. Grayscale notes that ETH2 will transform Ether from a commodity to what it describes as a ‘productive commodity’ by staking Ether to earn interest.

“This asset structure is unlike anything else in the physical world. Commodities are consumed. Equities provide rights to cash flows. Under Ethereum 2.0, Ether can be consumed as a commodity or staked as a claim on cash flows, similar to equity.”

-“Valuing Ethereum” – Grayscale Research.

If more users begin to stake Ether to earn interest, or ‘yield’ which has become the phrase used in the DeFi space, this could create another positive feedback loop for the value of Ether. This would be driven by a reduction in Ethers floating supply in the market as more users lock up their Ether as collateral.

Having outlined these three critical points, Grayscale‘s report concludes with an optimistic outlook for Ethereum’s value as a blockchain as well as the potential for Ether as a cryptocurrency token to continue to appreciate in value.

“Between the enormous amount of activity on Ethereum, the economic improvements to Ether, and the promise of increased scalability with Ethereum 2.0, there is a lot for the Ethereum community to be excited about. We can observe from the data that the price of Ether tends to move with underlying activity on the network. As noted throughout this report, multiple metrics are reaching new highs, including active addresses, hashrate, and network fees – a positive sign for investors.”