According to Matthew Siegel, head of digital asset research at VanEck, the adoption of Ethereum’s Layer 2 network will reduce ETH’s potential market cap in the coming years if the dynamics involved remain unbalanced. They say it could cost as much as a trillion dollars.
The analyst claimed in a post on Twitter (also known as X) on Thursday that Ethereum’s “changing fundamentals suggest a model update is in order.” If “current realities” are reflected, Ethereum’s price projections would see it plummet 67% to $7,300 by 2030, instead of rising to $22,000, Siegel wrote.
VanEck’s model takes into account the expected growth in the total locked value of Ethereum, which reflects the value of assets used in decentralized finance (DeFi) applications. It also takes into account the amount of Ethereum consumed by the network as a result of transaction fees, and the amount of Ethereum that is burned or removed from circulation.
Data collected over the past four months shows that Layer 2 networks are “extracting more value from Ethereum” than previously thought, Siegel said. Rather than Ethereum benefiting from a large amount of user activity compared to Layer 2 networks, the trend has largely reversed.
“Our original model assumed a 90:10 split of transaction revenue between Ethereum and L2,” Siegel explained. “Currently the track record is 10:90, favoring L2.”
Earlier this year, the layer 2 network that helps Ethereum scale was strengthened through Dencun. Ethereum’s upgrade introduced so-called BLOBs, which provided dedicated storage space for posting transactions to the Layer 2 network, reducing the cost of expanding the network. Previously, Layer 2 networks were forced to post bundled transactions in the form of relatively costly “call data.”
Ethereum’s supply is inflating as networks like Coinbase’s Base and Optimism continue to attract users and developers. According to Ultrasound.money, the year before Dencun, transaction fees exceeded the amount of Ethereum issued, but the asset’s supply has increased by 318,000 ETH since mid-April.
Although Siegel’s predictions indicated a surprising drop in Ethereum’s expected price, he later told Decrypt that his post was “all else equal, if ETH doesn’t regain some margin from L2. “This is simply a sensitivity analysis to show the impact on prices.” ”
“We expect the weak token price to trigger the community to tweak the ETH roadmap to reverse some of the decline in profitability,” he added. “We’re already seeing some evidence of this happening.”
As an example, Siegel pointed to the potential fee-sharing model between Ethereum’s mainnet and Layer 2 networks, recently proposed by Ethereum co-founder Vitalik Buterin.
“We need to maintain an ecosystem where people on Ethereum feel like they are on the same team. This includes technical interoperability, values and culture, and economic In part,” Buterin tweeted.
I believe that there is a problem of difference in the current situation. Twelve months ago the conversation was about L1 “extracting rent” from L2, now it’s the other way around. What we don’t want is a mixed economy where tax rates jump from 5% to 95% depending on the weather. If I could design…
— vitalik.eth (@VitalikButerin) October 11, 2024
Buterin published a blog post Thursday outlining his vision for Layer 2 networks. He supported Ethereum’s rollup-centric roadmap, writing that a flaw in the current ecosystem is that it is “difficult for users to navigate.”
Critics argue that having many layer 2 networks separates users and liquidity, creating silos of activity and assets. Buterin emphasized the need for “maximum interoperability,” writing that “Ethereum should feel like one ecosystem, not 34 different blockchains.”
Among major cryptocurrencies, Ethereum’s performance has lagged behind other cryptocurrencies over the past year. According to CoinGecko, the asset’s price rose 65% to $2,591 during that time, lagging Bitcoin’s 135% rise to $67,000 and Solana’s 517% rise to $148.
Ethereum’s relationship with the Layer 2 network is not the only one negatively impacting asset prices. Cryptocurrency’s recent struggles can be partially explained by the performance of the Spot Ethereum ETF, Tim Ogilvie, head of institutional Kraken, told Decrypt. Aside from the lack of staking yield for ETF investors, Ogilvie said the thesis on Ethereum is not as clear-cut as it is with Bitcoin from an institutional investor perspective.
He explained that the notion that Ethereum is a “programmable computer” powered by smart contracts, or “sonic money” based on burned fees, is not as favorable as digital gold. According to Coinglass, cumulative outflows from the Spot Ethereum ETF since its launch in July have totaled $160,000 so far.
“ETH is in a weird place right now, that’s for sure,” Ogilvie said. “If you’re building a pension fund portfolio, are you really investing in the future of blockchain? Maybe some people think so, but it’s an odd foot to add.”
Edited by Andrew Hayward
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