Generally speaking, it is highly unlikely that ethereum (ETH) will become a “popular currency,” but it still may compete with bitcoin (BTC) in the long run, according to the crypto venture firm Dragonfly Capital.
The firms’ General Partner Kevin Hu and Junior Partner Celia Wan wrote in their recent report that as institutional investors are investing in BTC as its store-of-value narrative begins to go mainstream, their understanding of Ethereum and ETH is “convoluted,” especially when notions such as decentralized finance (DeFi) and non-fungible tokens (NFTs) are added to the mix.
While an ETH bull may argue that if the Ethereum network becomes ubiquitous and fees stabilize, ETH can become a popular currency, “that is highly unlikely and stablecoins are fundamentally much better at both functions even if Ethereum does become a dominant platform,” the author said, adding that “as a medium of exchange and unit of account, ETH is unlikely to succeed.”
Even though ETH has five times the market capitalization of ERC-20 stablecoins, their total on-chain volume already exceeds that of ETH (USD 10bn vs USD 8bn a day), with off-chain volumes showing an even larger difference.
However, since it is used as collateral in DeFi, as a non-sovereign store-of-value, ETH may still have a chance at taking some potential market share.
“In the long run, it is conceivable that ETH can even compete with Bitcoin on the dimensions of scarcity, durability, and unforgeability,” Hu and Wan noted.
As the reasons behind this statement they give:
- EIP-1559 will lead to the stabilization of ETH’s monetary policy and inflation will likely be cut in half;
- Ethereum 2.0’s security model will eventually be “almost just as battle-tested” as Bitcoin’s, and a proof-of-stake consensus mechanism will likely increase the security guarantees of Ethereum if ETH is sufficiently valuable;
- if Ethereum and DeFi become the “financial layer of the future,” ETH may remain as one of the major collaterals because it was the first collateral at scale and the DeFi ecosystem was built around it.
All this being said, the authors find it possible for ETH to take 10% of BTC’s market share if Ethereum and DeFi continue to grow. If BTC’s potential market capitalization is around USD 4.7trn – USD 14.6trn, then ETH’s potential monetary value could be at USD 0.5trn – USD 1.5trn, they said.
Additionally, the Dragonfly Capital partners noted that ETH is set to “become a capital asset in addition to a consumable commodity [which] should have a profound effect on ETH’s value accretion,”
“Even if other tokens such as stablecoins may replace Ethereum in the future as alternative forms of payments, ETH will still be used by network validators for staking and receiving rewards. Therefore, ETH will likely accrue value from demand like a consumable commodity and cash flows like a capital asset,” they said.
Also, the venture capitalists argued that the current DeFi ecosystem on Ethereum has formed a positive feedback loop, where users both bring the liquidity-based network effect to DeFi and benefit from a liquid DeFi market.
“Furthermore, DeFi protocols’ composability and interoperability with each other have created a lock-in effect for Ethereum, making it hard for other Layer 1’s and side-chains to compete,” they concluded.
The authors also provided a very rough estimate when it comes to ETH’s potential valuation: between USD 3.7trn and USD 4.7trn “in the distant future.”
At 16:12 UTC, the market capitalization of ETH stood at USD 247bn. ETH traded at USD 2,119 and was up by almost 1% in a day and 6.5% in a week. At the same time, the market capitalization of BTC was USD 631bn. The cryptocurrency traded at USD 33,661, or by 1% higher than a day ago, trimming its weekly losses to less than 3%.