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Demand for Ethereum (ETH) is largely driven by the token’s use in on-chain applications and token transfers, according to a report by CoinShares.
Ethereum’s use cases have increased, but the long-term value is lacking
In a recently published detailed report, CoinShares’ Matthew Kimmell noted that despite Ethereum’s potential to host popular applications in the future, investors are struggling to see a significant value proposition in its native ETH token.
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Since its inception in July 2015, Ethereum has made great strides as it has continuously witnessed the emergence of new use cases, starting from simple token transfers, to use in on-chain applications, decentralized finance (DeFi) protocols and, most recently , non-fungible tokens (NFTs).
According to the report, Ethereum began to see broader utility starting in 2018, when its main use shifted from token transfers to simple on-chain applications, digital identity systems and on-chain withdrawals.
As of 2020, Ethereum has enabled more complex use cases such as protocol staking, liquidity mining, MEV (maximum extractable value), bridges, oracles, and second-tier technologies. Although the increasing Use cases may sound favorable for Ethereum on the surface, but the challenge lies in the fact that ETH usage is concentrated in a limited number of services.
The report reads:
The hard truth, however, is that a very small number of services consistently make up the majority of Ethereum usage, and these sets largely revolve around speculation or simple value transfer, and not necessarily the kind of complex “real-world utility” use cases that were originally envisioned. by the developers of the Ethereum Foundation.
The chart below confirms this observation, showing that simple token transfers and application interactions make up the largest portion of ETH usage, followed by infrastructure, intermediary activities, and contract management.
Marketplaces dominate application usage, Stablecoins lead token transfers
The report highlights that on-chain marketplaces – especially decentralized exchanges (DEXs) such as Uniswap – dominate application interactions. It is striking that more than 90% of transaction costs come from market activity.
In the first half of 2024, Uniswap alone captured around 15% of Ethereum transaction fees. This is not surprising since the leading DEX recently reaches the milestone of generating $50 million in revenue. On the contrary, NFT trading platforms have suffered dramatically reject in user transactions since their peak in 2021.
Token transfers continue to play a key role in Ethereum network activity. With the continuously growing ecosystem, the type of tokens being transferred has diversified. However, ETH and stablecoins such as USDT and USDC have emerged as the dominant tokens in terms of transaction fees.
The chart below illustrates the rise of stablecoins from mid-2017, when USDT started seeing high adoption as a trading pair for almost all listed ERC-20 tokens on crypto exchanges. Circle’s entry into the market in late 2020 with its USDC stablecoin has further driven the use of stablecoins within the broader Ethereum ecosystem.
An interesting observation in the report concerns the increased use of Ethereum Layer-2 solutions. While their adoption has addressed some of Ethereum’s scalability issues, they have also inadvertently reduced demand for Ethereum’s base layer. Kimmel notes:
In our opinion the last big change is EIP-4844which heavily incentivized Layer 2s has worked directly against the design economics of EIP-1559, which tied the value of ether to the demand for Layer 1 platforms.
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ETH is trading at $2,613 at the time of writing, up 0.2% in the last 24 hours. Stablecoins such as USDT and USDC have a market capitalization of $119 billion and $36 billion respectively.
Featured image from Unsplash, charts from CoinShares.com and Tradingview.com