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Ethereum (ETH) Demand: Key Drivers and Market Insights
According to a comprehensive report by CoinShares, the demand for Ethereum (ETH) is primarily driven by its utilization in on-chain applications and token transfers.
Ethereum’s Use-Cases Have Increased, But Long-Term Value Is Missing
In a recent detailed report, CoinShares’ analyst Matthew Kimmell pointed out that while Ethereum has significant potential to host popular applications in the future, investors are finding it challenging to perceive a substantial value proposition in its native ETH token.
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Since its launch in July 2015, Ethereum has made remarkable progress. Initially, it was primarily used for simple token transfers. Over time, its use-cases have expanded to include on-chain applications, decentralized finance (DeFi) protocols, and, more recently, non-fungible tokens (NFTs).
The report highlights that Ethereum saw broader utility from 2018 onwards, transitioning from token transfers to more complex applications like digital identity systems and on-chain withdrawals. From 2020 onwards, Ethereum has facilitated more sophisticated use-cases such as protocol staking, liquidity mining, MEV (maximum extractable value), bridges, oracles, and second-layer technologies.
Although these expanding use-cases indicate a positive trend for Ethereum, there is a significant challenge. The usage of ETH remains concentrated among a limited number of services. The report states:
“The hard truth is that a very small set of services consistently makes up the majority of Ethereum usage. These sets largely revolve around speculation or simple value transfer, not necessarily the type of complex ‘real-world utility’ use cases originally envisioned by the developers of the Ethereum Foundation.”
This observation is confirmed by data showing that simple token transfers and application interactions form the bulk of ETH usage, followed by infrastructure, intermediary operations, and contract management.
Marketplaces Dominate Application Usage, Stablecoins Lead Token Transfers
The report underscores that on-chain marketplaces, especially decentralized exchanges (DEXes) like Uniswap, dominate application interactions. Over 90% of transaction fees originate from marketplace activities.
In the first half of 2024, Uniswap alone accounted for about 15% of Ethereum transaction fees. This is not surprising, as Uniswap recently achieved a milestone of generating $50 million in revenue. Conversely, NFT trading platforms have seen a dramatic decline in user transactions since their peak in 2021.
Token transfers continue to play a crucial role in the Ethereum network’s activity. As the ecosystem expands, the types of tokens being transferred have diversified. However, ETH and stablecoins like USDT and USDC have emerged as the dominant tokens in terms of transaction fees.
The report also highlights the rise of stablecoins from mid-2017, when USDT began to see high adoption as a trading pair for nearly all listed ERC-20 tokens on crypto exchanges. Circle’s introduction of USDC in late 2020 further boosted stablecoin usage within the Ethereum ecosystem.
An intriguing point made in the report is the increased use of Ethereum layer-2 solutions. While their adoption has helped address some of Ethereum’s scalability issues, they have also inadvertently reduced the demand for Ethereum’s base layer. Kimmell notes:
“In our view, the latest major change, EIP-4844, which strongly incentivized Layer 2s, has worked directly against the economic design benefits of EIP-1559, which tied the value of ether to its Layer 1 platform demand.”
As of the latest data, ETH trades at $2,613, marking a 0.2% increase in the last 24-hour period. Stablecoins like USDT and USDC have a market cap of $119 billion and $36 billion, respectively.
ETH trades at $2,613 on the daily chart.
