Author: Jake Koch-Gallup, blockworks
Compiled by: Deep Tide TechFlow
Deep Tide Introduction: As more and more people begin to question Ethereum's value capture ability, this article offers a contrarian perspective. The author directly responds to the argument that "Ethereum is losing its liquidity moat" and provides counterarguments from the angles of monetary premium, the Layer 2 ecosystem, and stablecoin share. For investors who are reassessing Ethereum's long-term positioning, this is a piece of thinking material worth reading in comparison.
If you haven't read Carlos's newsletter from this Tuesday, go read it first. His core argument is: Ethereum is losing its last moat, liquidity. We debated this issue on the 0xResearch podcast (you can listen here), and I strongly disagree with his view (can you believe it? A Blockworks analyst actually has a different opinion).
His first example is that tokenized stocks on Ethereum have almost no trading volume, with only $25 million in trading volume over the past 30 days, accounting for about 3% of supply. But Ethereum holds the second-largest share of tokenized stock supply. Carlos anticipated this, but I still think the purpose of tokenized stocks is to expand global investors' access to the U.S. market, not to be used for lending and DeFi. On the podcast, his response was: tokenized stocks lying on your blockchain can't do anything because they don't generate revenue, and trading volume is what generates revenue.
Dear reader, this may be where you and I truly begin to diverge. I don't think Ethereum necessarily needs to generate revenue. It already has a monetary premium, just like many other L1s. Real economic value (REV) alone is far from enough to explain the market cap of most L1s. ETH trades at more than 1,100 times its past year's REV. Since the market clearly prices Ethereum partly as a reserve asset and collateral asset (ETFs, treasuries, DeFi collateral), ignoring this is equivalent to saying ETH and most L1s will forever be 99% overvalued, which is not a useful statement.
His second argument is that flagship applications are prioritizing growth elsewhere. He cites that Robinhood Chain accounts for 43% of Uniswap's trading volume over the past 30 days, while Ethereum accounts for only 32%. He also mentions Ethena's growth on Base. Both points have merit, but Robinhood Chain and Base are both Ethereum Layer 2 networks. If we agree that REV is not that important for L1s, then the growth of Ethereum Layer 2s is a victory for Ethereum. To be fair, Ethena has indeed also expanded to Solana, TRON, and Avalanche, which are not Layer 2 networks. Ethereum's share in USDe has fallen from 88% to 56%, but it is still the majority. Ethena is adding distribution channels, not leaving.
However, if you do think REV is extremely important, consider this: in September, Base paid Ethereum about $15,000 in rent to post data. In the same month, it paid the Optimism Collective $711,000. Now imagine a world where, 3 to 5 years from now, Ethereum says, "You know what, we also want the kind of revenue Optimism gets," and raises the minimum fee for posting data. Base might not like it, but if by then the Layer 2 network's scale has grown 10x, that would be a lot of money. So market share matters, even if it doesn't generate much REV right now.
His last argument is that Ethereum's stablecoin dominance is slowly declining, which is true. But the stablecoin market is not winner-take-all. Even if Ethereum's dominance falls from 51% to 30% over the next 10 years, the stablecoin market itself will continue to grow. If the total stablecoin market cap reaches $3 trillion in 10 years, Ethereum will have nearly $1 trillion in stablecoins, almost 6 times today's holdings of $155 billion. If you want to hear Carlos's response to the counterarguments I raise here, be sure to check out the podcast. Now, setting these aside, let's look at why Ethereum still has value and will continue to have value.
Reasons Ethereum still has value
Ethereum has by far the largest DeFi total value locked, accounting for 65% of the total. It has not fallen below 62% in any week since 2022.
Ethereum still has the deepest liquidity, the most secure network, and the most institutional participation of any blockchain except Bitcoin.
Ethereum has the largest onchain real-world asset (RWA) management scale (although its share has fallen from 99% in 2022 to 45% today).
Institutions hold ETH as an asset, not for its revenue. Spot ETFs and treasury companies hold about 13% of total ETH supply.
Robinhood and Coinbase could have launched their own L1s, but they chose to settle on Ethereum.
The largest tokenized funds, such as BlackRock's BUIDL, launched first on Ethereum mainnet.
Ethereum has been running for more than 10 years without a network-wide outage.
Ethereum and its Layer 2 networks have the largest developer base in crypto. The EVM is the default toolkit, and even competing L1s are copying it.
36% of ETH supply is staked, just hitting an all-time high, providing holders with a native yield that institutions can access through staking ETFs.
Ethereum is the computer of the crypto world.
In the end, I am a fundamentals investor. Crypto projects (usually) should have revenue, and that value should accrue to token holders. So the idea that ETH can survive on its monetary premium and a small amount of REV may just be holder self-comfort. But maybe, just maybe, Ethereum should be valued as a world computer.
Today's Highlights
After continuing to decline throughout the year, Plasma's stablecoin supply has nearly doubled since July to $1.41 billion, the highest level since mid-February. Although it is still far from its listing peak of $5.2 billion, the competition among stablechains is not over yet.