Grayscale: Use of Bitcoin & Stablecoins in DeFi May Challenge Ether’s Position; Praises EIP-1559 as Solution

The report says, “the price of Ether tends to move with underlying activity on the network,” which is at reaching new highs.


Grayscale Investments, the world’s largest digital currency asset manager with more than $26 billion in AUM, has released its report on “Valuing Ethereum” for its accredited investors in which it talks about the digital currency, younger than Bitcoin, having the potential to be money, a consumable commodity, or as an interest-bearing asset.

Currently, the price of Ethereum is on a strong uptrend, breaking into a new ATH at $1,700, up over 130% YTD. ETH -2.00% Ethereum / USD ETHUSD $ 3,872.18
-$77.44-2.00%
Volume 43.99 b Change -$77.44 Open $3,872.18 Circulating 115.89 m Market Cap 448.76 b
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According to the report, “the price of Ether tends to move with underlying activity on the network,” and its multiple metrics are reaching new highs, including active addresses, hash rate, and network fees.

Grayscale’s report explains Ether being the native asset underpinning a burgeoning decentralized financial system and “in many ways Ether is functioning as new-age digital money on the Ethereum network.”

Because of Ether being necessary to pay for network fees, this utility drives its use as a monetary good on the Ethereum network, noted the report. So, if considered as money, it has a lot of market share for capture.

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In the DeFi ecosystem, Ether’s use as collateral continues to broaden, but an uptick in the use of stablecoins and Bitcoin as collateral on Ethereum, according to Grayscale, “may be challenging Ether’s position as the ecosystem’s preferred collateral.”

While this growth of alternative assets on Ethereum could challenge Ether’s use as collateral, the increased usage of Ethereum as a settlement network is a positive trend, it adds.

As for the economic abstraction, the ability to pay fees in an asset besides Ether, challenging the value of Ether, the report notes of the EIP-1559 proposal that would burn the Ether used to pay for transactions.

This would make Ether more like combustible gas than money, and if implemented, the proposal would reduce the possibility of economic abstraction, which may also serve as a deflationary mechanism.

“If activity increases and the supply of Ether decreases due to burning, a supply and demand curve would indicate an increase in the unit price of Ether because each unit would need to satisfy a greater proportion of economic activity,” creating a “positive feedback loop for Ether’s price,” states the report.

Ethereum has also begun its journey to the next phase, ETH 2.0. Allowing holders to stake their ETH tokens as collateral to become validators make it an interest-bearing asset.

Grayscale said this is a key transformation in Ether’s value because “Ethereum 2.0 will transform Ether from a commodity to what we might describe as a productive commodity.”

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