Research on Grayscale: Limited Increase in Ethereum Spot ETF, Solana Emerges as Strongest Competitor
Grayscale Research
Grayscale Research analyzes various aspects of the current state of Ethereum and believes that the launch of a spot ETF would greatly help the public understand the “smart contract public chain.” Despite the higher valuation of ETH compared to when the Bitcoin ETF was launched in January (with limited potential for further growth), Grayscale remains optimistic about the prospects of both. However, Grayscale also specifically mentions Solana and believes that SOL is most likely to take Ethereum’s market share.
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L2 Active Users Account for 2/3 of Total Activity
L2 Leads to Decreased Ethereum Mainnet Revenue
Ethereum Mainnet Revenue Needs to Increase
Ethereum Spot ETF
50% of ETH Supply is Long-Term Locked
Solana Will Capture Ethereum’s Market Share
L2 Active Users Account for 2/3 of Total Activity
After the major upgrade in March, Ethereum is promoting the transition to a modular network architecture, where different types of on-chain infrastructure work together to provide the ultimate user experience. Over time, it is expected that there will be more activity on Ethereum L2.
L2 settles and publishes transaction records to L1, benefiting from the security and decentralization of the mainnet. Grayscale Research points out that this is in sharp contrast to blockchains with an overall design concept, such as Solana, where all key operations (execution, settlement, consensus, and data availability) occur on a single L1.
From the perspective of on-chain activity, the upgrade has been successful, with a significant increase in the number of active addresses on L2, currently accounting for about two-thirds of the total activity in the Ethereum ecosystem.
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Significant Growth in Ethereum Layer 2 Activity
L2 Leads to Decreased Ethereum Mainnet Revenue
However, the shift of on-chain activity to L2 has also affected Ethereum’s token economy.
When on-chain revenue on Ethereum is high, the amount of tokens burned often exceeds the rate of new coin issuance, leading to a decrease in the total supply of ETH. However, as on-chain activity transitions to L2, fee revenue on the Ethereum mainnet decreases, and the supply of ETH starts to increase again.
Although L2 still requires fees to publish data to L1 (so-called “blob fees” and other transaction fees), the amounts are often relatively lower.
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Due to lower mainnet revenue, the supply of ETH has recently increased
Ethereum Mainnet Revenue Needs to Increase
Grayscale Research believes that for ETH to increase over time, the Ethereum mainnet will likely need to see an increase in fee revenue. This can be achieved by:
Moderate growth in L1 activity, resulting in higher transaction costs.
Significant growth in L2 activity, resulting in lower transaction costs.
Grayscale Research expects both L1 and L2 on-chain activity to continue growing for Ethereum to benefit, possibly in a combination similar to L1 (low-frequency, high-value transactions) and L2 (high-frequency, low-value transactions).
Currently, approximately 70% of tokenized US Treasury bonds are on the Ethereum chain (as shown in the figure below), and higher-value NFTs may also remain on the Ethereum mainnet due to their high security and decentralization, with fewer transfers (for similar reasons, Bitcoin NFTs are also expected to continue growing).
Ethereum Custodies the Majority of Tokenized US Treasury Bonds
Ethereum Spot ETF
An Ethereum spot ETF would help increase demand and price for ETH.
Based on Grayscale’s comparison of BTC and ETH exchange-traded products (ETPs) outside the United States, Ethereum ETPs account for about 25%-30% of Bitcoin ETPs. Therefore, it is also expected that the net inflow of an Ethereum spot ETF will be 25%-30% of the $13.7 billion net inflow for Bitcoin since January.
Although ETH futures only account for about 5% of BTC futures in the US market, Grayscale Research believes this does not represent the potential relative demand for an Ethereum spot ETF.
Ethereum ETPs account for about 25%-30% of Bitcoin ETPs
50% of ETH Supply is Long-Term Locked
Grayscale lists approximately 50% of circulating ETH in long-term locked states:
27%: Staked.
11% locked in multiple smart contracts.
6%: Not transferred for over five years.
3%: Held in ETH ETP form.
0.7%: Held by the Ethereum Foundation, Mantle, Golem Treasury.
Grayscale Research states:
The above limits the available supply for an Ethereum spot ETF, and future net purchases of ETH will come from the remaining circulating supply, so any increase in demand could have a greater impact on price.
Net purchases of the Ethereum spot ETF will come from the remaining circulating supply
Solana Will Capture Ethereum’s Market Share
The report concludes with two points that are not favorable for the price of ETH.
Grayscale references the MVRV-Z indicator, which shows that when the Bitcoin spot ETF was launched in January, its MVRV-Z score was relatively low, indicating a moderate valuation and potential for significant upside. In contrast, ETH was overvalued, and the potential for upside after ETF approval may be smaller.
Ethereum’s MVRV-Z valuation is higher than when the Bitcoin ETF was launched
Lastly, Grayscale Research mentions that crypto investors may be more focused on the competition between ETH and other smart contract public chains, especially the SOL/ETH exchange rate, considering that Solana is the second-largest project in that market. Grayscale believes that SOL has the best chance of capturing market share from Ethereum in the long term.
Last year, SOL outperformed ETH significantly, and the SOL/ETH price ratio is now close to its previous high. In the short term, Grayscale expects the SOL/ETH exchange rate to stabilize, with the Ethereum spot ETF supporting the price of ETH. However, in the long run, the SOL/ETH exchange rate will depend on the growth of their on-chain revenue.
SOL/ETH exchange rate is close to the previous cycle high
BTC
ETH
MVRV-Z
Solana
Grayscale
Further reading
Will ETH enter a bull market? Analysis: ETF daily average net outflow may reach $110 million
Grayscale CEO Michael Sonnenshein resigns, former Goldman Sachs executive to take over.
