Written by: Ignas, DeFi Research
Compiled by: J1N, Techub News
The market now has good reasons to be bearish on Ethereum. Since the market low in early 2023, SOL has risen 6.8 times more than Ethereum, and the ETH/BTC trading pair has fallen 47% in the past two years.
Is Now Time for Ethereum to Rally?
Bearish case for Ethereum
There are many different reasons for Ethereum's poor performance, but I think a few of the important reasons are as follows:
Bitcoin is "digital gold", a concept that is easy to understand for retail investors and institutions. In contrast, the story of Ethereum is more complicated. The market's term "digital oil" is neither attractive nor accurate.
Solana is catching up to and even surpassing Ethereum in terms of active users, transaction volume, and awareness.
When investors choose to invest in cryptocurrency, Bitcoin is a safer choice, while Solana is a potential option with a relatively low market value. Ethereum is sandwiched between the two.
Ethereum's modularity and L2 fragment capital liquidity and complicate the user experience.
The modular system requires investors to spread their funds across various derivative tokens of Ethereum, such as multiple L2, LRT tokens, and DA tokens. In contrast, under the same circumstances, users on Solana only need to buy SOL.
I believe Ethereum will outperform Bitcoin as the market realizes the high returns of the POS mining mechanism. Based on the airdrop income of the re-staking protocol alone, I think the current price of Ethereum is seriously undervalued.
However, this did not bring a FOMO effect to Ethereum, which may be due to the overexposure and traffic of the Ethereum ecosystem during the past bear market. Many people believed that Ethereum would not fail and bought in a lot.
On the contrary, few Crypto Natives hold SOL. When SOL rebounds, these people will shift their funds from Ethereum to SOL. In the absence of a large influx of retail funds, the price of Ethereum stagnates.
Another issue is the decline in Ethereum staking returns and destruction rates.
After the EIP-4884 Proto-danksharding upgrade, L2's gas fee dropped, resulting in a lower destruction rate for Ethereum. Although Ethereum's inflation rate is still below 1%, for those who are optimistic about Ethereum as "ultrasound money", this situation is not optimistic.
It can be clearly seen that after the release of EIP-4844 in March, the destruction trend of Ethereum reversed.
There are very few "ultrasound money" Memecoins on Twitter at the moment. Bearish comments are flooding Twitter, but the bullish sentiment for Ethereum still exists, although not as strong as Bitcoin.
Instead, let’s discuss the bullish thesis for Ethereum.
Bullish Thesis for Ethereum
There are many reasons to be bullish on Ethereum, and I asked my followers on Twitter to share their views.
Before sharing, I will summarize everyone’s opinions into the following 10 points.
If gas prices remain around 20 Gwei, Ethereum is deflationary, making it an attractive, efficient network. It is worth noting that Ethereum gas prices have been below 20 Gwei since March.
Retail investors can now stake Ethereum at home, which attracts individual investors with consumer-grade hardware and increases the decentralization of the network.
The Ethereum ecosystem's strong developer community and emerging new ideas support continued innovation and network robustness.
Ethereum is the leading smart contract platform, ensuring reliability while ensuring decentralization, and has no real competitors.
Ongoing development such as L2 and interoperability improvements are major positives, while the community is working to optimize fragmentation and increase network efficiency.
Increasing regulatory clarity, particularly in the U.S. and EU, has bolstered market confidence in Ethereum, enabling institutions such as BlackRock to adopt it.
Various LSD protocols enable all Ethereum holders to participate in securing the network without the need for technical knowledge or resources.
Large institutions such as Coinbase and BlackRock have stated that tokenized applications of RWA on Ethereum will become increasingly popular.
There is huge room for growth in DeFi services and large stablecoin pools on Ethereum.
Ethereum holders and users have regained their enthusiasm and collective pride, contributing to blockchain evangelism and market education.
I also asked several prominent Ethereum holders and users why they are bullish on Ethereum. Camila Russo (founder of The Defiant) and Christine Kim (Galaxy researcher) responded.
Here are the reasons why Camila Russo is bullish on Ethereum:
Mature DeFi ecosystem: Ethereum and its second layer network have the most mature DeFi ecosystem in the entire cryptocurrency space. This liquidity and DApp concentration will attract more users, so that the impact of DeFi activities can be reflected on L1, thereby pushing up gas fees and consuming more Ethereum. DeFi is key because finance is one of the few real-world cryptocurrency application scenarios.
Decentralization and security: Ethereum’s decentralization and security have attracted the world’s largest asset managers, such as BlackRock’s BUIDL fund, PayPal’s PYUSD, JPMorgan Chase, Santander and other large banks are testing blockchain settlement and tokenization functions on Ethereum. Large institutions cannot afford the risk of blockchain downtime or validator/miner attacks and violations, so they will continue to choose Ethereum. This will drive activity and price increases.
Ethereum Spot ETF: Ethereum is one of only two cryptocurrencies that U.S. institutional investors can invest in through ETFs, which will provide long-term support for Ethereum prices.
Christine Kim highlighted the network effect of Ethereum:
I think one of Ethereum’s main advantages over its competitors is its network effect. Ethereum is the first general-purpose blockchain with first-mover advantage and has the largest developer community, both of which I think contribute to the value of the network.
In fact, I would much rather store my long-term holdings on Ethereum. Solana has had multiple outages, while Ethereum has been reliable over the years.
In addition, I am very bullish on Ethereum as a risk-weighted asset chain for tokenized RWA assets. For example, 52% of stablecoins and 73% of US Treasuries are tokenized on Ethereum.
Tokenization of U.S. Treasuries
If you are bullish on Memecoins, Solana might be your choice, but for tokenizing billions of dollars in RWA, Ethereum is the safest bet.
Next, a big problem is the second layer.
As an all-in-one public chain, Solana is fast and reasonably priced, but it still has shortcomings.
Modular extensions of L2 offer a long-term solution because they can be tailored specifically for specific use cases, providing more L2 flexibility, simplicity, and cultural sovereignty. Cygaar puts it well in the following post:
Currently, the reliance on cross-chain bridges results in fragmented liquidity and a poor user experience, but hopefully this is only temporary. For example, Catalyst AMM will allow atomic swaps between different chains, eliminating the need for bridged assets. In this case, liquidity is still fragmented, but the end user still gets the best price because liquidity comes from multiple chains. More solutions like Catalyst are in the works.
In addition, L2s themselves are making greater efforts.
Optimism is "integrating with ERC-7683 to allow superchains to interoperate with other parts of Ethereum L2 through the application layer," which means that all L2s in the Optimism ecosystem will become a whole.
Similarly, Polygon is building an AggLayer, “which means one-click transactions across chains. It will reinvent the on-chain experience.”
Then there’s Caldera’s Metalayer, Avail Nexus, and Hyperlane.
Even though multiple aggregation solutions have not yet been implemented, with continuous development, future liquidity and user experience issues should be solved.
I think people underestimate how quickly this is happening. I recommend following Andy on Twitter to stay up to date on the latest developments in modular extensions.
Also, read this Blocmates article to learn how to solve issues with multiple current products.
In fact, Vitalik himself has said that people will be surprised to find that the issue of “cross-L2 interoperability” is no longer an issue.
If you need more bullish arguments, check out Emmanuel’s post below. He is bullish because of Ethereum’s strong community, continued innovation, and long-term adaptability.
If L2 fragmentation issues are resolved and RWA and tokenized applications continue to grow on Ethereum, I would be very bullish on Ethereum, but these are long-term factors.
In the short term, there is a little discussed bullish point: the Pectra upgrade.
What is Pectra Upgrade?
The Pectra upgrade is the next major milestone in the Ethereum upgrade roadmap and is expected to be launched in the first quarter of 2025. It merges the Prague (execution layer) and Electra (consensus layer) updates.
Pectra Upgrade Schedule
In the past, all major upgrades of Ethereum have attracted much attention, but this time the Pectra upgrade seems to have received little attention from the market.
I understand why. Ethereum has gone through major changes before: the migration from PoW to PoS, the Ethereum burn start, and EIP-4884. Although the Pectra upgrade is not as large as the previous ones, there are also some interesting updates.
1. Account abstraction: Ultimately improving user experience
One of the biggest changes with the Pectra upgrade is how accounts are handled.
Currently, managing a wallet requires many cumbersome steps, from signing transactions to managing transaction fees across different networks. Through account abstraction, the Pectra upgrade simplifies the entire process.
EIP-3074 and EIP-7702 are two proposed improvements. EIP-3074 allows traditional wallets (External Owned Accounts or EOA) to interact with smart contracts, for example enabling batching and sponsored transactions.
EIP-7702 goes a step further and allows EOA to temporarily act as a smart contract wallet during a transaction. Temporary means that your EOA wallet becomes a smart contract wallet only during a transaction. It works by adding smart contract code to the EOA address. Let's take a look at what this would look like in an ideal scenario:
USDC can be directly exchanged for UNI with just one interaction, no approval required.
DApp can pay Gas fees for users
Pre-approve the DApps that users want to use with their wallet and set spending limits
EIP-7702 written by Vitalik seems to have taken precedence over EIP-3074, and EIP-7702 is also compatible with AA's implementation.
The idea of "EOA temporarily becoming a smart contract" is cool, because current DApps are generally not compatible with smart account wallets (try using Safe or Avocado multi-signature with DApp). I hope AA can get more attention after the upgrade.
2. Equity pledge optimization
The Pectra upgrade brings some significant changes for those running validators.
EIP-7251 increases the maximum stake amount for a validator from 32 ETH to 2048 ETH. It allows large stake providers to consolidate their stakes, reducing the number of validators and alleviating network load.
This is also a positive for smaller stakers because it provides more flexible staking options (you can stake 40 Ethereum or compound rewards). In addition, Ethereum staking queues will be shortened from hours to minutes.
One big highlight that I’m excited about is related to MEV mitigation, but it doesn’t look like it will be implemented in the Pectra upgrade.
3. Scalability improvements
Pectra introduced Peer Data Availability Sampling (PeerDAS) through EIP-7594.
Like Proto-Danksharding in the previous Dencun upgrade, PeerDAS will bring lower gas fees on L2. But I can't find data on how much cheaper it is (I think PeerDAS will be particularly useful during high usage). 0xBreadguy mentioned that the Pectra upgrade will expand blob capacity by 2-3 times.
There are also several technical upgrades, such as BLS12-381, which shortens BLS signatures (reducing gas costs), and EIP-2935, which verifies transactions without the need for blockchain history.
These EIPs, together with the Verkle Trees Transition (EIP-6800), which will eventually replace the existing Merkle Tree structure, can make lightweight clients more secure and make it easier for nodes to participate in the network, thereby increasing decentralization.
One of the major changes is the change of EVM, which will make it easier to write and deploy smart contracts, reduce costs and improve efficiency through 11 EIP standards. In other words, development on Ethereum will become smoother.
This tweet from Ethereum Intern simply explains the impact of the technology upgrade.
I'm glad that Single Slot SF (SSF) is finally coming with the Pectra upgrade, but it's not yet included in the upcoming Osaka upgrade.
Vitalik shared in December 2023 that SSF is the simplest way to solve most of the flaws in Ethereum’s PoS design.
Currently, Ethereum’s proof-of-stake consensus mechanism takes about 15 minutes to finalize a block, which means that the block cannot be changed or deleted without substantial economic penalties. SSF attempts to reduce this time to a single slot, about 12 seconds, ensuring that blocks are finalized almost immediately after creation.
In practice, this means faster and more secure bridges, as well as faster deposits to CEXs. Disappointingly, this has not yet been implemented. Not including this in the upgrade is disappointing, as it shows that Ethereum developers still have not made level 1 scaling a priority.
Regardless, the Pectra upgrade is a technology upgrade, but I think the market is underestimating its significance.
Now, let's talk about the price of Ethereum.
VanEck predicts that by 2030, the price of Ethereum will reach $11,800.
Honestly, $11,800 is pretty conservative (I expect Ethereum to be much higher), but keep in mind that VanEck predicts Solana will only be priced at $335 by 2030.
So, based on the base case forecast, Ethereum has a potential of 4.4x, while SOL only has 2.2x. Note that both of these forecasts were made a year ago, before the Ethereum ETF was launched, so I was curious to see their latest forecasts.
By the way, if you need more bullish perspective, Ark Invest CEO Cathie Wood expects Ethereum to reach $166,000 and Bitcoin to reach $1.3 million by 2030.
However, I am realistic about VanEck’s bullish case for Ethereum to reach $51,000. VanEck’s Ethereum price prediction is based on:
VanEck predicts that by 2030, Ethereum will have a 70% market share among smart contract platforms thanks to its first-mover advantage as the global blockchain settlement network.
Ethereum revenue is expected to grow from $2.6 billion per year to $51 billion by 2030. This growth is attributed to transaction fees, the increase in MEV, and the launch of "security as a service" (SaaS), which uses Ethereum staking to protect other protocols (restaking).
Ethereum is expected to capture more economic activities in areas such as finance, banking, payments, metaverse, social, gaming, and infrastructure.
Ethereum’s potential as a store of value asset has been recognized, and its usability has been enhanced by smart contract programmability and cross-chain messaging technology.
Below is a summary of the base, bear, and bull scenarios.
Ethereum’s 70% smart contract platform position seems pretty reasonable to me, even though Ethereum’s dominance is only 58% right now, but with all the secondary markets, it’s about 65%. Even with SOL’s crazy rise, Ethereum’s dominance has remained the same since the beginning of 2022.
The TVL ratio will be a key indicator as institutions are more concerned about it.
Another metric that both institutional and retail investors are watching is the flow of Ethereum spot ETFs.
Ethereum Spot ETF
If someone had told me a few months ago that Ethereum had a spot ETF but was trading below $3,000, I would have thought the market was in a bear market.
It’s too early to tell, but the Ethereum spot ETF seems to be getting increasingly bullish. Grayscale’s outflows are falling rapidly, and net flows have been positive for three consecutive days. It looks like those who needed to exit Grayscale have already done so.
We already know the impact Grayscale can have, but the magnitude of the increase will surprise people. If this trend continues, I am quite optimistic about the future of Ethereum.
