According to Dragonfly Capital, although it seems unlikely that ethereum will be a “popular currency”, it could still compete with bitcoin (BTC).
In their latest report, Kevin Hu, the General Partner of the firms and Celia Wan, the Junior Partner wrote that institutional investors are beginning to invest in BTC because its store-of value narrative is becoming mainstream. Their understanding of Ethereum and ETH has been “convoluted”, especially when concepts such as Decentralized Finance (DeFi), and Non-fungible Tokens (NFTs), are added.
An ETH bull might argue that if the Ethereum network becomes ubiquitous, fees stabilize, ETH could become a popular currency. However, the author stated that it is unlikely that ETH will succeed as a medium for exchange and unit account.
ETH’s market capitalization is five times that of ERC-20 stablecoins. However, their on-chain volume exceeds that of ETH ($USD 10bn vs. USD 8bn a daily), and the difference in off-chain volumes is even greater.
However, ETH still has a chance to capture some market share, because it is used as collateral for DeFi, as a non sovereign store-of-value.
Hu and Wan pointed out that ETH could even be able to compete with Bitcoin in the long-term on the dimensions “scarcity, durability and unforgeability”.
These are the reasons they give for this statement:
- EIP-1559 will stabilize ETH’s monetary policies and inflation will likely be reduced by half.
- Ethereum 2.0’s security model is “almost as battle-tested as Bitcoin’s” and a proof of stake consensus mechanism will likely increase Ethereum’s security guarantees if ETH becomes sufficiently valuable.
- If Ethereum and DeFi are the “financial layers of the future”, ETH could remain as one of the main collaterals, since it was the first collateral to scale and the DeFi ecosystem was created around it.
The authors believe that ETH could take 10% of BTC market share if Ethereum’s and DeFi’s growth continues. According to them, ETH’s potential monetary worth could be between USD 0.5trn and USD 1.5trn if BTC’s market capitalization is USD 4.7trn – USD 14.6trn.
Dragonfly Capital partners also noted that ETH will “become a capital investment in addition to a consumable product [which] should have a profound impact on ETH’s value accretion.”
“Ethernet validators will continue to use ETH for staking and receiving rewards, even if stablecoins or other tokens replace Ethereum in the future.” According to them, ETH will likely gain value from demand as a consumable commodity and cash flow like a capital asset.
Venture capitalists also argued that the current DeFi ecosystem has created a positive feedback loop. Users bring the liquidity-based network effect of DeFi to their wallets and get the benefits from a liquid DeFi marketplace.
They concluded that “Furthermore DeFi protocols’ interoperability and composability with one another have created a lock in effect for Ethereum, making other Layer 1’s difficult to compete.”
The authors also gave a rough estimate of ETH’s possible valuation, ranging from USD 3.7trn to USD 4.7trn “in a distant future”.
At 16:12 UTC the market capitalization for ETH was USD 247bn. ETH traded at USD 2,119, and saw a nearly 1% increase in trading volume in a single day. It also increased by 6.5% in a one-week period. The market capitalization for BTC was also USD 631bn. The cryptocurrency traded at USD 33.661, 1% more than it did a day before, reducing its weekly losses by less than 3%.