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Ethereum’s Changing Landscape

For investors, ETH’s future depends on how Ethereum balances innovation with maintaining healthy economic policy, says Matthew Kimmel, digital asset analyst, CoinShares.

Ethereum’s ability to host a wide-range of applications and assets has been evident for years, but the investment case for its native token, ETH, has become increasingly complex. In the wake of key protocol changes, particularly the hardforks activating EIP-1559 and EIP-4844, investors are asking how Ethereum’s adoption will translate into ETH’s long-term value.

While the platform has scaled, the relationship between its growth and ETH’s supply and demand — and thus its price — is no longer as straightforward as it once seemed.

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The EIP-1559 revolution: linking utility to token value

When Ethereum implemented EIP-1559 in 2021, it introduced a burn mechanism where the overwhelming majority of transaction fees (base fees) would be permanently removed from circulation. This created a direct relationship between Ethereum usage and ETH’s supply. As users paid for transactions on the Ethereum network, the burn would act as a deflationary force, reducing ETH’s supply and putting upwards pressure on its price.

In 2023, our valuation model at CoinShares showed that under the right conditions, where Ethereum generated $10 billion annually in L1 transaction fees, something it achieved at its 2021 heights, ETH could reach a value near $8,000 by 2028.

Since then, however, optimism has waned due to the Dencun hardfork and the rise of Layer-2s (L2), which have upended the fee burn and altered ETH’s value potential.

The rise of layer-2s: a double-edged sword

L2 platforms were designed to scale Ethereum by moving transactions off the main chain (L1) and onto faster, cheaper networks. Initially, L2s complemented L1, helping the network handle more transactions without clogging the base chain — like a pressure release valve giving balance in times of high usage.

But with the introduction of “blob space” in 2024, L2s could now settle transactions on L1 at much lower costs, reducing their requirement to pay expensive L1 fees. As more activity migrated to L2s, the supply burn that EIP-1559 was designed to instill began to drop, weakening the downward pressure on ETH’s supply.

The reality of Ethereum generating high L1 fees to support ETH’s value is now looking bleak. L1 transaction fees have steadily collapsed, leading to questions about what differentiates the services offered at each layer, and what will drive the L1 fee landscape moving forward.

A path forward: restoring the burn or adapting to new realities

Despite these challenges, there are potential paths forward to restore demand for L1 transactions and, in turn, ETH valuation.

One option is developing high-value use cases that rely on L1’s security and reliability, yet, given current trends, this appears unlikely in the near future. Another possibility is that L2 adoption grows so rapidly that the sheer volume of transactions compensates for the discounted fees — but this would require extraordinary L2 growth, beyond near-term expectations.

The most likely, and perhaps the most controversial, solution is repricing blob space to increase L2 settlement fees. While this would restore some of the L1 supply burn, it risks upsetting the economics of L2s that have been key to Ethereum’s recent success and enhanced its ability to compete as an ecosystem with alternative platforms (like Solana, Binance Chain, etc.).

The uncertain future of ETH

While L2s have scaled Ethereum, they have also disoriented the mechanisms that tie ETH’s value to its utility. For investors, this means that ETH’s future depends on how Ethereum balances innovation with maintaining healthy economic policy.

For now, ETH’s investment case is unsettling, and risks remain high as the Ethereum community decides its path forward.

Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.

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NYDFS ‘More Eager Than Anyone’ for Federal Legislation, Chief Says

NYDFS Superintendent Adrienne Harris said any federal legislation should still keep a role for state regulators.

NEW YORK — New York Department of Financial Services Superintendent Adrienne Harris said federal legislation addressing cryptocurrencies would be welcome, but maintained that states should keep their existing roles overseeing digital assets.

States have been able to move more quickly while conventional wisdom that allowing states to regulate digital assets may create a “race to the bottom” in terms of regulatory oversight hasn’t been borne out, Harris said at the Digital Asset Compliance and Market Integrity Summit in midtown Manhattan Wednesday.

“We are maybe more eager than anyone to have a federal partner and to see federal legislation and regulation,” Harris said. “I think it’s really important that legislation gets passed, regulations get written, but it is still important that there is a role for the states.”

Harris said she was “optimistic” that the House and Senate might move legislation soon, saying NYDFS has spoken to both parties in both houses of the legislature over the past few years.

BitLicense evolution

New York’s BitLicense, which is nearly a decade old, has evolved over the years but the regulator’s view of it has stayed the same, Harris said.

“I think our approach hasn’t evolved that much. The approach was always about, how do you sort of square these competing objectives of fostering innovation, but protecting consumers and markets,” she said. “And so that means you really have to stay abreast of developments in industry, but also be the cop on the beat and strike that balance.”

NYDFS has one of the world’s largest crypto units, Harris said, with 60 full-time staffers dedicated to the crypto sector.

Harris said the general public’s views on the BitLicense have similarly become more accepting since its introduction, a change she called “gratifying.” Even federal lawmakers have pointed to the BitLicense as an example.

“[That’s] not to say that it’s perfect, right? There are some really valid critiques, both in terms of the rule and the way it has been operationalized,” she said. “But it’s been so gratifying to see California, Illinois, Nebraska, and then the EU and Singapore; everybody sort of takes pieces.”

Bitcoin Price and Hashrate Divergence May Set the Scene for a Potential Rally, Historical Data Shows

September’s counter-seasonal price trend has already started to show signs of this divergence trend helping BTC.

A divergence between bitcoin (BTC) price and its hashrate or network’s total computing power could potentially point towards a rally in the price of the largest digital asset.

Historically, these divergences have occurred only a few times in the past three years. In some cases, bitcoin prices have reached a local bottom during these events, followed by a rally as the market catches up with the rising hash rate. Bitcoin network’s hashrates rise and fall depending on how many miners have their mining computers online to validate transactions.

Consistent with this pattern, bitcoin has already shown signs of recovery, gaining about $9,000 since the local bottom on Sept. 6, representing a 15% increase in value. This divergence between bitcoin’s (BTC) price and its hash rate started to shape up in July and then persisted into early September, when the computing power of the network reached an all-time high of 693 exahashes per second (EH/s) on a seven-day moving average, while bitcoin’s price was near $54,000.

A significant factor contributing to the recent surge in hash rate is the activity of publicly traded mining companies. Before the halving – where bitcoin rewards get cut in half – the hash rate peaked at 650 EH/s and dropped to 550 EH/s in June, as less efficient miners exited the network due to higher competition. It has now returned to pre-halving levels as publicly traded miners that are well-capitalized, have increased their market share by raising their computing power.

In fact, data from the sixteen public companies show that they have almost reached a 23% market share in production, the highest since at least January 2023, according to the industry journal TheMinerMag. It is likely that publicly traded miners will continue to capture a larger share of the hash rate over time as they compete to stay profitable post-halving.

Counter-seasonal trend

September has historically been dubbed a bearish month for bitcoin, with historical data from Coinglass indicating an average price decline of 4%. However, this year has defied that trend, with bitcoin posting a 7% increase so far. This counter-seasonal trend could be indicating that due to the lower bitcoin price and rising hashrate, the price could be playing catch up with the hash rate, potentially setting up for another rally. Of course, there are other market factors such as interest rate decisions could also catalyze this price change.

Additionally, the next difficulty adjustment, scheduled for Sept. 25 and projected to decrease by 5%, could also indicate that prices may be catching up. Blocks are currently being mined at an average of 10.5 minutes, according to mempool.space. This indicates a potential slowdown in the hash rate as price plays catch up.

Miners accumulating

Another factor that could signal a potential rise in price is what miners are doing with their mined bitcoin.

Glassnode data indicates that from November 2023 to August 2024, miners consistently sold bitcoin to fund their operations due to the halving, marking one of the longest periods of sell pressure on record.

However, in the past 30 days, miners began accumulating bitcoin in their wallets, suggesting that the financial strain from the halving is largely over. If miners are distributing less bitcoin, this reduces the supply entering the market, increasing the chance of potentially helping the price.

For Financial Advisors, Real World Assets Could Be a Safe(r) Path to Crypto

Tokenized Real World Assets (RWA) are a potential avenue for financial advisors to approach the crypto sector while minimizing risk.

One of the most exciting use cases for blockchain technology is commonly referred to as Real World Assets, or RWA. Based on a report from Boston Consulting Group, the on-chain RWA market is expected to reach between $4 trillion and $16 trillion by 2030.

We spend so much time talking about the value of crypto assets like bitcoin and ETH, especially when it applies to financial advisors, but RWA can drive trillions of dollars in adoption, is touted by some of the biggest names in finance (JP Morgan, Citi, Boston Consulting Group, Blackstone) and will be extremely important for advisors to understand.

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Are Real World Assets like crypto assets?

Most assets we talk about with regard to blockchain are chain-native assets like bitcoin, ETH, SOL, or UNI. This means they are native to a public blockchain and derive their value from the use or performance of a protocol.

For example, bitcoin is an incentive for miners to continue processing blocks on the Bitcoin blockchain, while ETH is used to pay for transactions on the Ethereum network.

When we talk about Real World Assets, we usually mean the integration of using on-chain databases to track the assets, with performance and valuation coming from outside the blockchain.

For example, I could have a token that represents equity in a real estate investment, or in a pool that lends money to entrepreneurs in the developing world. While the token is on a blockchain, the assets and payments are in the real world.

The Real World Asset tokens are simply representations of assets that are not necessarily blockchain-native, and are NOT volatile assets like we think of in crypto. These RWA tokens, like all cryptographic tokens, are programmable, so we can encode lockup periods, and accredited investor requirements.

Why use a blockchain?

Public blockchains are simply decentralized databases, good for storing information in an immutable manner. We currently store our data – money, private company equity, loans, financial records – in centralized databases with names like Google, Amazon, Chase, Schwab and your local county title database. Therefore, we have to ask permission every time we want to access that data, and the data from one silo doesn’t easily or natively work with data from another.

When we move that data onto a public blockchain, we can control it using a wallet, a self-custody technology that works hand in hand with blockchains. Once it’s there, we can take advantage of many of the benefits of public blockchains:

Why should advisors learn?

Clients are increasingly interested in alternative assets – private credit, real estate, collectibles. Often RWA tokens will represent some of these alternatives.

We already see private credit from Maple Finance and Goldfinch, as well as collectibles from Rally Road and 4K. For years, we haven’t seen many options for clients to find income in their portfolio. As interest rates have risen, many of the RWA options offer double-digit returns through interest, without the crypto volatility risk. They can make low-risk loans in markets where Traditional Finance can’t or won’t go, and keep the process efficient.

Advisors will need to understand the increased transparency and liquidity. Your clients may have the chance to sell half their real estate tokens after 12 months, and use that money to invest in a pool aimed at providing invoice factoring.

Advisors should also have a good knowledge of self-custody, and the efficiencies and security risks inherent to it, so they can help clients invest in these alternatives.

Additionally, the increase in activity around RWA will drive more use of the networks. For blockchains like Ethereum and Polygon, this may also trigger higher token prices since the native token – ETH or MATIC – is used to pay for the transactions.

The promise of blockchain technology has always been about increasing inclusion and efficiency through public databases. Unlike addressing native crypto assets, which can be volatile and subject to new regulations, Real World Assets on-chain are simply more efficient, transparent ways to denote what people are already comfortable investing in.

Bitpanda and Raiffeisen Unit Partner to Offer Crypto for Banking Customers #prizmabet

EU banks’ forays into crypto have been meek so far, but new laws are on the way

Crypto exchange Bitpanda and a Vienna-based unit of Raiffeisen Bank have announced they are working together to offer crypto to the lender’s customers, according to a Wednesday statement.

The two have signed a letter of intent to cooperate, and will have finished evaluating the offer by the end of the year, said a statement by the lender.

“Examination of the partnership with Bitpanda aims to add an innovative, secure aspect to our product range and to enable all customers to easily accumulate wealth,” said a statement by Michael Höllerer, General Director of Raiffeisenlandesbank NÖ-Wien, which groups the bank’s operations in the Austrian capital and surrounding region.

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In February, a survey published by the European Central Bank suggested that lenders’ crypto activities were “insignificant,” and that the underlying distributed-ledger technology is “barely used.”

Analysts in both the crypto and traditional finance sectors have been hopeful that a new EU law known as the Markets in Crypto Assets regulation will encourage institutional adoption.

Edited by Parikshit Mishra.