Ethereum's Demand Is Driven by Few Speculative Use Cases: CoinShares

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Ethereum, the second largest crypto asset by market capitalization, has witnessed notable expansion in the crypto space. Despite this expansion, CoinShares says the investment case of its native asset, Ether, remains ambiguous.

Speculative Use Cases Drive Ethereum’s Demand

In a post on the CoinShares blog, Matthew Kimmell noted that Ether’s value is driven by demand for Ethereum transactions. That is, it relies on the number of users on the chain who are willing to access Ethereum’s services to the ecosystem.

The research into Ethereum usage reveals that although the ecosystem has expanded considerably, it is not so with transaction demand. According to the report, transactions have been focused on a few speculative use cases.

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James Butterfill, CoinShares Head of Research, says this revelation calls for action. Butterfill maintains that the report raises concerns about the sustainability of Ethereum’s on-chain utility. The long-term value of Ethereum usage appears not to be strong.

NFT Decline and Layer-2 Technologies Impact Ethereum

A notable challenge with Ethereum is its usage in token transfers and speculation. Experts say it will benefit more from real-world applications than it originally planned. Ethereum has moved from asset transfer to interfaces with decentralized apps and other infrastructure like Layer-2 technologies.

According to Butterfill, the influence that NFT marketplaces such as OpenSea recorded in 2021 has suffered a significant decline. Now, Uniswap and aggregators like MetaMask account for application activity. This again supports the report’s findings that its primary utility has become speculation.

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Another use case for Ethereum’s network activity lies in token transfers. The analysts observed that stablecoins and Ether remain the dominant assets in terms of transaction fee spending.

Ethereum Needs Real-World Applications

Meanwhile, Kimmell noted a declining demand for the Ethereum chain despite its support for different applications that users pay billions of dollars to access annually. A major culprit that has displaced the demand for Ethereum’s base layer is the rise of Layer-2 solutions.

“In our view, the latest major change, EIP-4844, which strongly incentivized Layer 2s, has worked directly against the economic design benefits of EIP-1559, which tied the value of ether to its Layer-1 platform demand,” Kimmell said.

So, despite addressing scalability issues, Layer-2 solutions have yet to be able to promote on-chain utility.