Ethereum has outperformed its biggest rival, Bitcoin, year-to-date. Bernstein analysts say there are five catalysts contributing to the cryptocurrency’s recent gains. Increasing decentralized finance activity is creating a tailwind for the network.
Bernstein: Ethereum rally isn’t just about potential ETF!
Ethereum (ETH), the world’s second-largest cryptocurrency, has seen a 33% year-to-date gain. Thus, it has outperformed its major rival Bitcoin (BTC). Bernstein covered this topic in a research report on Monday. Analysts say this rally is driven by catalysts other than the potential approval of a spot exchange-traded fund (ETF).
First, they note that ETH supply is deflationary. They also note that it has not increased since the Ethereum Blockchain switched to a proof-of-stake consensus model in September 2022. The report states that this fact is not sufficiently appreciated. The amount of ETH locked is also an important factor. Bernstein says ETH held on exchanges is at an all-time low of 11%. He states that this is a sign that more of the cryptocurrency is locked. There is ETH locked in staking pools, decentralized finance (DeFi) smart contracts, and layer-2s.
More ETH holders are staking their ETH
“With ETH transaction fees increasing based on higher Blockchain activity, more ETH holders are incentivized to stake their ETH,” say analysts Gautam Chhugani and Mahika Sapra. Additionally, the authors include the following evaluation in the report:
As financial smart contracts on Ethereum Layer 2 networks scale (Arbitrum, Optimism, and Polygon), more ETH finds itself locked in smart contracts, leading to a reflexive feedback loop of increased demand.
Restaking protocols a catalyst for Ethereum
The note also noted that the Eigen layer, a protocol used to stake ETH, has attracted more staking demand as “those who (re)stake ETH gain from new tokens/services launched on Eigen.” Bernstein says that since the beginning of 2023, new layer 2 networks have brought scalability and lower fees to the Ethereum network with the resurgence of decentralized finance.
With greater clarity on token regulations, “application tokens such as DeFi tokens could potentially allow for revenue sharing with token stakers,” the report said, adding that “a healthy DeFi ecosystem will continue to drive higher activity and Ethereum fees,” thus accruing more value to ETH. It states that it will.
Another catalyst: Ethereum Dencun upgrade
The report also highlights the Uniswap fee shifting offer. cryptokoin.comAs you follow from , this development triggered a 60% rally in UNI. The report points to Uniswap as an example of how “tokeneconomic designs” can get better.
The last major catalyst is the Ethereum Blockchain’s Dencun upgrade in March this year. According to the report, following the upgrade, “ETH participants expect a 90% reduction in Ethereum layer 2 transaction costs. He also hopes to increase the profitability of layer-2 networks. This will reduce congestion on the main-net. Additionally, it will bring higher volumes into the ecosystem.
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