Ether’s catalysts 

After prolonged underperformance, Ethereum has a number of strong catalysts in place.

Since the announcement of BlackRock filing to launch Bitcoin ETFs last June, Ether has underperformed Bitcoin by 33 percent. When BlackRock also filed to launch Ethereum ETFs, the performance differential briefly narrowed, but then, as the Bitcoin ETF launches approached, it widened again. 

Since Ethereum’s Merge upgrade in September 2022, Ether has underperformed Bitcoin by 45 percent. 

The performance differential relative to Solana is even more glaring. Since last summer, when the narrative turned strongly in Solana’s favour as the market showed a preference for its approach to scaling over Ethereum’s, Solana has outperformed Ether by over 400 percent.

Price performance of Bitcoin, Ether and Solana, rebased

Source: CoinMarketCap

(Note: For the full year, Solana outperformed Ether by much more than 400 percent, but initially, this was due to Solana’s revival after being oversold due to the fallout from the FTX failure, including the collapse of the largest application built on Solana. The 400 percent outperformance only covers the period when the narrative moved strongly in favour of Solana’s scaling approach.) 

Recently, analysts started predicting a reversal of these trends, accompanied by bullish forecasts. Standard Chartered predicts a USD 4,000 price by May, while JPMorgan expects Ether to reach USD 8,000 over the next two years. Some analysts are much more bullish yet, with various forecasts in the range of USD 12,000–27,000. 

These predictions are underpinned by a number of notable catalysts.

The upcoming upgrade

After the first stage of the Ethereum 2.0 upgrade roadmap, which converted the network from a proof-of-work to a proof-of-stake platform, the second stage is focused on substantially improving Ethereum’s scalability. 

The full realisation of the scalability upgrade is still some time away, however, the first phase is about to be rolled out on 13 March after successful implementation on three testnets. 

The current upgrade, although only a partial implementation of the planned solution, already goes a long way towards addressing Ethereum’s scalability issues by reducing transaction costs for Layer 2 protocols on Ethereum. The upgrade allows for more transaction data without extending processing times, and this will greatly improve the speed and affordability of transactions on Ethereum’s Layer 2 networks. 

The development – which has been long anticipated after a pivot in the technological approach – is a preliminary version of a process that will streamline how data are verified on Layer 2 protocols built on Ethereum. Instead of authenticating large swaths of data, the process will sample and verify tiny pieces of that information. Meanwhile, data necessary only for short-term transaction verification will be temporarily stored off-chain and eventually deleted to prevent network overload and to minimise storage and processing costs on Ethereum. Secure and efficient data handling is ensured through cryptographic techniques that detect any data alterations. 

Following the upgrade, the Ethereum ecosystem’s transaction throughput is expected to increase from approximately 100 transactions per second to 1,000. The expectation is that at full implementation, the ecosystem will be able to cheaply handle over 100,000 transactions per second and, eventually, possibly even millions of transactions per second. The current upgrade will also reduce gas fees for Layer 2 protocols on Ethereum by at least tenfold. 

This improvement will make the network more adept at handling a high volume of transactions, and it is expected to attract developers to the ecosystem as data access becomes more cost-effective, setting the stage for future innovations exploring new use cases and applications. 

The upgrade includes further components that facilitate more efficient storage, improve the performance of the smart contract execution platform and network governance and enhance security, making the network more resistant to a wider range of security threats, including sophisticated cyberattacks.  

As Ethereum implements its upgrade roadmap, future stages will focus on streamlining the protocol, with an emphasis on further improving decentralisation and enhancing security, including streamlining transaction validation and minimising hardware requirements, thereby lowering the barrier to becoming a validator. 

The successful implementation of this current crucial upgrade will be an important positive for Ethereum’s future growth and market share.

Ethereum ETFs

Since last September, a number of institutions have filed to launch Ethereum spot ETFs in the US. After the approval of Bitcoin spot ETFs as well as Ethereum futures ETFs, it is reasonable to expect that Ethereum spot ETFs will also be greenlighted – although those applications that incorporate a staking feature may face further challenges. 

There is debate in the market about how strong the demand for the Ethereum spot ETFs is likely to be, with some predicting a comparable impact to the Bitcoin spot ETFs, others suggesting that due to the lesser name recognition and Ether not being widely seen as a safe haven asset, the demand will be less significant. We believe that the involvement of some of the world’s largest traditional financial institutions – including the largest asset manager, BlackRock – will ensure strong demand as they bring their substantial client base and engage in active marketing campaigns. 

The first final approval date of the filings is 23 May, and the expectation is that approvals could be granted to a number of applications on, or shortly prior to, that date.

Other drivers

As blockchain technology evolves, a recent fast-growing trend is for smaller, younger blockchains to utilise the security of the strongest blockchains, such as Ethereum, by restaking Ether to offer pooled security to other networks. 

The first restaking applications launched in 2023, and the leading restaking protocol, EigenLayer, has seen extraordinarily fast growth in the total value locked (TVL), approaching USD 8bn within days after the cap was temporarily removed on the maximum amount of Ether in liquid staking protocols allowed to be restaked. After this increase in TVL, EigenLayer became the fourth largest DeFi protocol by TVL behind industry stalwarts Lido, Maker and Aave, and the rapid growth demonstrates the substantial pent-up demand for Ethereum’s security. The cap will be permanently lifted in the future. 

As the trend of restaking gathers pace, it creates further demand for the Ethereum network and Ether. 

Sentiment

Over the past 6–12 months, the market narratives have shown a strong preference for the benefits of integrated (all-in-one) scalability, such as Solana’s approach. However, the “modular” approach of scaling through Layer 2s is also valid, with both solutions having certain pros and cons. After an extended period of the market focusing on the benefits of integrated solutions, Ethereum’s scalability upgrade could bring a renewed appreciation for Ethereum’s approach, especially as transaction volumes accelerate with the positive sentiment in the crypto industry. 

Ultimately, Ethereum, as the largest smart contract platform, stands to be the primary beneficiary of greater on-chain activity. Due to Ethereum’s tokenomics model, greater transaction volumes will also mean that Ether will be increasingly deflationary, which will contribute to the positive sentiment. 

The potential for Ethereum spot ETF approvals has already had some positive influence on the price of Ether. As key dates approach and the newsflow around approvals leans optimistic, this factor is likely to become a strong driver of price performance.

Summary  

Ether’s prolonged underperformance may reverse with a number of positive catalysts on the horizon. The largest smart contract platform will be the primary beneficiary as transaction volumes and development activity increase in a bull market. The successful implementation of important scalability improvements will enhance investor confidence in Ethereum’s long-term viability and its development team’s ability to execute complex upgrades, while highlighting Ethereum’s commitment to continuous improvement and innovation. Meanwhile, the likelihood of spot Ethereum ETF approvals and the developing trend of using Ethereum’s blue-chip network security to support other protocols will generate further demand for the token, and market sentiment may shift in favour of Ethereum.

Read more about crypto assets from Sygnum here.

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