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Ethereum’s Hard Fork Draws More Stakers But Raises Regulatory Stakes

May 04, 2023

Read Time 10+ MIN

Ethereum's "Shapella" hard fork enabled full withdrawals and, despite decreasing ETH supply and increasing daily fees, staked Ethereum's value reached a $40B all-time high.

Please note that VanEck may have a position(s) in the digital asset(s) described below.

SEC Chair Gary Gensler dominated headlines in April with two appearances on Capitol Hill and multiple enforcement actions in the space, including a Wells Notice served to Coinbase, whose CEO Brian Armstrong vowed to “exhaust all avenues” to fight. So far, this includes a counter-suit against the SEC for its lack of rule-making and plans to set up offshore trading venues.

However, the bigger story in the month, in our opinion, was Ethereum’s “Shapella” hard fork which enabled full withdrawals from the Ethereum staking smart contract and created a long-term competitor to U.S. T-bills with an equivalent yield but a declining supply. Since the transition to proof-of-stake last September, ETH supply is down 3%, while daily fees have risen from ~$2.5M in August 2022 pre-merge to a ~$7M run-rate in April, implying a $2.6B annual tally according to our estimates (see below). After an initial flurry of staking withdrawals dominated by Kraken, who, in a settlement with the SEC, agreed to end their staking offering in the US, the number of days’ queue to withdraw staked ETH principal has collapsed from 17 days on April 12thto 5 days at the end of the month. The value of all staked Ethereum is now around its $40B all-time high despite an ETH price still down 62% from its peak. We expect liquid-staked Ethereum and a number of DeFi innovations (see below) to eventually catalyze another round of retail leverage as the bull market heats up ahead of Bitcoin’s next halving, now a year away.

Ethereum Daily Fees

Ethereum Daily Fees

Source: VanEck, Token Terminal as of 4/30/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

But first, let’s contrast ETH’s fundamental momentum to the fundamentals of our debt-based fiat system, underpinned by the almighty USD, whose issuer, the U.S. treasury, reported a year-to-date fiscal deficit in April of $1.1 trillion, +60% y/y. Federal tax revenues are now negative year-over-year, implying a recession is underway. As we write, the FDIC is orchestrating a sale of First Republic Bank using its reserve fund, agreeing to share losses on FRC mortgages and commercial loans with JPMorgan, and providing a $50B credit line made at the discretion of unelected bureaucrats with no skin in the game. We acknowledge that seeing de-dollarization debated on “The View” is hardly comforting from a positioning perspective, but still: bailing out rich coastal Americans who got below-rate mortgages in exchange for leaving cash at the now-defunct bank, while the U.S. Treasury claimed for weeks that “the banking system is sound,” is hardly a good look. US trading partners, many of whom are now being sanctioned by the same US Treasury, are clearly observing this treatment of taxpayer funds & continue to unload US treasuries. China’s holdings are down 35% from their peak. Japan, who quietly announced a deal to buy Russian energy above the G7 price cap, holds 20% fewer treasuries than just 18 months ago.

Back on the topic of regulation, while it is possible that this SEC may yet go after Ethereum developers for coordinating to fork the chain and “promising” staking returns to buyers, as has been hinted by Chair Gensler in the past, we were encouraged to hear several Democratic members of congress like Rep Richie Torres (NY-D) take a states-rights approach to regulating the industry in the hearings last month. We also note that according to media reports, Senators Elizabeth Warren (D-MA) & Roger Marshall (R-KS) were forced to delay the reintroduction of their crypto anti-money laundering bill due to a lack of sponsors. This bill is particularly concerning because it requires unhosted wallet providers, validators, and miners to provide identifying information of their “customers” (which they often don’t have). Unless this bill reappears, perhaps the “second derivative” of proposed legislation in the US may have peaked with the FTX and other bankruptcies in the rear-view mirror, even if the environment is hardly positive. In any case, digital assets returns were again strongest during Asian trading hours in April. We increasingly see crypto as an EM asset class that could attract flows from US entities who see Chinese stocks as uninvestable despite their ~40% weight in EM indices.

One clear consequence of US enforcement actions and the tighter liquidity environment for startups (total VC funding is down 62% y/y with crypto/blockchain down 91% according to JPMorgan) is a strong-get-stronger market dynamic which continued in April, as Bitcoin & Ethereum rose 4% and 3% respectively vs. most crypto categories we track which fell in the month. The MarketVector DA 100 large-cap index has outperformed small-caps by 2000bps since February 1st.

In the rest of this note, we explore Ethereum’s valuation in more detail the technical progress made last month, and the recent transaction momentum on layer 2s such as ARB, OP & MATIC, which settle on ETH. After refreshing our model, we see ETH revenues rising from an annual rate of $2.6B to $51B in 2030. Assuming ETH takes a 70% market among smart contract protocols, this implies a token price of $11.8k in 2030, which we discount to $5.3k today at a 12% cost of capital derived from ETH’s recent beta.

Ethereum Valuation Methodology

We value Ethereum by estimating cash flows for the year that ended on 4/30/2030. We project Ethereum revenues, deduct a global tax rate and a validator revenue cut and arrive at a cashflow figure. We then apply multiple estimates by applying a long-term estimated cash flow yield of 7% minus the long-term crypto growth rate of 4%. We then arrive at the fully diluted valuation (“FDV”) in 2030, divide the total by the expected number of tokens in circulation, and then discount the result by 12% to 4/20/2023. You can see our revenue estimates and price targets in the table below with more detailed assumptions in the Ethereum Valuation Scenarios table.

Ethereum Revenue and Price Targets
  Today Base 2030 Bear 2030 Bull 2030
Ethereum Total Revenue $2,539 $50,985 $2,564 $136,771
Transactions $1,991 $29,337 $1,271 $83,839
Finance, Banking, Payments $929 $10,370 $444 $26,666
Metaverse, Social and Gaming $834 $13,068 $700 $42,004
Infrastructure $228 $5,899 $126 $15,170
MEV - Block Builder Revenue $497 $19,665 $1,175 $48,078
Ethereum Security as a Service $0 $1,983 $118 $4,854
ETH Price Target $1,900 $11,849 $343 $51,006

Source: VanEck Research as of 4/30/2023. Past performance is no guarantee of future results. The above is not intended as financial advice, a recommendation to buy or sell Ethereum, or any call to action. There may be risks or other factors not accounted for in the above scenarios that may impede the performance of Ethereum; the actual future performance of Ethereum is unknown, and may differ significantly. Any projections, forecasts or forward-looking statements included herein are the results of a simulation based on our research, are valid as of the date of this communication and subject to change without notice, and are for illustrative purposes only. Please conduct your own research and draw your own conclusions.

Ethereum’s Business Model

To properly unpack our valuation approach to Ethereum, it is important first to understand what Ethereum is, how it works, and why it is valuable. At the most basic level, one can think of Ethereum as a mall that lives on the internet and provides a secure place for internet commerce to take place. Users interact inside Ethereum’s mall by means of wallets, and Ethereum’s mall businesses are made up of batches of smart contract code. The Ethereum software determines the structure and rules of the mall, while validators ensure that the rules are followed, secure the mall, and maintain a ledger of all economic events that occur within the mall. Ethereum also apportions the limited space within the mall by charging users for conducting business and exchanging value.

Ethereum is free software that is hosted on computers distributed throughout the globe. It employs an array of logic, called a protocol, to create a unified understanding of ownership, commercial activity, and business logic. This allows users to engage in commerce without the need to trust any of its participants or counterparties. Ethereum code creates verifiable and unambiguous rules that assign clear, strong property rights to create a platform for unrestrained business formation and free exchange.

The computers that run Ethereum software, called validators, receive inflationary rewards and a portion of the fees remitted by users performing activity on Ethereum. Businesses are created on Ethereum by deploying a series of smart contracts. Smart contracts are computer code libraries that autonomously execute functions when called upon by users without any intermediary. Using smart contracts, developers can build logic that replicates the function of businesses like banks, auction houses, social media companies, video games platforms, cloud computing services, and commodities exchanges. Using Ethereum, a business can keep its treasury entirely on Ethereum and enable smart contract disbursements to employees, vendors, contractors, and suppliers who can also have wallets on Ethereum.

For users to perform on-chain actions to exchange value or interact with on-chain businesses, they incur fees paid to Ethereum. These fees are relative to the computational intensity and spot demand for computation on the Ethereum network. Curiously, unlike most enterprises where businesses pay the overhead of rent, electricity, and the rest, users directly pay the overhead costs of interacting with the on-chain business to that on-chain business’s host and chief vendor - Ethereum. Thus, users pay both the costs of hosting the business and the costs of Ethereum computation, on behalf of on-chain businesses, through their transactions.

The principal medium of exchange on the Ethereum network is the ETH token. For users to conduct activity on Ethereum, they must pay for the cost of performing their actions in ETH, just like at Dave & Busters, where one must buy “gaming points” to play video games. To do anything on Ethereum, a user of Ethereum must utilize ETH tokens. Additionally, validators must post value, in the form of ETH, as collateral against their honesty. If a validator cheats, the ETH is seized. Considering that ETH tokens are the currency used to pay validators (who are selling ETH to cover costs), this marries demand with supply – Ethereum users buy tokens to use Ethereum, and Ethereum validators sell tokens to “supply” Ethereum.

What does it mean to “supply” Ethereum? In essence, it means participating in the consensus mechanism of Ethereum that verifies value transfers, allows for the deployment of smart contract code, or enables calls to Ethereum’s software. All business logic and exchange of assets occur as ledger entries on blocks. Blocks are simply the “to-do list” for the Ethereum computer to complete, and every twelve seconds, the table of actions is executed. The list directs Ethereum to perform an action or a series of actions on behalf of the users. These directions could be as simple as sending value or as complex as buying and selling dozens of tokens simultaneously across dozens of different Ethereum-based token exchanges. Users gain inclusion on the block for their actions by paying a base fee and an inclusion fee. If there is a lot of demand for Ethereum’s “to-do list,” users can increase their inclusion fee, called a “tip,” to ensure their request is fulfilled. Additionally, Ethereum has created a marketplace to auction off the right to order (and add transactions to) the action list on each of Ethereum’s blocks. This is done because there is immense value in ordering the transactions. These two activities currently represent Ethereum’s core business – selling blockspace and selling the right of others to order it. Distilled, Ethereum is selling secure, immutable blockspace that facilitates internet commerce.

Revenue Recognition

Because Ethereum is not really a business, we identify revenue as an activity where tokens are used in Ethereum’s core business – the provision of immutable, decentralized computing through the sale of blockspace. As a result, we count transaction fees, both the base fee and the tip fee, as a revenue line. Other analysts only count the base fee because it is burned, which impacts all ETH holders, while omitting the tip because it only is remitted to each leadership slot validator. In their construct, only staked ETH on validators receives the tip fee. However, we count both tip and base fees in addition to base fees as each reflects economic activity on Ethereum related to the sale of blockspace. Therefore, the economic value of those actions flows through to Ethereum as a business.

Additionally, we subtract ETH burned from the base fee from the ETH total supply and derive token value from the end-year, reduced supply total. Admittedly, unlike other components of our analysis, the yearly trajectory of ETH usage significantly influences today’s token valuation through total token supply reduction. Additionally, we do not count inflationary security issuance as a revenue item as it does not relate directly to an outside entity buying blockspace.

Not only do we recognize the transaction fees of the system, but we also recognize MEV as a revenue item to ETH. With entities like Flashbots auctioning off blockspace to builders, a portion of the MEV will accrue to ETH stakers, passed on by validators. Similar to tip fees given to validators, we also believe block-building fees should be included in Ethereum’s revenue calculations as they are economic activity related to the sale of blockspace.

Finally, we assert that ETH is evolving beyond a transactional currency or a consumable commodity like oil or natural gas. We believe that ETH, while not a complete store of value like Bitcoin due to Ethereum’s demonstrated mutability of code and an evolving social consensus focused on utility, will nevertheless become a store-of-value asset for state actors looking to maximize human capital (vs. Bitcoin, which maximizes for stranded energy). Importantly, in this model update, due to smart contract programmability on Ethereum combined with maturing cross-chain messaging technology, we introduce a novel revenue item called “Security as a Service” (SaaS).

Conceptually, ETH’s value can be used both within Ethereum and outside of it to secure applications, protocols, and ecosystems. Using projects such as Eigenlayer, ETH can be used to back entities such as Oracles, Sequencers, Validators, bridges, contractual agreements, and perhaps novel entities yet to be discovered. The result is that ETH approximates a Layer 0 asset like Bitcoin or Polkadot’s DOT and Cosmos’s ATOM claim. These Layer 0 assets can be used to back and bootstrap new blockchains. Since ETH is a bearer asset, ETH can be locked behind some business or protocol’s guarantees to act honestly. If that honesty is violated, that value can be seized to penalize malicious or irresponsible parties and/or compensate affected parties. This can be thought of as a performance bond or collateral that ensures a damaged party recovers losses while a lousy actor pays for its malice.

Stepping back, this business type relies upon the value of ETH as a token and the safety and persistence of Ethereum’s software. Thus, as Ethereum’s security can be exported, ETH holders who participate in SaaS should be rewarded at some multiple to the summed value of priority fees, tips, block-building fees, and ETH inflationary issuance – the ETH holder’s opportunity cost multiplied by risk. This multiple reflects the average security risks and investment risks involved in offboarding ETH as a security provision asset.

Transaction Revenue

The base of our projections comes from the smart contract platform “market capture.” This is the percentage of each business category’s economic activity that we believe will utilize, be derived from, or reside on public smart contract platforms like Ethereum. Our main categories are Finance, Banking, and Payments (FBP), Metaverse, Social and Gaming (MSG), and Infrastructure (I). FBP encompasses financial activity, including consumer and business payments, banking services, and exchanges of value. MSG includes software and internet businesses that revolve around online social media, gathering, gaming, and virtual/online world value creation. Infrastructure encompasses the provision of cloud computing, server space, and distributed storage, as well as telecommunication and the internet. We assume that 5%, 20%, and 10% of finance, metaverse/media, and tech infrastructure activity, respectively, move on-chain. (Our relatively high estimates for metaverse/media contemplate the recent acceleration in information censorship in countries like Brazil, India & Ireland and the high number of open-source social networks currently under development).

Since the precise value accrual from a business deployed to a blockchain is uncertain, we assume a take rate on the business economic activity derived from blockchain deployment. This is not without precedent, as many blockchain-native businesses are currently deployed to smart contract platforms. The businesses themselves do not directly pay fees to Ethereum for the usage of their businesses. The users do. However, over the long run, to simplify the user experience, businesses deployed to blockchain will likely pay fees on behalf of their customers. For example, a coffee roaster whose website is hosted on AWS does not make a customer pay for both the coffee purchase and the roaster’s website costs at check out. Instead, the coffee store abstracts those costs and makes the customer only directly pay for the purchase items. In the future, blockchain-reliant and blockchain-based businesses will likely gravitate towards similar dynamics.

Looking at the cost breakdown to the user for using a blockchain business can inform our estimates of blockchain value capture over the long run. Right now, a user who wants to secure a loan using AAVE on Ethereum will pay both fees to AAVE and Ethereum for this business transaction. Of course, on the flip side, these fees to a user represent revenues to AAVE and Ethereum. If such a transaction occurred in real life, it would look like someone going to a Sharper Image at the mall and paying for his “laser pointer blowtorch back-scratcher” in addition to a portion of the Sharper Images’ monthly rent at checkout. We can see the breakdown of this ratio by examining the gas costs users pay to interact with an on-chain business’s smart contracts (Ethereum’s revenue) versus the costs the user pays directly to the business (AAVE’s revenues) from the same transaction. These ratios vary greatly depending on the type of on-chain business.

On-Chain Business Margin as Percentage of Total Fees Paid by Users (annual)

On-Chain Business Margin as Percentage of Total Fees Paid by Users (annual)

Source: VanEck, Token Terminal as of 4/30/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

We can infer from the above chart that over the past year, the average cost split between platform and business for a user of AAVE is shared 6.98% to the platform (Ethereum) and 93.02% to AAVE (application and its lenders). Drawing back to focus on value accrual to smart contract platforms like Ethereum, we feel this relationship will shift over time as off-chain businesses deploy on-chain to reduce costs and seek new revenue. In our model, we assume application take rates will vary between 90% to 97% of revenue depending on the end market, with ETH share falling between 3% and 10% depending on the business category.

We think approximating this take rate is essential because “transactions revenue” is not an ideal mechanism to describe future blockchain value capture. Going by our earlier assertion that the transactions are a “to-do list” of items for Ethereum to compute, many uses of the blockchain cannot be best described as “transactions.” Blockspace is the more fitting unit of measurement and description of the product sold by smart contract blockchains like Ethereum. It is possible that smart contract blockchains package blockspace into a “service level agreement” to other parties to guarantee some present or future amount of compute or transaction activity. This activity will create complex, liquid blockspace futures markets that mirror commodities futures dynamics. However, we will stick with “Transaction Revenue” to keep in line with current conventions.

To deduce future ETH supply reductions from ETH base fee burns that occur from blockspace usage, we begin by applying past Ethereum burn/fee ratios. We employ a figure of 80% for the percent of burned transaction fees. In ETH terms, we then estimate a transaction cost average for both Ethereum and Layer 2 platforms with a very significant cost decline rate of roughly 60%. We speculate that the cost differential for L2s will be 1/100ththat of Ethereum. After that, we calculate future MAUs on Ethereum as a function of end-market business MAUs and Ethereum’s capture of those MAUs. Ethereum capture rate of those MAUs is determined by Ethereum’s take rate of those underlying business categories’ economic activity (between 5% and 20%, depending on the end market). We do not project transactions and then extrapolate a revenue assumption from them. We simply assume a declining transaction cost in ETH and project a yearly burn amount from the base fee burn. Again, this burn amount is subtracted from the total running supply of Ethereum and significantly impacts token value as Ethereum’s FDV is spread across fewer tokens.

MEV Revenue

MEV is considered a “bogeyman” of blockchain that many entities seek to stop, distribute and/or suppress MEV. MEV is simply the profits that can be made by ordering transactions within each produced block. In reality, MEV can be limited but cannot be destroyed. We see MEV playing an integral role in securing (paying the validators and stakers) blockchains over the long run because of MEV’s immense value. A corollary of its certain persistence is shelf space at a supermarket. There will always be more valuable shelf space (that at “eye level”), and someone will be willing to pay to occupy that space at the expense of others. Likewise, there will always be value in ordering transactions, and there is immense value to be gained by monetizing that ordering.

Because MEV is highly correlated with on-chain activity, it is difficult to predict. For our estimate, we assume that MEV is directly related to the value of all assets hosted on Ethereum. This gives us a “management fee” for keeping value on Ethereum. Currently, we estimate yearly MEV value approximates ~2.0% of on-chain TVL on Ethereum (not the value of all assets on chain) for the past year. Long term, we assume that MEV as a percentage of assets will shrink as protocols and applications act to reduce its impact, the turnover rate of on-chain assets declines, and applications remit some of its value back to users. Therefore, we see the MEV take rate dwindling to 0.15%. We assume the total value of on-chain assets relates to the total value of all hosted assets on the blockchain, and this value is derived from the share of the FBP that blockchains retain and Ethereum’s market share.

L2 Settlement

As L2 settlement represents the long-term scaling solution for executing transactions on Ethereum, it's assumed to be the most important business line for Ethereum going forward. L2 settlement represents the line item of the transaction batches being posted to Ethereum. We predict settlement revenue as a function of L2 revenue and the margin relationship between “profits” and the cost of security to send batches to Ethereum. In our projections, we assume L2 revenue to be simply composed of MEV and transaction revenues which are both estimated by using the Ethereum framework. We then assume that L2s pay a portion of those revenues as security fees to Ethereum. We have seen the L2 “margins” fluctuate between 15% - 40% depending upon gas costs of Ethereum. Over the long run, we assert that most revenue from the L2 will still accrue to Ethereum, including MEV on the L2. We assume this to be the case because we project there will be thousands of L2s competing for blockspace on Ethereum and margins. We assert a long-term margin rate of 10% for the L2s versus the current range of 15% - 40%. This estimate is admittedly arbitrary, but we expect that as thousands of competing chains emerge to compete for Ethereum blockspace, margins for L2s will shrink dramatically. In terms of the value split, we assume that 98% of all transactions are executed on the L2s while 50% of the total value of assets rest on L2s. We assert that Ethereum will still host half of the ecosystem's value because some assets and transactions may necessitate extreme security, composability, and atomicity levels.

Security as a Service

We define Ethereum’s SaaS business as the revenues received from exporting ETH token value to back outside ecosystems, applications, and protocols. This is a burgeoning and uncertain use case for ETH that is hard to predict. To speculate on what percentage of ETH will be exported to gain fees for security provision, we look to current and past examples of bridged assets. Currently, the total percentage of ETH that is bridged off Ethereum is 0.47%, while the total supply of ATOM off-chain is around 0.5%. In the past, BTC wrapped and exported to other chains was as high as 1.7%, and during the peak of bridging activity on Ethereum, more than 15% of Ethereum’s USDC supply was bridged off the chain. As a starting point, we assume that 10% of ETH is used to provide security off-chain and that for a risk premium, it should command a 2x premium to ETH on-chain.

Ethereum Price and Revenue Targets

In our Base Case, we assume that Ethereum will achieve $51B in annual revenue in the year ending 4/30/2030. We deduct a validator fee from this total, 1%, and a global tax rate of 15%, and we arrive at cash flows of $42.90B to Ethereum. Assuming an FCF multiple of 33x, 120.7M token, we come to a Base Case 2030 Price Target of $11,848 per token. To determine a valuation in today’s dollars, we discount Ethereum at 12% despite finding, through CAPM, an 8.74%. We use this elevated figure to reflect increased uncertainty around the future of Ethereum. As a result, we find today’s discounted price to be $5,359.71 in our Base Case.

We base these estimates on the thesis that Ethereum becomes the dominant open-source global settlement network that hosts substantial portions of the commercial activity of business sectors with the highest potential to gain from moving their business functions to public blockchains. In a portfolio of similar smart contract platforms, we assume to own a collection of call options, with the dominant platform likely to take a majority market share.

Ethereum Valuation Scenarios
  Base Bear Bull
ETH Price Estimate      
Ethereum Terminal Smart Contract Market Share 70.00% 15.00% 90.00%
Estimated Revenue 2030 (M) $50,985 $2,564 $136,771
Global Tax Rate on Crypto 15.00% 15.00% 15.00%
Validator Cut 1.00% 1.00% 1.00%
Value to Tokenholders in 2030 (M) $42,904 $2,157 $115,093
FCF Yield 7.00% 7.00% 7.00%
Real Yield 6.00% 6.00% 6.00%
Long Term Revenue Growth over GDP 100.00% 100.00% 100.00%
Long Term GDP Growth 2.00% 2.00% 2.00%
Long Term Crypto Revenue Growth 4.00% 2.00% 5.00%
FCF Terminal Multiple 33 20 50
ETH FDV (M) $1,430,118 $43,146 $5,754,655
ETH Supply in 2030 (M) 120.70 125.68 112.82
Discount Rate 12.00% 12.00% 12.00%
ETH Price 2030 $11,848.62 $343.29 $51,006.28
Discounted Token Price $5,359.71 $155.29 $23,072.65
Crypto Terminal Market Share      
Finance, Banking, Payments 5.00% 1.00% 15.00%
Metaverse, Social, and Gaming 20.00% 5.00% 50.00%
Infrastructure 10.00% 1.00% 20.00%
Ethereum Value Capture of End Market Revenue      
Finance, Banking, Payments 3.00% 3.00% 3.00%
Metaverse, Social, and Gaming 10.00% 10.00% 10.00%
Infrastructure 5.00% 5.00% 5.00%
MEV Revenue      
MEV LT Take Rate 0.10% 0.10% 0.10%
MEV Value Accrual to Token 90.00% 90.00% 90.00%
L2 Projections      
L2 Usage of Ethereum Block Space 95.00% 95.00% 95.00%
Transaction Percentage on L2 98.00% 98.00% 98.00%
Ecosystem TVL Layer 2 50.00% 50.00% 50.00%
L2 Revenue Capture of Total (split to L2) 10.00% 10.00% 10.00%
Ethereum Security as a Service      
Percent Supply of ETH 10.00% 10.00% 10.00%
ETH Opportunity Cost Multiple 2.00 2.00 2.00
Burn Ratio 80.00% 80.00% 80.00%
L2 Transaction Cost 1.00% 1.00% 1.00%
Terminal Staking Rate of Tokenholders 30.00% 30.00% 30.00%

Source: VanEck Research as of 4/30/2023. Past performance is no guarantee of future results. The above is not intended as financial advice, a recommendation to buy or sell Ethereum, or any call to action. There may be risks or other factors not accounted for in the above scenarios that may impede the performance of Ethereum; the actual future performance of Ethereum is unknown, and may differ significantly. Any projections, forecasts or forward-looking statements included herein are the results of a simulation based on our research, are valid as of the date of this communication and subject to change without notice, and are for illustrative purposes only. Please conduct your own research and draw your own conclusions.


DeFi tokens underperformed the broader digital assets universe, down 9% monthly. Among larger caps, only Maker (MKR) was up. The total volume of decentralized exchanges decreased in April to $52.5B from the impressive $112.4B seen in March. The total value of digital assets in DeFi (TVL) fell 3% to $48.4B despite Ethereum’s slight price appreciation. However, Uniswap's market share of decentralized exchange volume continued to increase, reaching approximately 68%.

Still, April has been a month filled with anticipation for DeFi users. Some of the largest protocols are introducing significant product offerings to the market, indicating an impending competition for capital. Aave, Maker, Curve, and Yearn are among the longest-standing and trusted names in DeFi and are all set to deploy some of the bear market’s most eagerly awaited smart contracts. Aave and Maker are deploying smart contracts that directly compete with each other’s current core products. Aave will soon release their decentralized stablecoin, GHO, and Maker deploying Spark, a fork of Aave’s peer-to-peer lending market. GHO will offer AAVE stakers a cost-effective alternative to Aave's current stablecoin borrowing rates, which hover around 3.6% APR. Meanwhile, Spark will allow DeFi users to borrow Maker's decentralized stablecoin, DAI, at the DAI savings rate of 1% against governance-approved collateral.

We think the ability of Spark to take market share from Aave may be limited, though, as the initial lending cap for the protocol will be set at 200 million DAI. In contrast, Aave’s Ethereum market currently supplies over $2B of over-collateralized loans. Additionally, since most of the code for Spark was originally from Aave, Maker has decided that 10% of the protocol’s profits will be sent to the AAVE DAO. Separately, Curve is poised to release their eagerly anticipated smart contract for crvUSD, a unique stablecoin with an advanced and intriguing design. Curve, one of the oldest decentralized exchanges, has ~$4.3B in total assets deposited and enabled 6.3% of dex volume in April. crvUSD will be an overcollateralized stablecoin with two primary components: LLAMA and Peg Keeper. LLAMA stands for Lending-Liquidation AMM Algorithm and functions as a liquidation mechanism that gradually liquidates and de-liquidates positions using concentrated LP tokens as collateral. It regularly makes swaps as asset prices fluctuate, which is a departure from traditional AMMs that rebalance liquidity to the less advantageous asset. As a result, collateral will experience permanent loss instead of impermanent loss, which might help protect the borrower’s collateral since the algorithm will progressively swap volatile assets for crvUSD as stakeholders approach liquidation levels. This mechanism may lower the risk of being liquidated completely. Either way, The Peg Keeper acts as a stabilizer contract that should maintain the peg by minting and burning crvUSD. If the crvUSD price exceeds $1, the contract mints and deposits crvUSD into pools to stabilize the price. Conversely, if the crvUSD price falls below $1, the contract burns crvUSD from LPs.

Lastly, Yearn recently approved the launch of their new yETH vault, which is akin to a passively managed yield fund tailored to a specific crypto asset. In a forthcoming article, we will analyze how the yETH vault's architecture leverages the success of the yCRV vault, providing a lucrative avenue to gain exposure to liquid staking derivative tokens without relying on any single token. Our conclusion from all these product releases is that technological innovation continues to advance the capital efficiency in DeFi at a rapid pace, and the sector’s attractiveness to outside investors may increase as this fact is recognized, assuming a more benign regulatory backdrop.

Metaverse & NFTs

Metaverse tokens continued to underperform compared to ETH in April, with APE’s price down 5% and MANA and SAND prices down 7% and 8%, respectively. NFT volumes fell 18% compared to March. Despite the decrease in NFT trading, BLUR's price rose 8%. In the ongoing competition for NFT volume among NFT exchanges and aggregators, Blur and OpenSea continue to dominate the market. Blur lost a small percent of the market share of NFT volume this month but still maintained dominance, with over 60% of April NFT volume settling through the platform. Blur’s market share of NFT aggregators also maintained volume dominance, with about 52% of aggregator volume originating via Blur. OpenSea, on the other hand, only saw 18% of NFT exchange volume and about 45% of aggregator volume via OpenSea Pro.

April saw an exceptional increase in NFT activity on Bitcoin, with the total number of Ordinal Inscriptions now over 2.3 million and 67% created in April. However, total fees from Inscriptions only increased by 25% despite a surge in number due to a shift in demand towards lighter-weight text-based Inscriptions. As a result, they occupy a smaller share of block size, resulting in lower fees per inscription.

Daily Bitcoin Transactions (7-day Moving Average)

Daily Bitcoin Transactions (7-day Moving Average)

Source: VanEck, Token Terminal as of 4/30/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

As for gaming, unique active wallets in the top web3 games decreased by 5% MoM and are down 25% since the beginning of the bear market. Despite highly anticipated game releases this year and next, current activity does not warrant a strong conviction in these assets. That being said, we will monitor this market as it develops.

Notable Web3 gaming announcements in April:

  • Mythical Games plans to transition the Mythical Chain from Ethereum to the Polkadot ecosystem and launch a Mythos Superchain.
  • Immutable has yet to announce the third IMX token upgrade, slated for April 20th.
  • Apple’s outside payments ban being ruled unlawful was seen as a win for the NFT industry.
  • Romania announced its informatics institute would be launching a national NFT marketplace.
  • Sotheby's set to auction 3AC digital art collection.
  • New set of Trump NFTs sold out on day one, but the collection’s floor price tanked.
  • BackPack NFT minted their Mad Lads collection and thwarted bots trying to game the mint, boosting the collection’s unique holders and treasury.
  • LooksRare v2 launched, reducing trading fees from 2% to .5%.

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Sources: Artemis XYZ, Token Terminal, Dune, Messari, Arcana (RIP), Etherscan, Coin Gecko.

ETH Model Sources: Morgan Stanley, US Federal Reserve, World Bank Group, Mckinsey, SIFMA, Alliance Bernstein, Mckinsey, Statista, Morgan Stanley, Macquarie, Deloitte, Gartner, PWC, Deliotte, IoT Analytics.

Index Definitions

MarketVector Digital Assets 100 Large-Cap Index: is a market cap-weighted index which tracks the performance of the 20 largest digital assets in the MarketVector Digital Assets 100 Index.

MarketVector Digital Assets 100 Index: is a market cap-weighted index which tracks the performance of the 100 largest digital assets.

MarketVector Smart Contract Leaders Index: designed to track the performance of the largest and most liquid smart contract assets, and is an investable subset of MarketVector Smart Contract Index.

Coin Definitions

  • Bitcoin (BTC) is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries.
  • Ethereum (ETH) is a decentralized, open-source blockchain with smart contract functionality. Ether is the native cryptocurrency of the platform. Amongst cryptocurrencies, Ether is second only to Bitcoin in market capitalization.
  • Render (RNDR) is an ERC-20 compatible utility token used to pay for animation, motion graphics and VFX rendering on the distributed RNDR Network
  • Arbitrum (ARB) is a rollup chain designed to improve the scalability of Ethereum. It achieves this by bundling multiple transactions into a single transaction, thereby reducing the load on the Ethereum network.
  • Optimism (OP) is a layer-two blockchain on top of Ethereum. Optimism benefits from the security of the Ethereum mainnet and helps scale the Ethereum ecosystem by using optimistic rollups.
  • Polygon (MATIC) is the first well-structured, easy-to-use platform for Ethereum scaling and infrastructure development. Its core component is Polygon SDK, a modular, flexible framework that supports building multiple types of applications.
  • Cardano (ADA) is a open-source, smart-contract platform that aims to provide multiple features through layered designs.
  • Solana (SOL) is a public blockchain platform. It is open-source and decentralized, with consensus achieved using proof of stake and proof of history. Its internal cryptocurrency is SOL.
  • Polkadot (DOT) is a blockchain network designed to support various interconnected, application-specific sub-chains called parachains.
  • Avalanche (AVAX) is an open-source platform for launching decentralized finance applications and enterprise blockchain deployments in one interoperable, scalable ecosystem.
  • Uniswap (UNI) is a popular decentralized trading protocol, known for its role in facilitating automated trading of decentralized finance (DeFi) tokens.
  • Polygon (MATIC) is the first well-structured, easy-to-use platform for Ethereum scaling and infrastructure development. Its core component is Polygon SDK, a modular, flexible framework that supports building multiple types of applications.
  • Arbitrum (ARB) is an Ethereum layer-two (L2) scaling solution. It uses optimistic rollups to achieve its goal of improving speed, scalability and cost-efficiency on Ethereum.
  • NEAR Protocol (NEAR) is a decentralized development platform that uses a Proof-of-Stake (PoS) consensus mechanism and will eventually feature a sharded architecture to scale transaction throughput.
  • Filecoin (FIL) is a decentralized data storage network built by Protocol Labs that allows users to sell their excess storage on an open platform.
  • Cosmos (ATOM) is a cryptocurrency that powers an ecosystem of blockchains designed to scale and interoperate with each other.
  • Algorand (ALGO) is a scalable, secure, and decentralized digital currency and smart contract platform. Its protocol uses a variation of Proof-of-Stake (PoS) called Pure PoS (PPoS) to secure the network and reach consensus on block production.
  • EOS (EOS) is a open-source protocol designed to support the creation of smart contracts and decentralized applications.
  • Aptos (APT) is a Layer 1 blockchain that uses the move programming language. The cryptocurrency promises users increased scalability, reliability, security and usability.
  • Fantom (FTM) is a Layer 1 project that uses a single consensus layer to support the creation of multiple execution chains.
  • Stacks (STX) is a Bitcoin Layer for smart contracts; it enables smart contracts and decentralized applications to use Bitcoin as an asset and settle transactions on the Bitcoin blockchain.
  • The Graph (GRT) is a protocol for indexing and querying data from blockchains, starting with Ethereum.
  • Basic Attention Token (BAT) is a blockchain-based digital advertising and rewards platform powered by BAT, an ERC-20 token, and Brave, a new internet browser.
  • Lido DAO (LDO) is a liquid staking solution for Ethereum and other proof of stake chains.
  • Aave (AAVE) is an open-source and non-custodial protocol to earn interest on deposits and borrow assets with a variable or stable interest rate.
  • Immutable X (IMX) operates as the first-ever Layer 2 scaling solution for NFTs on the Ethereum blockchain.
  • (YFI) is a decentralized asset management platform that has multiple uses ranging from liquidity provision, lending, to insurance.
  • SushiSwap (SUSHI) is a decentralized exchange built on Ethereum that utilizes an automated market making system rather than a traditional order-book.
  • Bancor (BNT) is an ecosystem of decentralized, open-source protocols that promote on-chain trading and liquidity.
  • Compound (COMP) is a DeFi lending protocol that allows users to earn interest on their cryptocurrencies by depositing them into one of several pools supported by the platform.
  • Balancer (BAL) is an automated market maker (AMM) that was developed on the Ethereum blockchain and launched in March 2020.
  • Blur (BLUR) is the native governance token of Blur, a non-fungible token (NFT) marketplace and aggregator platform that offers features such as real-time price feeds, portfolio management and multi-marketplace NFT comparisons.
  • Ethereum Name Service (ENS) is a distributed, open, and extensible naming system based on the Ethereum blockchain.
  • USD Coin (USDC) is a stablecoin issued by Circle that is pegged to the U.S. dollar on a 1:1 basis.
  • Maker (MKR) is the governance token of the MakerDAO and Maker Protocol — respectively a decentralized organization and a software platform, both based on the Ethereum blockchain — that allows users to issue and manage the DAI stablecoin.
  • ApeCoin (APE) is a governance and utility token that grants its holders access to the ApeCoin DAO, a decentralized community of Web3 builders.
  • Decentraland (MANA) is building a decentralized, blockchain-based virtual world for users to create, experience and monetize content and applications.
  • The Sandbox (SAND) is a virtual world where players can build, own, and monetize their gaming experiences using non-fungible tokens (NFTs) and $SAND, the platform’s utility token.

Risk Considerations

This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Information provided by third-party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this communication and are subject to change without notice. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

The information, valuation scenarios and price targets presented on Ethereum in this blog are not intended as financial advice, a recommendation to buy or sell Ethereum, or any call to action. There may be risks or other factors not accounted for in these scenarios that may impede the performance of Ethereum; the actual future performance of Ethereum is unknown, and may differ significantly. Any projections, forecasts or forward-looking statements included herein are the results of a simulation based on our research, are valid as of the date of this communication and subject to change without notice, and are for illustrative purposes only. Please conduct your own research and draw your own conclusions.

Past performance is not an indication, or guarantee, of future results. Hypothetical or model performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading, and accordingly, may have undercompensated or overcompensated for the impact, if any, of certain market factors such as market disruptions and lack of liquidity. In addition, hypothetical trading does not involve financial risk and no hypothetical trading record can completely account for the impact of financial risk in actual trading (for example, the ability to adhere to a particular trading program in spite of trading losses). Hypothetical or model performance is designed with benefit of hindsight.

Investments in digital assets and Web3 companies are highly speculative and involve a high degree of risk. These risks include, but are not limited to: the technology is new and many of its uses may be untested; intense competition; slow adoption rates and the potential for product obsolescence; volatility and limited liquidity, including but not limited to, inability to liquidate a position; loss or destruction of key(s) to access accounts or the blockchain; reliance on digital wallets; reliance on unregulated markets and exchanges; reliance on the internet; cybersecurity risks; and the lack of regulation and the potential for new laws and regulation that may be difficult to predict. Moreover, the extent to which Web3 companies or digital assets utilize blockchain technology may vary, and it is possible that even widespread adoption of blockchain technology may not result in a material increase in the value of such companies or digital assets.

Digital asset prices are highly volatile, and the value of digital assets, and Web3 companies, can rise or fall dramatically and quickly. If their value goes down, there’s no guarantee that it will rise again. As a result, there is a significant risk of loss of your entire principal investment.

Digital assets are not generally backed or supported by any government or central bank and are not covered by FDIC or SIPC insurance. Accounts at digital asset custodians and exchanges are not protected by SPIC and are not FDIC insured. Furthermore, markets and exchanges for digital assets are not regulated with the same controls or customer protections available in traditional equity, option, futures, or foreign exchange investing.

Digital assets include, but are not limited to, cryptocurrencies, tokens, NFTs, assets stored or created using blockchain technology, and other Web3 products.

Web3 companies include but are not limited to, companies that involve the development, innovation, and/or utilization of blockchain, digital assets, or crypto technologies.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.

© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.