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Ethereum could see 200% growth in daily active users, $800B fair value by 2025 - RxR Analyst
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(Kitco News) - When it comes to the increasing attention being paid to digital assets, Bitcoin (BTC) remains the primary point of focus as it was the first to launch and has the highest market capitalization of all cryptos, but Ether (ETH) is gaining traction in the eyes of institutional investors as its number of active users has now surpassed that of Bitcoin.
The rising adoption of Ethereum is largely due to the fact that the network is host to the largest ecosystem of decentralized applications (dApps) in the digital marketplace, covering all popular sectors, from non-fungible tokens to decentralized finance (DeFi).
While Ethereum’s standing in the community is undeniable, the crypto winter has taken a toll on the price of ETH, and recent analysis from RxR, a research-focused joint venture between Republic Crypto and Re7 Capital, suggests that Ether is trading at a 27% discount to its fair value when accounting for activity on various layer-two (L2) scaling solutions.
RxR determined this fair value projection on an enhanced version of Metcalfe’s law, which includes the active user base on the Ethereum mainnet as well as its various L2s. More traditional Metcalfe law models typically only include the active user count on the mainnet.
“As we see with household social apps, the more active users that network has, the more valuable that network is,” said Lewis Harland, an analyst at RxR. “These ‘network effects’ apply to crypto networks like Ethereum, too. A Metcalfe’s law valuation approach can be applied to blockchain networks where the value of a network is proportional to the square number of active users within that respective network (n2) – a network is theoretically more valuable if each user is able to interact with a growing number of users.”
Harland said that Ethereum’s network value was tracking Metcalfe’s Law Index “fairly well” for most of its history, but after March 2021, Ether “has been trading at a premium to its active user base fair value.”
“We think modeling ETH’s network value should evolve as its network structure evolves,” Harland said. He noted that since April 2021, scaling networks like Polygon have been “contributing to Ethereum’s backspace at scale,” and have increased the total value locked on the Ethereum network.
There are “over 250 applications on Ethereum [with] a total value locked (TVL) of [greater than] $1m,” he said. “Nearly 30 layer 2 networks have an aggregate TVL of $10B due to the advent of rollup-centric solutions.”
“We can adjust Metcalfe's Law model to incorporate the active user base of Ethereum’s scaling networks to create a more relevant model,” Harland said. “Ethereum’s network valuation tracks the updated ML index better when the active user base of Ethereum’s scaling networks is factored into the model than when omitted. You can also see that ETH fell from trading at a significant premium to its Metcalfe’s fair value to the model’s ‘fair value.’”
Ethereum’s ML index vs. MCAP. Source: RxR
“The two models output very different fair values, highlighting the importance of updating valuation measures as the respective network’s structure evolves,” he said. “The updated model puts ETH’s valuation at $275B (current MCAP trading at a 27% discount), assuming no further user growth in perpetuity. Therefore, the current ETH opportunity is the current discount to its new Metcalfe fair value in a high-growth potential outcome.”
With the growing popularity of Ethereum scaling solutions capable of servicing a wider set of use cases, Harland said they “see a reasonable chance of 200% growth in daily active users in 2024, implying a $800B fair network value by 2025 (2.9x from current fair value and 3.9x from current FDV).”
Daily active users vs. ETH MCAP ($). Source: RxR
Harland noted that the number of active users within the Ethereum ecosystem surpassed that of Bitcoin in 2023, and said the “rate of active users on Ethereum has also consistently outpaced Bitcoin as a function of days since launched.”
“Higher user participation rates can translate to higher valuations,” he said. While “the broader liquidity cycle has catalyzed faster network adoption YTD on the Ethereum network, the market hasn’t priced in this recent growth in ETH relative to BTC.”
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Smart accounts come to Ethereum with the launch of ERC-4337 |
Addressing the analysis by RxR, Zignaly co-founder and CFO A. Rafay Gadit said, “It's important to note that all valuation methods (Mining Cost, DCF, Comparative, or any other) have strengths and weaknesses. No single valuation method is perfect, and it's essential to use various methods to get accurate estimates of the value of Ethereum.”
Gadit said that while the underlying case for a higher price of Ether is supported by the increase in active users on the mainnet and L2 networks, it will likely take an improvement in the macroeconomic environment for its price to see meaningful appreciation.
“If the global economy starts to recover from inflation and recession fears, this could lead to a broader market rally, including cryptocurrencies like Ethereum,” he said. Other factors that could help provide a boost in Ether price moving forward include, “The adoption of Ethereum by businesses and consumers; The development of new applications and use cases; and greater clarity on the regulatory environment for cryptocurrencies.”
“As for price predictions, it's difficult to say precisely where Ether will be in the short term,” Gadit said. “However, the long-term outlook for Ethereum is very bullish. Ethereum is the leading smart contract platform, and it is well-positioned to benefit from the continued growth of decentralized finance (DeFi) and NFTs."
According to Chris Martin, head of research at Amberdata, “Ethereum's development cycle has been mainly focused on scaling, and specifically scaling to support L2s. For example, the upcoming EIP-4844 is specifically for upgrading blocksize and introducing blobs.”
“With Ethereum moving towards being the foundational layer, and Layer 2's (most of which have their own native token) growing in popularity, it's not clear where the next rally for Ether will be,” Martin said. “Fingers crossed for clarity on Ether spot ETFs.”
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