Penta Lab Research Report Top 30 Series: Ethereum

Author: Penta Lab

The most widely used smart contract platform awaits Dencun upgrade and ETF issuance

Token: ETH

Current market value: $378,048,194,322

Data as of: February 26, 2024

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Ethereum is the most widely used smart contract platform, helping to reduce digital assets. The value of global financial net assets has soared from US$140 trillion in 2000 to US$510 trillion in 2020, which is 6.1 times global GDP. Despite the continuous development of digitalization, intangible assets only account for 4% of net assets. In addition, the expense ratio of the traditional financial services industry is approximately 3.3%, and smart contracts have the opportunity to reduce transaction costs. Among them, according to DeFiLlama data, Ethereum has the largest total value locked (TVL) in the decentralized finance (DeFi) ecosystem, currently approaching $48 billion. Its TVL peaked at US$153 billion in November 2023.

Layer 2 expansion solution brings prosperity to the Ethereum ecosystem. Because Ethereum’s design concept emphasizes decentralization and security, it processes transactions relatively slowly, resulting in Ethereum’s limited network throughput and affecting the scalability of dAPP. The community expands Layer 2 on the basis of Ethereum Layer 1 through different technical paths such as Rollup, side chain and state channel, improving transaction throughput and reducing gas fees and transaction speed without sacrificing decentralization and security. , while also maintaining transaction security.

POS upgrade consolidates smart contract’s leading position in market value. From the operation of the Proof of Work (PoW) consensus mechanism of Ethereum 1.0 to the Proof of Stake (PoS) consensus mechanism of Ethereum 2.0, it no longer relies on the computing power of miners for maintenance. The network effectively solves the problems of high energy consumption, potential security challenges and network congestion of the PoW mechanism, and provides sufficient sustainability and security to support large-scale decentralized applications (dApps). At the same time, the net deflation in supply caused by the destruction mechanism of the approximately 4,500 decentralized applications of Ethereum superimposed on the EIP-1559 protocol has pushed up the value of ETH and also improved network security.

Ethereum Cancun-Dencun has been upgraded, and the market is paying attention to the approval of the Ethereum ETF. The Dencun upgrade represents an important progress for the Ethereum network and is mainly aimed at reducing the operating costs of layer 2 expansion solutions. By introducing dedicated storage space, this upgrade is expected to cut second-tier transaction fees by 80%. This is not only expected to significantly improve the competitiveness of second-tier platforms such as Optimism and Arbitrum, narrowing the gap with low-fee blockchains such as Solana, but also may double their profit margins. This improvement has the potential to play a role in maintaining Ethereum’s value accumulation by alleviating the need that current second layers may seek external data availability services to reduce costs. The Dencun upgrade is a positive response by the Ethereum ecosystem to existing challenges and may have a profound impact on the entire blockchain industry.

Valuation: Assessing Ethereum’s valuation six months from now is not an easy task, especially on March 13 There will be a lot of room for Dencun to upgrade gas fees to come down, and a potential ETF will be approved in May. We are optimistic that Ethereum will become the world's largest smart contract leader in the long term and lead the electronicization of traditional finance. We will place the valuation on the TVL and income changes after the Dencun upgrade.

Main risks: delays in ETF approval, security incidents

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