Ethereum (ETH) has rallied 33% year-to-date, handily outpacing Bitcoin’s gain. Beyond speculative demand for a spot ETF, other catalysts appear to be driving the outperformance.
In their latest research note, analysts at Bernstein cite Ethereum’s deflationary tokenomics as a key driver of ETH’s robust appreciation this year.
Additionally, swelling amounts of ETH deposits into staking pools and DeFi protocols are also constraining supply.
Key Details:
- ETH has gained 33% year-to-date versus Bitcoin’s rise.
- Bernstein analysts attribute the rally to favorable tokenomics.
- ETH supply has held static since the Merge upgrade.
- Just 11% of the ETH supply is now held on exchanges.
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Importantly, Ethereum’s transition to proof-of-stake consensus has kept net ETH issuance at zero since September 2022.
Ethereum held on exchanges sits at all-time low
The percentage of ETH deposited on exchanges has also plunged to all-time lows below 11%. More ETH is instead getting staked, deposited into DeFi protocols, or migrated to layer-2 scaling solutions like Arbitrum and Optimism.
“And 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,” the report stated.
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Additional Tailwinds:
- Surging transaction fees incentivize ETH staking.
- The emergence of layer 2 networks enhances scalability.
- Upcoming ETH upgrade to further reduce fees.
- Regulatory clarity may enable DeFi revenue sharing.
Bernstein believes Ethereum’s layer 2 momentum and progress on tackling high fees will continue as developers launch new scalability solutions. The upcoming Dencun upgrade in March is also seen as reducing layer 2 costs by 90%.
With ETH supply crunched and demand drivers multiplying, analysts cite Ethereum’s strengthening network is likely to drive additional upside for ETH holders.