• Ethereum has outperformed rival Bitcoin since the beginning of the year.
• Bernstein believes five ingredients are contributing to Ethereum’s recent rally.
• Increased activity in decentralized finance is a tailwind for the Ethereum network.

Ethereum (ETH) has risen 33% since the beginning of the year, outperforming rival Bitcoin (BTC). Investment firm Bernstein said in a research note on Monday that the rally is being driven by factors other than the potential approval of physical exchange-traded funds.

Ethereum’s deflationary trend

First, the report points out that Ethereum’s supply is deflationary and has not increased since the Ethereum blockchain transitioned its consensus format to proof-of-staking (PoS) in September 2022. , said this fact is underestimated.

Increase in locked Ethereum

The amount of Ethereum locked is also an important factor. Bernstein noted that Ethereum held on exchanges is at an all-time low of 11%, a sign that more Ethereum is being locked up. Ethereum is locked in staking pools, decentralized finance (DeFi) smart contracts, and layer 2.

Analysts Gautam Chhugani and Mahika Sapra said, “Ethereum transaction fees are likely to increase due to increased blockchain activity (DeFi, NFTs, and tokens).” “This is an incentive for more Ethereum holders to stake.”

“As financial smart contracts (Arbitrum, Optimism, Polygon) on Ethereum’s Layer 2 network expand, more Ethereum will be locked into smart contracts, leading to a mutual feedback loop of increased demand.”

Restaking Eigenlayer

The Eigen layer, the protocol used for re-staking Ethereum, is also said to be a factor in the increased demand for staking. The report pointed out that “those who (re)stake Ethereum are benefiting from the new tokens/services launched with Eigen.”

layer 2 network

Bernstein said that in 2023, with the resurgence of decentralized finance (DeFi), new layer 2 networks have brought scalability and lower fees to the Ethereum network.

He pointed out that with further clarification on token regulations, “application tokens such as DeFi tokens could allow revenue sharing with those who staked the tokens.” “A healthy DeFi ecosystem will continue to drive the growth in activity and fees on the Ethereum network,” which will accumulate more value on Ethereum.

Uniswap’s fee switch proposal, which led to a 60% rise in governance token Uniswap (UNI), is cited as one example of how “token economic design” can be improved. .

Denkun upgrade

The final major ingredient is the planned Dencun upgrade of the Ethereum blockchain in March of this year. Following the upgrade, “Ethereum contributors expect Ethereum’s Layer 2 transaction costs to be further reduced by 90%, increasing the profitability of the Layer 2 network,” the report notes. did. The upgrade is said to reduce congestion on the mainnet and drive an increase in the amount of transactions flowing into the ecosystem.

｜Translation and editing: Rinan Hayashi
｜Image: CoinDesk
｜Original text: Ether’s Bitcoin Beating Rally Not Just Because of Potential ETF Approval: Bernstein