• Ether outperformed bitcoin in the first half of 2018.
  • Bernstein identifies five factors that have contributed to recent cryptocurrency gains.
  • The network is benefiting from increased decentralized finance activities.

ETH Price Index and Live Chart – CoinDesk”>(ETH), the world’s second-largest cryptocurrency, has outperformed its larger rival bitcoin <a data-position="autolink" href="http://coindesk.com/price/bitcoin/" title="Bitcoin Price Broker Bernstein stated in a Monday research report that this rally is driven by other catalysts than the possible approval for a spot exchange traded fund (ETF).

The report stated that the ether supply has been deflationary since September 2022 when the Ethereum blockchain shifted from a proof-of stake consensus model to . This fact, it said, is underappreciated.

Also, the amount of ether that is locked up plays a role. Bernstein points out that ETH on exchanges has reached a record low of 11%. This is a sign of more cryptocurrency being locked away. There are ETH in staking pool, DeFi smart contracts and layer-2s.

Analysts Gautam Chugani and Mahika Sapr wrote that “with the growth of ETH transactions fees based on increased blockchain activity (more NFTs, DeFis, tokens), ETH holders will be incentivized more to stake their ETH.”

The authors noted that “as financial smart contracts scale on Ethereum Layer 2 (Arbitrum Optimism, and Polygon), more ETH is locked up in smart contracts. This leads to a feedback loop of increasing demand.”

Eigen, a protocol for restaking Ether, has attracted more stake demand. “ETH (re-)stakers benefit from new tokens/services released on Eigen,” said the note.

Bernstein stated that since the beginning of 2023, layer 2 networks brought scalability to the Ethereum network and reduced fees, resulting in the revival of decentralized financial services.

The report stated that with more clarity on token regulations “application tokens like DeFi tokens may allow revenue sharing to token holders,” adding that “a healthy DeFi ecosystem will continue to drive higher Ethereum fees” and, therefore, more value to ETH.

One example of “token-based economic designs” that could be improved is the Uniswap Uniswap Fee Switch proposal. This resulted in a gain of 60% in the UNI Governance token.

The Dencun Upgrade to the Ethereum Blockchain, scheduled for March of this year, is the last major catalyst. The report stated that “ETH contributors are expecting a further 90% decrease in Ethereum layer two transaction costs, and improved profitability of the layer 2 networks” following the upgrade. This will reduce congestion on mainnet, and drive more volumes into the ecosystem.

Bernstein: Ether could be the next “Institutional Darling”

Aoyon A. Ashraf is the editor.