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Can ether really “flip” bitcoin?
For several years, there has been speculation in the crypto community around a potential flippening event. This is in reference to ether (ETH), the second largest crypto asset, “flipping” bitcoin—that is, reaching a larger market cap than the world’s largest cryptocurrency.
Despite underperforming Bitcoin year to date, Ethereum’s unique advantages and persistent demand drivers position it well for future growth and we believe the flippening is still possible.
Let’s look at five potential catalysts that could together help ETH make a big move in this direction in the coming months.
- ETFs in the US: Last week, the SEC approved the listing of several spot ether ETFs. While it may be months before these ETFs are trading, this is a significant milestone for Ethereum and underscores the growing institutionalization of this asset class. ETFs will give institutional investors easier access to ETH, potentially driving up demand and price. The record-breaking inflows seen in bitcoin ETFs this year indicate strong crypto demand, suggesting that inflows for ether ETFs could surpass $5 billion in fresh capital during the first few months of trading. This projection is based on the assumption that the US market will adopt ether ETFs in proportions similar to what has been seen in other regions where both bitcoin and ether ETFs are already available.
Source: AUM for each ETF/ETP is from Bloomberg, accessed May 21, 2024
- US election outcome: It’s no secret that the current administration has taken a less-than-friendly approach to the regulation of crypto. A new administration would very likely present a dramatic shift in its view of ETH and other crypto assets, opening up the potential for increasing regulatory clarity and the opportunity for Ethereum and its ecosystem to grow in the largest financial market in the world. But regardless of the election outcome, there is evidence of growing bipartisan support for creating a more sensible regulatory environment for crypto assets.
- Dovish monetary policies: If the Federal Reserve and other central banks decide to cut interest rates or implement quantitative easing (QE), Ethereum could benefit significantly. Lower interest rates typically drive investors to seek higher returns in alternative assets, including crypto assets. Furthermore, QE increases liquidity in the market by injecting more money into the economy. This additional liquidity often finds its way into higher-yielding investments, such as ETH and Decentralized Finance (DeFi) applications. DeFi platforms offer various financial services like lending, borrowing, and earning interest on crypto assets, which become increasingly attractive in a low-interest-rate environment. As a result, both ETH and its associated DeFi ecosystem could see heightened demand and price appreciation under dovish monetary policies.
- Increase in transaction volumes: The growth of tokenization and other Ethereum use cases is predicted to be a multi-trillion-dollar market over the next decade. As more assets are tokenized and more transactions occur on Ethereum, transaction volumes will rise. Higher transaction volumes can drive demand for ETH, increasing its value. Additionally, Ethereum’s strong developer ecosystem, the utility of ETH as DeFi collateral, and its decentralized and secure mainnet further support its growth.
- A new killer app: Stablecoins have emerged as a significant application for smart contracts. In emerging markets, particularly in countries with stringent capital controls due to high inflation, stablecoins are growing rapidly as people seek alternatives to protect their wealth. In these markets, stablecoins could disrupt traditional financial services like payments, remittances, and banking. Ethereum is uniquely positioned to benefit from this as it remains by far the most widely used stablecoin network.
But we believe stablecoins are just the first of many potential “killer” applications. Tokenized money market funds are likely to follow, offering low-risk returns in a high-interest-rate environment and paving the way for global, digital-native investing. Moreover, other applications outside of finance might emerge in the next 12-18 months. Identity solutions and Decentralized Physical Infrastructure Networks (DePIN) could see accelerated adoption, driven by advancements in AI.
A rising tide of demand
Last fall, I wrote about Ethereum being crypto’s sleeping giant. Ethereum is, of course, not the only smart contract platform that has been experiencing growth. It has been facing increased competition from platforms like Solana and Avalanche. While some have suggested this might weaken the ETH investment case, we believe a rising tide lifts all boats and the demand for smart contract-based applications will create an environment where many different networks can thrive, even if Ethereum remains the dominant platform for the foreseeable future.
Uncertainty around which network will dominate the crypto landscape or receive more regulatory clarity will be a long-term fixture of this market. This is one of the reasons why investing in a basket of crypto assets like the Nasdaq Crypto Index, as opposed to single-asset investing, can benefit investors over time. Regardless of whether or not ETH ever flips BTC, crypto network development continues to mature, presenting significant opportunities for investors with a long-term investment horizon.
This material expresses Hashdex Asset Management Ltd. and its subsidiaries and affiliates (“Hashdex”)’s opinion for informational purposes only and does not consider the investment objectives, financial situation or individual needs of one or a particular group of investors. We recommend consulting specialized professionals for investment decisions. Investors are advised to carefully read the prospectus or regulations before investing their funds. The information and conclusions contained in this material may be changed at any time, without prior notice. Nothing contained herein constitutes an offer, solicitation or recommendation regarding any investment management product or service. This information is not directed at or intended for distribution to or use by any person or entity located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject Hashdex to any registration or licensing requirements within such jurisdiction. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of Hashdex. By receiving or reviewing this material, you agree that this material is confidential intellectual property of Hashdex and that you will not directly or indirectly copy, modify, recast, publish or redistribute this material and the information therein, in whole or in part, or otherwise make any commercial use of this material without Hashdex’s prior written consent.
Investment in any investment vehicle and cryptoassets is highly speculative and is not intended as a complete investment program. It is designed only for sophisticated persons who can bear the economic risk of the loss of their entire investment and who have limited need for liquidity in their investment. There can be no assurance that the investment vehicles will achieve its investment objective or return any capital. No guarantee or representation is made that Hashdex’s investment strategy, including, without limitation, its business and investment objectives, diversification strategies or risk monitoring goals, will be successful, and investment results may vary substantially over time. Nothing herein is intended to imply that the Hashdex s investment methodology or that investing any of the protocols or tokens listed in the Information may be considered “conservative,” “safe,” “risk free,” or “risk averse.”
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Uncertainty around the U.S. economy has been taking a toll on Bitcoin and Ethereum, especially with Friday’s underwhelming nonfarm payroll data causing a 6-8% sell-off, re-echoing recession fears. On the institutional side, Bitcoin ETFs witnessed $1.2B in outflows in the eight days through last Friday, before seeing net inflows of $28.6M on September 9. Nevertheless, in the time of turbulence in the broader economy, one crypto-native market has been showing resilience.
Decentralized Finance (DeFi) is a blockchain-based financial market that operates without intermediaries like banks or brokerage firms. Instead, it uses smart contracts to facilitate peer-to-peer activity. Making financial services available to anyone with an internet connection, DeFi eliminates the barriers of traditional finance, while promoting financial autonomy and reducing reliance on centralized institutions. Another main advantage DeFi has over traditional finance is that users can trade around the clock, seven days a week.
Some of the use cases of DeFi include:
• Lending and borrowing: Just like bank loans, platforms like Aave allow users to lend their assets while earning interest, or borrow against collateral.
• Decentralized exchanges (DEXs) function similarly to stock exchanges by enabling users to trade between a variety of crypto pairs. However, instead of relying on centralized market makers, they utilize an automated market-making system (AMM) – pioneered by Uniswap – to facilitate trades in a decentralized manner.
• Stablecoins like Maker’s DAI maintain stable value to provide a way to store and transfer assets without worrying about volatility. Since they’re pegged to a stable asset, such as USD, they are also often used as collateral within DeFi ecosystems.
• Derivatives in DeFi are replicas of complex financial products found in traditional finance, such as options and futures, with cryptoassets in the underlying. In addition, synthetic assets (such as sXAU and sAAPL) allow users to participate in markets that might otherwise be inaccessible.
• Yield farming allows participants to put their idle cryptoassets to use. Users provide liquidity to DeFi protocols to facilitate trades, loans, or other financial services. In turn, these liquidity providers earn passive income in terms of rewards, which can be a portion of transaction fees, governance tokens, or just interest.
Why are we talking about them now?
During market downturns and bearish periods, it’s crucial to take a step back and assess which businesses have fundamental value versus those propelled by hype. For example, DeFi demonstrated relative resilience compared to other crypto segments.
While Bitcoin and Ethereum experienced declines of approximately 6% and 9%, respectively, DeFi as a whole saw a more modest average decrease of around 3% over the last 30 days. For example, Uniswap increased by 6.2%, while Aave grew by 52.5%.
Figure 1 – Monthly Performance of Crypto Sectors
Source: Artemis, 21Shares
Further, when breaking down which businesses are making the most revenue across the space, DeFi protocols stand out, as shown below.
Figure 2 – Top Revenue-generating Protocols, Excluding Smart-contracts Platforms
Source: DeFiLlama, 21Shares
Drilling deeper into DeFi, the sector’s growth can be effectively gauged by examining exchange activity, particularly swapping transactions. As exchanges serve as the primary entry point for DeFi, their transaction volume offers valuable insight into the sector’s utilization. Currently, users are executing an average of nearly 2M swap transactions, representing a 10x increase since late 2021 on Uniswap.
Figure 3 – Total Number of Swaps Executed via the Different Iterations of Uniswap
Source: Dune Analytics, 21Shares
Further, DeFi’s monthly revenue nearly matched its November 2021 peak, reaching $70M. Notably, protocols simplifying financial market engagement, such as Pump.fun, have been the primary revenue drivers in this cycle. Pump.fun, which enables users to launch tokens without technical expertise, generated approximately $100M in less than six months. While it’s been primarily focused on meme coins, this trend highlights the growing demand for user-friendly DeFi platforms that lower barriers to participation for individual investors.
Finally, stablecoins are the bedrock of the DeFi ecosystem, serving as a volatility-free haven for crypto capital. Their pivotal role warrants a dedicated deep dive, but for now, let’s examine its remarkable growth since the Luna collapse. For instance, in Q2 of 2024, Tron processed up to one-third ($1.25T) of Visa’s annual settlement volume.
To further contextualize, the total stablecoin market capitalization is approaching its all-time high (ATH), surging approximately 38% from its July 2023 lows to reach $170B. In the same vein, stablecoins now consistently outpace Bitcoin in daily transaction volume, as shown in Figure 4, underscoring their pivotal role in enabling efficient, low-cost payments that aren’t just limited to crypto, as evident by Visa, Stripe, and Shopify’s integrations.
Figure 4 – Weekly Volume of Stablecoins and Bitcoin (USD)
Source: Artemis, 21Shares
So, where do we look?
Now that we’ve demonstrated the compelling value proposition of DeFi and its continued dominance in industry usage let’s examine the three pillars of the ecosystem: Aave, Maker, and Uniswap.
Aave: Crypto’s Leading Lending Platform
Aave is the largest money market protocol. Its token’s price, which surged over 50% from its recent August lows, is now approaching its highest level since May 2022, making it one of the rare market outperformers. While the protocol’s TVL remains approximately 45% below its 2021 peak, Aave demonstrated remarkable year-over-year growth.
Over a 12-month period from Q2 2023 to Q2 2024, the protocol saw net deposits rise by approximately 123%, growing from around $8B to $18B. Fees also surged, increasing from almost $24M to $103M, representing a growth of roughly 335%. This shift dramatically improved the protocol’s financial performance, moving from net losses of $4M by Q2 2023 to positive earnings of $7M by the end of July 2024. As a result, the protocol achieved the lowest Price-to-Fees (P/F) ratio in the last 12 months, at 3.7x.
Most impressively, Aave had the highest monthly active user count, 101.6K, in Q2 of this year, leading to a total cumulative user count of 2.2M. This is remarkable as it shows that the protocol is facilitating meaningful activity and has thereby found its product-market fit, even during times of muted activity.
Figure 5 – Total Amount of Weekly Borrowers
Source: Dune Analytics, 21Shares
In line with this data, Aave’s total number of weekly borrowers reached an ATH in mid-August, as depicted below. This reflects the protocol’s health and its cardinal role within DeFi.
Figure 6 – Total Borrowed Amount on Aave in $
Source: Artemis, 21Shares
TLDR: Despite a 40% decrease in assets’ value amid the broader crypto market slowdown, Aave has significantly expanded its user base across multiple networks. This growth has led to increased revenue, surpassing Q4 2021 levels and resulting in positive earnings of over $7M during the last quarter. With Aave’s strategic expansion plan and its anticipated collaboration with Trump’s DeFi protocol, the outlook for the next few months appears bullish.
Maker: World’s Largest Decentralized Central Bank
Sky, formerly known as Maker, has emerged as the top revenue-generating DeFi application, second only to stablecoin issuers like Tether (USDT) and Circle (USDC). While the full implications of the recent Sky rebranding continue to unfold, the protocol has already made a name for itself by pioneering synergies with traditional finance (TradFi), particularly through the onboarding of tokenized real-world assets onto the crypto ecosystem. This sector now makes up a significant portion of its TVL, particularly in areas such as public and structured credit, as shown below in Figure 7.
Nevertheless, Maker’s primary business remains centered on decentralized lending, which currently accounts for approximately $4B of its $5.5B TVL. Maker’s expertise in lending, alongside its expanding involvement in real-world assets, continues to drive its dominance in the DeFi ecosystem.
Figure 7: Maker TVL by Type
Source: Dune, 21Shares
Despite recent challenges, Maker continues to show resilience in the DeFi landscape. Although the token price dropped 21% last month, the protocol remains positioned for long-term growth, with underlying metrics showing steady momentum.
While Q3 2024 revenue is projected to fall slightly below Q2’s $85M peak, it is still on track to more than double the $33M from Q3 2023. This impressive year-over-year growth highlights Maker’s ability to generate consistent earnings despite varying market conditions.
A standout achievement is Maker’s net treasury, which surged over 10x from $15M in Q3 2023 to $154M in Q3 2024. This strong financial buffer helps shield the protocol from volatility and supports future initiatives like the Sky rebrand, which we’ll break down in a separate edition.
Figure 8: Maker On-chain Revenue by Type
Source: Dune Analytics
User engagement is also on the rise, with monthly active users up 15% this quarter, approaching 3,000. This growing activity reinforces Maker’s product-market fit. With increased revenue and user activity, Maker’s Price-to-Fees (P/F) ratio has improved, dropping from 11.8x in Q3 2023 to 8.1x, suggesting the protocol may be undervalued. As shown in Figure 8 above, Maker’s diversified revenue streams further strengthen its position as a key sustainable DeFi player.
While total borrows on Maker have dropped nearly 45% from their 2021 peak, the protocol has stabilized at a healthy $5B in monthly borrowing, reflecting strong demand for its lending services, as shown in Figure 9. Notably, despite the plateau in borrowing, Maker’s revenue has grown steadily throughout 2023, indicating successful diversification beyond its original use case.
Figure 9: Maker’s Borrowed Amount in $ vs Revenue
Source: Artemis
TLDR: By expanding into new business lines, Maker is positioned for future growth as DeFi establishes itself as a sector with proven demand. The protocol is well-poised to capitalize on DeFi’s growing adoption and integration with the broader financial ecosystem, securing its place at the forefront of the industry.
Uniswap: Crypto’s Dominant Non-Custodial Stock Exchange
Generally, users prefer non-custodial crypto exchanges, which provide greater security and autonomy compared to centralized exchanges (CEX). Even with the recent market turbulence, the DEX to CEX spot volume is still close to its all-time high, showing that the conviction remains strong around DeFi’s infrastructure.
Being the biggest DEX by TVL and the pioneer behind automated market makers, let’s explore how Uniswap ranks among its centralized counterparts. In Q2, Uniswap made 81% and 65% of Coinbase and Robinhood’s volume, respectively, while just having a fraction of the resources and workforce.
Figure 10 – Uniswap’s Daily Active Users
Source: Dune Analytics, 21Shares
In Figure 10, we can see that new users recently climbed to 90K, a number Uniswap never crossed in a single day, let alone at a time of uncertainty in broader markets. Further, with 12M monthly active users, Uniswap enjoys 60% market share. To put matters into perspective, Curve Finance is a DEX that comes right after Uniswap in TVL ranking and has 27.9K monthly users. If we have a look at Uniswap’s centralized competitors, Coinbase has 8M active users and Robinhood has 13.7M.
Assessing Uniswap’s business has to include a look into its revenue streams. In October 2023, Uniswap Labs imposed a 0.15% fee on specific tokens to swaps conducted on its main interface. Over the past six months, Uniswap Labs generated $45M via its interface fee, gulping the lion’s share in the fee generating vertical, excluding Solana-based DEXs, as shown below.
Figure 11 – DEX Trading Fees Market Share
Source: Artemis, 21Shares
TLDR: Despite Uniswap’s lackluster price performance, largely due to perceived utility issues compared to other major DeFi tokens, the protocol’s outlook appears promising. This optimism stems from two key factors: increasing revenue from its interface fee and the potential activation of the fee switch. The market’s reaction to the fee switch news in February was notably positive, with the token surging nearly 130%. All in all, Uniswap’s dominant position in the DEX sector, evidenced by its substantial fee generation and expanding user base, could position it as a relevant barometer for the broader DeFi landscape.
So, what are the key catalysts that could reignite the industry in the coming months?
• Fee-switch and Domino Effect on DeFi:
o In February, the Uniswap Foundation proposed activating the fee-switch, allowing token holders to share protocol revenue. Though paused, this move signaled a shift in DeFi towards transforming simple governance tokens into revenue-generating assets. Aave is now considering a similar feature, and we expect more protocols to pursue similar value accrual mechanisms.
• Falling interest rates
o As central banks lowered borrowing rates during the pandemic to stimulate economic growth, savings accounts offered unattractive yields, driving some investors to DeFi for higher returns. Although early yields were unsustainable, the sector has since relatively matured with the integration of tokenized assets, blending yields from both traditional and decentralized finance. This evolution could become a key advantage as rates continue declining in the coming months.
• Trump’s DeFi Project
o While many details are still pending, World Liberty Project appears to be a lightweight, non-custodial lending protocol designed to integrate with Aave. This setup allows users to deposit into without forking the protocol itself. The project could significantly impact Aave, enhance confidence in DeFi platforms, and consequently drive up sector valuations. It could underscore the benefits of stablecoins, which the platform is expected to heavily rely on, if it doesn’t stir regulatory scrutiny.
• Simplified User Interface
o Apple’s new NFC policy could significantly increase the demand for stablecoins by unlocking their utility as an alternative payment method through their devices, via tap-to-pay. This change could elevate DeFi’s infrastructure role, though the impact will largely be felt behind the scenes, with users primarily noticing the convenience in terms of cost efficiency.
o Features like account abstraction will enable users to create and recover smarter crypto wallets using Web2 credentials, offering a more user-friendly experience reminiscent of fintech platforms.
For investors looking to gain exposure to the DeFi ecosystem, one of the most established sectors with a proven product-market fit, 21Shares offers the following ETPs on the European market. These investment products provide a regulated way to invest in leading DeFi protocols and capture growth opportunities within this rapidly evolving sector.
Figure 12 – Top Aave ETPs by Assets under Management
Source: Bloomberg, Data as of September 10, 2024.
Avg. Daily Spread YTD: refers to the best daily average bid/ask spread this year across European exchanges.
Figure 13 – Top Uniswap ETPs by Assets under Management
Source: Bloomberg, Data as of September 10, 2024.
Avg. Daily Spread YTD: refers to the best daily average bid/ask spread this year across European exchanges.
Figure 14 – Top Maker ETPs by Assets under Management
Source: Bloomberg, Data as of September 10th, 2024.
Avg. Daily Spread YTD: refers to the best daily average bid/ask spread this year across European exchanges.
What’s happening this week?
Source: Forex Factory, 21Shares
Research Newsletter
Each week the 21Shares Research team will publish our data-driven insights into the crypto asset world through this newsletter. Please direct any comments, questions, and words of feedback to research@21shares.com
Disclaimer
The information provided does not constitute a prospectus or other offering material and does not contain or constitute an offer to sell or a solicitation of any offer to buy securities in any jurisdiction. Some of the information published herein may contain forward-looking statements. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those in the forward-looking statements as a result of various factors. The information contained herein may not be considered as economic, legal, tax or other advice and users are cautioned to base investment decisions or other decisions solely on the content hereof.
The crypto markets fell for the week, with Bitcoin (BTC) dropping 7.0%, Ethereum (ETH) down 9.0%, and Solana (SOL) falling 3.8%. The Nasdaq Crypto IndexTM (NCITM) declined 7.1%. Crypto markets remain in a consolidation phase but have accrued a sequence of weeks performing negatively, despite positive newsflow regarding institutional adoption.
US jobs report sparks volatility
After the release of the US jobs report on September 6, which led to speculation about the Fed’s intentions for rate cuts, Bitcoin experienced significant volatility. The price surged to $57,000 but then dropped below $54,000, marking its lowest point in a month. This sharp swing triggered nearly $50 million in liquidations of leveraged positions in just one hour, affecting various altcoins.
Australia’s first Ether ETF may begin trading soon
The Monochrome Asset Management filing is expected to be listed by the end of the month. This news is significant for investors as it signals greater acceptance of crypto from regulators, which could further drive adoption in global markets.
Crypto-native travel platform integrates with Skyscanner
Travala, a crypto-friendly travel platform, has formed a strategic partnership with Skyscanner, one of the world’s largest travel aggregators. This integration allows Skyscanner’s over 110 million monthly users to access Travala’s offerings, including booking more than 2.2 million hotels and the ability to pay with over 100 different cryptocurrencies. This move aims to facilitate crypto adoption in the travel sector. The integration highlights the growing acceptance of alternative payment methods, reinforcing the practical utility of crypto assets in everyday services.
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