One thing I’ve learned from investing in crypto markets over the years is that the most impactful ecosystem developments tend to happen when no one is paying attention.

The most recent example of this phenomena is what has taken place within the Ethereum ecosystem over the last year, a period marred by the FTX disaster, macroeconomic uncertainty, and an unfavorable public sentiment toward crypto.

In my conversations with investors, some have shared a perception that Ethereum (ETH) has been in some sort of dormancy over this year. But the reality over the last 12 months tells a much different story. There have been enormous and exciting developments happening under Ethereum’s hood and I believe the investment case for the world’s largest smart contract¹ platform has never been stronger. Let’s take a closer look at the three primary pillars supporting this perspective. 

 

1. Infrastructure developments. 

 

The most notable development this year was Ethereum’s transition from a Proof-of-Work to Proof-of-Stake consensus mechanism. There are strong arguments for the benefits of both types of consensus² but—importantly—Ethereum’s shift to PoS has allowed it to facilitate staking, a process that allows investors to earn a return on their ETH by contributing to the security of the network. This has helped make Ethereum more similar to a technology investment with measurable profitability, and thus more attractive and familiar to traditional investors focused on understanding valuation metrics. As a result, Ethereum is emerging as crypto’s risk-free rate with the number of staked ETH jumping 85% over the last year.

 

ETH staked since the beginning of PoS on Ethereum

 

 

^{Source: Hashdex Research with data from beaconcha.in (accessed September 14, 2023).}

 

These infrastructure developments have helped spur more investor interest in ETH, something that is evident from the flurry of Ethereum ETF applications that have been filed with the SEC in recent weeks. As the US moves forward with allowing Ethereum-based ETFs, demand for ETH will jump in the shorter term and become more sustainable over the longer term as investors are able to include an ETH allocation within their traditional portfolios.     

 

2. Tokenization trends. 

 

A recent Bank of America report suggested that traditional asset tokenization could exceed $16 trillion over the next 5-15 years. Tokenization involves converting the value of physical assets such as real estate, art, and commodities into digital tokens that represent real-world assets on a blockchain. Ethereum is enabling much of this asset tokenization because of its role as the dominant smart contract platform.  

As infrastructure developments scale and become more understood, we could see another parabolic move like the “ICO Boom” of 2017 when markets discovered the power of smart contract applications, or the “DeFi Summer” in 2020 as investors discovered the impact of decentralized finance applications. 

 

“If we can create more tokenization of assets and securities…it could  revolutionize finance.”

^{Larry Fink, BlackRock CEO, in a July 5, 2023 interview}

 

The tokenization of real-world assets could also lead to the next explosion in the adoption of decentralized applications beyond just finance, including decentralized social networks (e.g., friend.tech), consumer payments (e.g., the PayPal/Venmo stablecoin initiatives), or digital collectibles for major brands through non-fungible tokens (NFTs). Ethereum sits at the center of all of these tokenization initiatives as the necessary base layer or “plumbing” for these applications. The greater the usage of tokenization, the greater the demand for ETH.

 

3. Generational shift. 

 

I wrote in detail about this topic this summer, but what I think is important for investors to understand is how the generational tide will continue to turn in terms of the understanding and acceptance of this technology. Younger, digitally native generations intuitively understand we are on a path to a more digitized future, while older generations have been slow to grasp this paradigm shift. In 2022, Charles Schwab reported that 47% of Millennials and 43% of Gen Z’ers had crypto exposure in their 401(k), while this was true for only 4% of Baby Boomers. In addition to growing social and public policy influence, younger generations are poised to have an outsized economic impact as their purchasing power grows and are expected to inherit over $70 trillion over the next 20 years. New and disruptive technologies like Ethereum will be the beneficiaries. 

The generational biases against new technologies isn’t a new phenomenon, just look at how the internet was treated as it was emerging or even how credit cards were looked at less than five years before 75% of US families owned at least one. Technological breakthroughs like Ethereum can seem slow and arduous as they are developing, but in hindsight we wonder how we ever lived without that technology, whether the internet, credit cards, or countless other innovations.

 

People in 1993 react to credit cards being accepted at a #burgerking

 

Ethereum’s opportunity 

 

While the developments over the last year make it clear that Ethereum has been anything but idle, this perception is certainly real. However, I view this as yet another reason to be bullish on the investment case for ETH going forward. These periods of relative calm, when it can seem like no one cares about the crypto markets, are typically good entry points for investors before the period of euphoria begins that can push prices to new all time highs. 

What’s important to remember is that as with any other investment, a disciplined approach over a long-term horizon will produce the best results. We strongly believe that Ethereum is driving the next frontier of innovative investing. As more investors understand the important role Ethereum will play as the technological piping in the global economy, we have no doubt they will appreciate that this sleeping giant wasn’t really sleeping at all.

 

<sup>[1] A smart contract is a computer program that facilitates the execution of an agreement between two parties without intermediation.

[2] Consensus is how trust and security are created within a blockchain network.</sup>

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