The financial institution has adjusted its year-end price target for Ethereum (ETH) to $4,000, a decrease from its earlier estimate of $10,000, highlighting underlying vulnerabilities in the network’s economic framework.
In a research document labeled “Ethereum — Midlife Crisis,” the firm’s head of digital assets research, Geoffrey Kendrick, argued that Ethereum’s transition to proof-of-stake along with the emergence of Layer-2 (L2) networks has led to a decline in the value retained by the central blockchain.
Kendrick estimated that Base, the leading Layer-2 solution, has single-handedly stripped away $50 billion from Ethereum’s core market cap.
The analysis indicated:
“Layer 2 blockchains were intended to enhance ETH scalability, yet we estimate that Base, a significant Layer 2, has pulled $50 billion from ETH’s market capitalization. Lacking a shift in strategy from the Ethereum Foundation, we foresee ETH-BTC continuing its downward trend.”
Concerns Regarding L2 Effects
The report identified various elements contributing to Ethereum’s lackluster performance. While the network continues to lead in DeFi, NFTs, and tokenized assets, its capacity to capture value has weakened.
Kendrick noted that the rollout of the Dencun upgrade in March 2024 intensified this issue by bolstering L2 solutions, which now retain a greater portion of transaction fees while lowering costs for users.
He stated:
“A Layer 2 created to tackle Ethereum’s scalability challenge is reaping all the benefits, while the main protocol is falling behind.”
The analysis suggested that Ethereum’s economic contribution loss to L2 solutions could exceed $50 billion over time unless strategies are implemented to redirect more financial value back to the primary chain.
Kendrick recommended that Ethereum consider imposing a “super tax” on L2s, akin to how certain governments tax foreign mining corporations that exploit excessive profits.
Decline in ETH-BTC Ratio
Given these structural issues, the financial institution also lowered its Ethereum-Bitcoin (ETH-BTC) ratio forecast, even though it is currently at historic lows. The prediction now sees the ratio dropping to 0.015 by year-end, a significant fall from the previous target of 0.05.
This cautious outlook arises amidst a larger discussion regarding Ethereum’s long-term sustainability and whether its scaling solutions aimed at enhancing transaction efficiency could inadvertently favor external networks more than the Ethereum base layer itself.
Notably, the institution retained a more positive perspective on Ethereum’s long-term potential, anticipating a recovery to $6,000 by 2026 and $7,500 by 2027.