Fun with Fundamentals - The Daily Gwei #231

Ethereum's fundamentals have never been stronger.

Well, it’s another all time high day for ETH and the ETH/BTC ratio is at a price it hasn’t seen since August of 2018. I’m sure that you’re all feeling incredibly bullish (so am I) so I figured it’d be good to run through a review of why Ethereum’s market performance has been so strong lately.

Ethereum’s fundamentals are extremely strong right now and are only getting stronger as every passing day goes by but what do we actually mean when we talk about “fundamentals”? Well, fundamentals are properties that drive value to the network and ultimately drive value to ETH. For Ethereum, that’s the growth of DeFi over the last couple of years, the explosive growth of NFTs over the last few months, the continued rollout and adoption of layer 2, core protocol work on eth1 & eth2 (plus the merge), protocol upgrades such as EIP-1559 and so much more.

All of these fundamental properties work to drive value to the Ethereum network and ETH as an asset in various ways. DeFi and NFTs increases network usage which creates lots of demand for ETH as trustless collateral and as a medium of exchange/unit of account. Layer 2 expands the number of transactions that Ethereum can handle and also dramatically lowers fees (while inheriting Ethereum’s security properties). The core protocol work on eth1 includes upgrades (EIPs), research, general client improvements and more which works to build additional utility and resiliency into the Ethereum protocol. Eth2 research and development (along with the merger) improve Ethereum’s long-term fundamentals by showing the market that Ethereum has major upgrades coming at the protocol layer (builds trust).

Now, all of the increased network usage translates into increased fees being paid which, under EIP-1559, translates to lots of ETH being burned which of course drives fundamental value to ETH as an asset. With eth2, the more people that stake, the less ETH is in active circulation, the more fundamental value is driven to ETH. As more fundamental value is driven to ETH and its market cap increases, volatility dampens and liquidity increases, it becomes very attractive to larger “institutional” players to either buy it themselves or support it via vehicles like ETFs (and we saw Canada launch 3 ETH ETF’s just some days ago).

On top of all of the above, there are other fundamentals I like to keep tabs on such as the number of active addresses on Ethereum, the amount of fees being paid in the network (in both USD and ETH terms), the number of addresses holding 0.1 ETH or more, the amount of ETH in smart contracts (and in eth2) and so much more. Of course, the growth of these metrics can be a function of the growth of things like DeFi and NFTs so it’s all one healthy symbiotic relationship. The best part is that no matter how you frame it, all of these fundamentals work to directly drive value to Ethereum & ETH and increase the overall health of the ecosystem.

If you’ve been reading this newsletter (or watching my YouTube videos) for a while you’ll know that all of the fundamentals I mentioned above have literally never been stronger - all time highs across the board for pretty much all of them. The best bit is that we’re still so incredibly early and we have billions more people to onboard into Ethereum so if Ethereum’s fundamentals are considered strong now, imagine what they’ll be like over the next few years!

Have a great day everyone,
Anthony Sassano

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All information presented above is for educational purposes only and should not be taken as investment advice.