Overall, ethereum (ETH) is highly unlikely to become a “popular currency,” but it could still compete with bitcoin (BTC) in the long run, according to crypto firm Dragonfly Capital.

The firms’ General Partner Kevin Hu and Junior Partner Celia Wan wrote in their recent report that as institutional investors invest in BTC as the store of value story begins to become mainstream, their understanding of Ethereum and ETH is “complicated,” especially when concepts like decentralized finance (DeFi) and non-replaceable tokens (NFTs) are added to the mix.

While an ETH bull might argue that if the Ethereum network becomes ubiquitous and fees stabilize, ETH could become a popular currency, “that’s highly unlikely and stablecoins are fundamentally much better at both functions, even if Ethereum becomes a dominant platform.” says the author. said, adding that “ETH is unlikely to succeed as a medium of exchange and unit of account.” Chainlink price has risen.

Although ETH has five times the market cap of ERC-20 stablecoins, their total on-chain volume already exceeds that of ETH ($10 billion versus $8 billion per day), with off-chain volumes showing an even greater difference.

However, since it is used as collateral in DeFi, as a non-sovereign store of value, ETH may still have a chance to capture some potential market share. “In the long run, it’s conceivable that ETH could even compete with Bitcoin in terms of scarcity, durability, and tamper-evity,” noted Hu and Wan. Polygon price has risen.

As the reasons behind this statement they give:

EIP-1559 will lead to the stabilization of ETH’s monetary policy and inflation is likely to be halved;

Ethereum 2.0’s security model will eventually be “almost as proven” as Bitcoin’s, and a proof-of-stake consensus mechanism is likely to increase Ethereum’s security guarantees if ETH is sufficiently valuable;

if Ethereum and DeFi become the ‘financial layer of the future’, ETH could remain one of the most important collateral because it was the first collateral to scale and the DeFi ecosystem is built around it.

Having said all that, the authors believe it is possible for ETH to take 10% of BTC’s market share if Ethereum and DeFi continue to grow. If BTC’s potential market cap is around $4.7 trillion – $14.6 trillion, the potential monetary value of ETH could be between $0.5trn and $1.5 trillion, they said.

In addition, the Dragonfly Capital partners noted that ETH “will become a capital asset in addition to a consumable item [that] should have a profound effect on ETH’s appreciation in value,”

“Even if other tokens such as stablecoins can replace Ethereum as alternative forms of payment in the future, ETH will still be used by network validators for wagering and receiving rewards. Therefore, ETH is likely to generate value from demand such as a consumable and cash flows as a capital asset,” they said.

The venture capitalists also argued that the current DeFi ecosystem on Ethereum has formed a positive feedback loop, with users both bringing the liquidity-based network effect to DeFi and benefiting from a liquid DeFi market.

Lock in effect

“In addition, the composability and interoperability of DeFi protocols have created a lock-in effect for Ethereum, making it difficult for other Layer 1s and sidechains to compete,” they concluded. The authors have also given a very rough estimate when it comes to ETH’s potential valuation: between $3.7 trillion and $4.7 trillion “in the distant future.”

At 16:12 UTC, ETH’s market cap was $247 billion. ETH traded at $2,119 and was up nearly 1% in a day and 6.5% in a week. At the same time, BTC’s market cap was $631 billion. The cryptocurrency traded at $33,661, or 1% higher than a day ago, cutting weekly losses to less than 3%.