Bernstein: Small Economic Recovery Would Make Ether's Tokenomics Favorable

Ether (ETH), the native token of the Ethereum blockchain, needs “very little recovery in economic activity for the token economics to turn favorable,” Bernstein said in a research report, and that creates a strong story for the cryptocurrency’s “asymmetric growth model.”

Ethereum’s transition to proof-of-stake (PoS), a software upgrade that was called the Merge, substantially improved ether’s tokenomics with around 90% lower emissions, possible deflation and more than 5% staking yields, according to the report published Monday.

With the success of layer 2 blockchains, ether can position itself as a category leader within the digital-assets market, the report added.

The Merge was the first of five upgrades planned for the blockchain and involved the shift from a proof-of-work (PoW) method of validating transactions and securing the network to a more energy-efficient PoS consensus mechanism. Layer 2s are separate blockchains, built on top of layer 1s that reduce bottlenecks. A layer 1 network is the base layer, or the underlying infrastructure of a blockchain.

Bernstein estimates that ETH’s deflation could reach about 4% annually, noting that current burn activity is being led by decentralized finance (DeFi), non-fungible-token (NFT) exchanges and token transfers.

The broker estimates that the break-even level of daily fees needed to fully offset gross ETH issuance is around 2,100 ETH, which is where current levels stand, meaning that there is a small reduction in the supply outstanding.

“Ethereum’s modular approach to scaling will improve transaction speed and affordability,” the note said, and lower fees will allow more users to come onto the blockchain.

The layer-2 scalability road map will lead to the launch and adoption of Ethereum-compatible zero-knowledge (ZK) rollups, and Bernstein forecasts monthly active users for the Ethereum stack will jump to about 500 million by 2032 from around 8.5 million now.

ZK-rollups are Ethereum layer 2 protocols that process transactions separately from the main network to help increase speed and lower fees.

Read more: Bernstein Still Sees Institutional Adoption Despite Crypto Winter