Is Ethereum's Liquidity Moat Disappearing? 10 Core Arguments Against Bearish Claims

Author: Jake Koch-Gallup, blockworks

Compiled by: Deep Tide TechFlow

Deep Tide Overview: As more people begin to question Ethereum's value capture ability, this article provides a contrarian perspective. The author directly addresses the argument that "Ethereum is losing its liquidity moat" and offers counterarguments from the perspectives of monetary premium, layer two ecosystems, and stablecoin market share. This is a thought-provoking piece worth reading for investors reassessing Ethereum's long-term positioning.

If you haven't read Carlos's newsletter from this Tuesday, go check it out. His core argument is that Ethereum is losing its last moat: liquidity. We debated this on the 0xResearch podcast (you can listen here), and I strongly disagree with his viewpoint (can you believe it? An analyst from Blockworks actually disagrees).

His first example is that tokenized stocks on Ethereum have almost no trading volume, with only $25 million in trades over the past 30 days, accounting for about 3% of the supply. However, Ethereum holds the second-largest share of tokenized stock supply. Carlos anticipated this, but I still believe that the purpose of tokenized stocks is to expand global investors' access to the U.S. market, not for lending and DeFi. In the podcast, his response was that tokenized stocks lying on your blockchain do nothing because they do not generate revenue, and trading volume is what generates revenue.

Dear readers, this may be where you and I start to genuinely diverge. I do not believe Ethereum necessarily needs to generate revenue. It already possesses a monetary premium, just like many other L1s. Actual economic value (REV) alone cannot explain the market capitalization of most L1s; ETH's trading price is over 1,100 times its REV from the past year. Since the market clearly prices Ethereum partly as a reserve asset and collateral asset (ETFs, government bonds, DeFi collateral), ignoring this is tantamount to saying that ETH and most L1s are forever overvalued by 99%, which is not a useful statement.

His second argument is that flagship applications are prioritizing growth elsewhere. He cites that Robinhood Chain accounted for 43% of Uniswap's trading volume over the past 30 days, while Ethereum only accounted for 32%. He also mentioned Ethena's growth on Base. Both points are valid, but Robinhood Chain and Base are both layer two networks of Ethereum. If we agree that REV is not that important for L1s, then the growth of Ethereum's layer two is a victory for Ethereum. To be fair, Ethena has indeed expanded to Solana, TRON, and Avalanche, which are not layer two networks. Ethereum's share in USDe has dropped from 88% to 56%, but it still holds the majority. Ethena is increasing distribution channels, not leaving.

However, if you truly believe REV is extremely important, consider this: in September, Base paid Ethereum about $15,000 in rent to publish data. In the same month, it paid $711,000 to Optimism Collective. Now imagine a world where, 3 to 5 years from now, Ethereum says, "You know what, we also want the kind of revenue that Optimism is getting," and then raises the minimum fees for publishing data. Base might not like it, but if by then the layer two networks have scaled tenfold, that would be a significant amount of money. So market share is important, even if it doesn't generate much REV right now.

His final argument is that Ethereum's dominance in stablecoins is slowly declining, which is true. But the stablecoin market is not winner-takes-all. Even if Ethereum's dominance drops from 51% to 30% in the next ten years, the stablecoin market itself will continue to grow. If, in ten years, the total market cap of stablecoins reaches $3 trillion, Ethereum will have nearly $1 trillion in stablecoins, almost six times its current holding of $155 billion. If you want to hear Carlos's response to the counterarguments I raised here, be sure to check out the podcast. Now let's set those aside and look at why Ethereum still has value and will continue to have value.

Reasons Why Ethereum Still Has Value

Ethereum has the largest total value locked in DeFi to date, accounting for 65% of the total. Since 2022, it has not had a week below 62%.

Ethereum still possesses the deepest liquidity, the most secure network, and the highest institutional participation among all blockchains except Bitcoin.

Ethereum has the largest on-chain real-world asset (RWA) management scale (though its share has dropped from 99% in 2022 to 45% today).

Institutions hold ETH as an asset, not for its revenue. Spot ETFs and holding companies account for about 13% of the total ETH supply.

Robinhood and Coinbase could have launched their own L1s, but they chose to settle on Ethereum.

The largest tokenized funds, such as BlackRock's BUIDL, first launched on Ethereum's mainnet.

Ethereum has been running for over 10 years without a single network outage.

Ethereum and its layer two networks have the largest developer base in the crypto space, with EVM being the default toolkit, even competitors' L1s are copying it.

36% of the ETH supply is staked, recently hitting an all-time high, providing native yield for holders, which institutions can access through staking ETFs.

Ethereum is the computer of the crypto world.

At the end of the day, I am a fundamental investor. Crypto projects (typically) should have revenue, and that value should belong to token holders. So believing that ETH can survive on its monetary premium and a small amount of REV may just be self-soothing for holders. But perhaps, just perhaps, Ethereum should be valued as a world computer.

Today's Highlights

After a year of continuous decline, Plasma's stablecoin supply has nearly doubled since July, reaching $1.41 billion, the highest level since mid-February. While it still has a long way to go from its peak of $5.2 billion at launch, the competition in the stablechain market is far from over.

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