Although professional investors may be warming up to Ethereum ETH -1.04% ’s application hosting potential, for many, the investment case for its native crypto asset ether remains unclear, according to CoinShares.

The crypto asset manager released a new Ethereum usage report on Tuesday, focusing on the factors that directly impact ether’s value. CoinShares found the primary driver is the demand for Ethereum transactions. “It hinges on how much users are willing to spend for the services Ethereum provides,” researcher Matthew Kimmell wrote.

However, while Ethereum's ecosystem continues to expand, transaction demand is highly concentrated in a few speculative use cases, “raising concerns about the platform's long-term value and necessitating a focus on fostering sustainable on-chain utility,” CoinShares Head of Research James Butterfill added in a separate post.

Ethereum transactions fuel ether’s value far more than staking yields, monetary adoption, financial collateral use or anything else, according to CoinShares.

Ethereum has shifted from basic asset transfers to complex interactions with decentralized applications, financial tools and infrastructure like staking and Layer 2 technologies. While its ecosystem offers increasing functionality, much of its usage still revolves around speculation and simple token transfers rather than the diverse real-world applications originally envisioned, the analysts noted.

Ethereum fee spend. Image: CoinShares.

“The hard truth is that a very small set of services consistently makes up the majority of Ethereum usage,” Kimmel said.

Ethereum’s primary use case is decentralized exchanges, with Uniswap consistently leading, accounting for over 90% of transaction fees, Kimmel said. While NFT marketplaces like OpenSea briefly surged in 2021, their influence has declined, leaving Uniswap and aggregators like 1inch and MetaMask as the main drivers of application activity — highlighting speculation as a key utility, Butterfill added.

Application category fee spend. Image: CoinShares.

Token transfers are also central to the network’s activity, with stablecoins playing an increasingly critical role as one of the most sustainable and intuitive use cases for crypto, according to the analysts. “As Ethereum’s ecosystem has expanded, the types of tokens being transferred have diversified significantly, but ether and stablecoins have emerged as the dominant assets in terms of transaction fee spend,” Kimmel noted.

Fee spend by token transferred. Image: CoinShares.

While Ethereum has successfully grown to support a variety of applications that users are willing to spend billions of dollars a year to access, the trend of demand for the Ethereum chain is declining, Kimmell said.

The rise of Layer 2 solutions in recent years has helped address scaling issues but has also “cannibalized” demand for Ethereum's base layer, complicating the relationship between ether's value and the broader ecosystem, according to Kimmel. “In our view, the latest major change, EIP-4844, which strongly incentivized Layer 2s, has worked directly against the economic design benefits of EIP-1559, which tied the value of ether to its Layer 1 platform demand,” he said.

Moving forward, the challenge is to foster on-chain utility that not only scales but adds meaningful long-term value to users and drives sustainable demand for Ethereum services, Kimmell concluded.

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