17 Comments

Bravo, super clever.

Lyn Alden has accurately observed that most of what is happening on DeFi right now is circular. It's not feeding on real self-sustaining demand. It's just feeding off of speculative activity.

If, like many of us, you believe much of the financial system is going to eventually run on crypto, then you're only concerned about when and not if real uses cases are going to come down the pike. Circular it is for now, but no biggie.

This is what I find astounding. Speculative activity is just the tip of the iceberg. How much does Big Tech make up of market indices today? What are the flows in and out of AMZN, GOOG, FB, etc. with every index-related transaction? Whatever amounts those are must dwarf the flows in and out of AMZN, YHOO, EBAY, etc. during the early internet heyday. What are the revenue numbers for the Big Tech giants today vs. the early internet leaders after they first went public?

If today, this circular early heyday speculative activity is enough to drive a run rate of ~$9B already, how large is that same number going to be when the full iceberg is in view? If the tip of the iceberg is a $9B run rate already, the run rate at maturity is going to be mind-blowing.

Granted, there was a large NFT frenzy in Q1 and a strong bull market in crypto as well, but not matter how you cut it, we are talking very large numbers when it comes to Ethereum transaction fees even today.

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I should add that Ethereum is generating so much transaction revenue even while we are still in this circular early heyday speculative phase AND EVEN while by far most of the trading activity is taking place on centralized exchanges. (As I understand it, deposits/withdrawals from the centralized exchange are what primarily generate gas fees, not trades on the exchange itself.)

Imagine how much Ethereum transaction fees will grow if most of that trading activity migrates to decentralized exchanges.

Of course, the average fee paid per trade on a centralized exchange should be much lower than the average fee paid per trade on centralized exchanges. If trading volume on DEXs represents only 1% of total $ trading volume, if 100% of the trading $ volume on CEXs migrates to DEXs, that doesn't mean resulting Ethereum transaction revenue will go up by 100x.

We can expect that most of that trading volume will only migrate to DEXs once fees on DEXs become competitive with fees on CEXs (for even small-sized trades). In other words, what is the opportunity for Ethereum transaction revenue? On a willingness-to-pay estimation basis, the opportunity is largely the trading fee revenue that centralized exchanges are collecting currently, in aggregate.

Ballpark, how much are centralized exchanges collecting in trading fee revenue in aggregate?

Well, in Q1, it looks like Coinbase reported $1.8B in revenue. If we assume all of that was trading fee revenue, which it wasn't but can probably still suffice as a crude approximation, then the run rate for Coinbase is $1.8B x 4 = $7.2B. I've seen one estimate of Coinbase having 30% market share. If Coinbase is just 30% of the total pie, then the size of the total pie is roughly $7.2B / 30% = $24B. So very crude ballpark-wise, if all the current mostly speculative trading activity were now taking place on DEXs, we might possibly see an addition of over $20B in Ethereum transaction fee revenue.

One of the main reasons all that trading activity has to remain on the exchanges is that the network obviously can't scale to that level of activity. If the scaling solutions were already in place today and DEXs had had a chance to achieve broad market adoption, Ethereum transaction revenue could easily be in the $20-30B (per yr) range.

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Just a clarification, the reason I provide a range of $20-30B as the estimate for annual Ethereum transaction revenue is that realistically, even in the terminal state, much of the trading activity will probably still take place on centralized exchanges. The centralized exchanges could very well be trading wholesale on the DEXs, but there will be many users who value the custodial services that exchanges provide, so we won't see anything close to a total capture of the current centralized exchange trading fee revenue by the DEXs. Moreover, and this is obviously important, the trading fee revenue that DEXs siphon will get split between the DEX liquidity providers (and to a lesser extent the DEX token holders) and Ethereum gas fees.

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Centrally premined scams like Ethereum only has centralized exchanges built on it. it's just centralized exchange using a centralized blockchain and in no way a decentralized exchange. blockchain doesn't mean decentralization, and premining majority (70%) of what controls it gives 1 party more control than all others combined. Ethereum is not a technology project, it's not a decentralized project, it's only a malicious scam that lies about people's safety for profit, pretending to be like Bitcoin or other cryptocurrencies while designing opposite of same. There's a reason there are no intelligent ethereum supporters, only a community of illiterate and scammers with no possible exceptions.

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Clever!

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James, really appreciate your thoughtful articles. Re ETH, is there a way to use this earnings release to triangulate to your TP = $40k? I understand you may have to make many assumptions at this point but just wanted to get your thoughts on how to think about ETH as a fundamental investment. Thanks again.

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LALANTOP

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This is great!

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Love these articles. Impressive revenues in terms of growth and USD. How will 2.0 effect the absolute revenue number in USD and with the decrease in transactions cost going forward, how much will transactions have to increase to make a comparable revenue stream? Thanks.

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2.0 won't decrease transaction costs.

L2 scaling will, however that won't reduce fee costs on Ethereum mainnet.

Sharding scaling on Ethereum Mainnet is coming in mid-to-late 2022 that should reduce Ethereum mainnet fees by 64x. Ethereum has shown price elasticity, showing that when costs go down, transaction counts go up by more than the cost goes down. I expect total transaction volume to go up by more than 64x if fees are 64x lower, making total revenues higher in 2023 than 2022 and 2021.

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what stupid prediction on ETH. pure garbage

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Ethereum has a 70% central premine of what controls it that was free for only 1 central party, that means 1 party with more control than all others combined. 1 party in control of pricing literal incentives and stake is in no way decentralized and clear weakest link in the design - the reason no developers have ever centrally premined, only scammers did. Ethereum is 100% centralized so it's ONLY the worlds largest scam, nothing else. There is no DeFi on a centralized network, just random projects claiming to be that for marketing purposes same way Ethereum, bitconnect, and onecoin only claimed to be cryptocurrencies. They literally already had confiscations which are trivial on premined network.

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Genius.

Canadians are so polite they approve ETFs quickly 🇨🇦

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Trades on "DEX" exchange ... love it

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Please keep this up - excellent format for consumption by TradFi

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Brilliant summarised update!

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Brillant idea!

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