Standard Chartered Lowers Ether Forecast from $10K to $4K, Cites Economic Imbalance of L2 Fees as Cause of Downgrade

Standard Chartered released a report on Ethereum, reducing its price estimates of $10,000 to $4,000 for ETH. It cites Layer-2 leakage, such as with the Base blockchain developed by Coinbase, which retains 80% of its fee revenue instead of enriching the Ethereum network. Standard Chartered estimates that Base drains around $50 billion from Ethereum’s market capitalization.

Ethereum investors will have to contend with less-than-positive estimates, coming just in time for the digital token’s 10th anniversary. The report described Ethereum as going through a midlife crisis. The problem, with layer 2 draining funds, could get worse as the Converge blockchain is estimated to further exacerbate it.

Ethereum currently lacks a decisive edge when it comes to cheaper fees and faster transaction times. The token further lags behind Bitcoin with regard to market price. However, a forecast of $4,000 is still optimistic, representing a 100% profit from recent levels.

Standard Chartered introduces the term GDP to measure the value generated within the Ethereum network, likening it to a national economy. They use this concept to measure how efficient the network is, finding that many transactions are occurring off the main network, such as with blockchains like Base.

Many traders predict a lower price for ETH and maybe even a drop below $1k if current conditions continue. If Ethereum remains red for three months, this may signal a bear market. ETH dropped around 30% in February alone, encouraging many traders to liquidate their holdings.

In a February blog post, Buterin argued that scaling layer 1 on the Ethereum blockchain is necessary to enhance network value, given that layer 2 innovations have continued to thrive. He predicts that if layer 1 gas capacity is expanded, Ethereum’s performance and cost-effectiveness will become more competitive. 

Standard Chartered has argued that layer 2 networks, initially designed to improve scalability and decongest traffic, have downgraded the blockchain and made it less effective. The bank’s point is that the design flaws have taken away core economic value from the Ethereum ecosystem and negatively impacted the market price. 

The bank further predicts that the ETH/BTC ratio will suffer a sharp drop, reaching a similar level to 2017 of 0.015 by the end of 2027. Ethereum may continue to perform poorly relative to Bitcoin and discourage future and current investors. 

The Dencun upgrade, according to Standard Chartered, was a decisive moment for on-chain changes, with end users preferring layer 2 networks like Base, contributing to a dramatic shift in the overall usage of Ethereum. This change negatively affected Ethereum’s earnings because, since most earnings come from block rewards, the network has a lower share of fees. The Dencun upgrade allowed layer 2 networks to retain most of the fees, leaving Ethereum with a serious economic imbalance. According to Standard Chartered, the solution is to introduce a tax system that brings back money from layer 2 fees.