From CoinShares Research Blog by Luke Nolan

Intro

In our 4-part series named “The Value of Ether”, we have discussed in detail the framework in which we think it is most appropriate to link value accrual to ETH token holders with the underlying mechanics that operate the Ethereum blockchain. More specifically, we have laid out a case on how increased usage of the network has an impact on supply dynamics and can therefore have a knock-on effect on the value of the Ether token.

Using this framework we have modelled a value outcome that rests on two basic assumptions: First, that future usage of Ethereum blockspace can generate fees above US$10 billion on an annual basis by 2028, and second, that a ~0% long-term equilibrium inflation rate is the most stable and therefore the most likely state. This scenario would imply a token price of ~$8,200.

The conversation will naturally next gravitate towards the conditions that would be necessary to enable such a level of usage in the future. Whilst there is tremendous value in analysing what people are currently using Ethereum for, and where Ethereum has thus far found product market fit, we will save that analysis for a later date, and here instead focus on the envisioned future use cases for Ethereum at a mature state.

Searching the internet will yield plenty of conceptual and perhaps idealistic future use cases of not only Ethereum, but blockchain technology in general. However, advocates of these ideas often lack convincing arguments for why new use cases or current non-blockchain use cases should be brought onto the blockchain. Among the volumes of propositions, however, we’ve found a collection of ideas which we have identified as at least plausible buyers of future blockspace.

In favour of structure and simplicity, we have identified 4 main high level groups of use cases, each containing sub groups that can be described by their parent umbrella term. They are: Decentralised Trade, Tokenization, Governance and DAO’s, and Digital Identity/Credentials. We are purposefully excluding use cases such as MEV, which are meta use-cases (the gas usage here is incidental to whatever thing the user is trying to do).

In order to cover them all in bite-sized articles, we are splitting their coverage into a 3-part series, with the overall aim to explore, at the highest level:

This piece will cover Decentralised Trade, and the two following ones will cover the remaining three groups. An in-depth analysis of market sizes and envisioned blockspace impact will have to be saved for later.

Decentralised Trade

The term Decentralised Trade refers to the exchange of assets, services or information in a way that does not involve intermediaries or traditional governing authorities. The sub groups we believe fall under this umbrella term are:

Decentralised trading is and likely always be a core use case for Ethereum. Whether speculating on the price of ERC-20 tokens, swapping into wrapped versions of tokens of other blockchains, or simply buying a product or service on Ethereum, decentralised trade will be a fundamental part of Ethereum’s future.

Decentralised trade can be further divided into its own subgroups, which we’ll cover individually.

Decentralised Exchanges (DEXs)

DEXs on Ethereum are peer-to-peer marketplaces where transactions occur directly between market participants, usually facilitated by liquidity pools. DEXs are currently one of Ethereum’s main use cases, but the nuance in this exploration is that we have a solid conviction that this will remain a major user of blockspace going forward, and that is highly unlikely to change.

We envision main users of Decentralised Exchanges and Liquidity Protocols as being: Cryptocurrency Traders and Investors, Developers, Financial Institutions, Researchers and Everyday Market Participants.

There are three types of Decentralised Exchanges:

Automated Market Makers (AMM)

A DEX that uses Automated Market Makers is built upon a number of smart contracts that intermediate trading algorithmically in an attempt to solve liquidity issues that may arise from pure peer-to-peer trading. In other words, there is no need for a seller to be on the other side of a buy order, and vice versa. The ‘other side’ is simply a token with a price that changes based on a set of parameters encoded into a smart contract.

This works with the use of Liquidity Pools, in which users deposit an amount of stablecoins and the equivalent amount of whatever ERC-20 token that is being traded for that specific pair. In exchange for doing so, users earn a portion of the transaction fees that the DEX charges and sometimes some additional interest on their deposits.

Order Book DEXs (On-chain and Off-chain)

Order Book-based DEXs are more closely related to how you would traditionally trade, say an equity on a stock exchange; Buy and sell orders are listed in an order book, and trades only occur when these match. In other words, people are able to buy at the nearest ask, and sell at the nearest bid. Order Book DEXs are less capital efficient, because they can often come with a lack of liquidity, with the possible effect of higher spreads and higher slippage. The upside of Order Book DEXs is that participants in these markets can scope out the book and have a better understanding of depth on both sides.

DEX Aggregators

A DEX Aggregator is different from both types of DEXs explained above. Here, the purpose of such a platform is to scan multiple different exchanges and find the cheapest, most liquid, and usually, the fastest way for a user to trade a specific asset.

Open Source Liquidity Protocols/Permissionless Lending and Borrowing Platforms

Open Source Liquidity Protocols (OSLPs), are platforms that allow users to engage in DeFi activities in a permissionless manner. They are based upon smart contracts, enabling users to lend/borrow stablecoins and ERC-20 tokens in exchange for interest payments either determined by the platform algorithmically or by the users themselves (subject to corresponding demand).

There are a number of reasons why OSLPs are popular and, we believe, will play a significant part in the future of Ethereum blockspace usage. In a traditional setting, someone seeking to borrow money using collateral will be subject to central authorities, incurring time delays and credit checks. In this setting, users are not judged based on anything other than the amount of collateral they are able to put up. Lenders are protected from default risk as borrowers are automatically liquidated once their health metric breaches a clearly defined threshold (i.e. AAVE). The automated and transparent nature of these platforms hold superior properties to their traditional counterparts.

Payments

Payments on Ethereum are as simple as they sound: peer-to-peer transfers from one address to the other. Here we are excluding the aforementioned use cases above that do involve payments, but they are almost always in seek of a return in exchange for another asset or through yield earnt from lending, as opposed to more simple and clear cut trades.

Here we refer to payments from a few, different (non-exhaustive) perspectives:

We believe payments will always play a crucial role for Ethereum, in some way. We do however, expect a large majority of payments to move to Layer 2s over time as not to price out lower value transactions, where the fee represents a large percentage of the transaction value.

We envision main users of Payments as being: People in Emerging Markets, Everyday Crypto Users, Blockchain Business Owners, Credit Agencies and Content Creators.

Prediction Markets and Gambling

Users may choose to use blockchain-based gambling platforms to evade controls set by their governing authorities, or generally to participate in a more private manner. Further to this, non-KYC deposits and withdrawals make it fast and efficient to move in and out of these markets.

Prediction markets, although overlapping in some ways to traditional gambling platforms, offer ways for users to speculate on the outcome of real life events, such as political elections, sports results, and even niche outcomes such as “When will GPT-5 be announced?”.

Source: Polymarket

These markets offer ways for people to speculate on outcomes that are unlikely to be offered on traditional platforms (there is little way for traditional platforms to use algorithms to determine likelihoods of niche events). Crypto allows these markets to be globally accessible and frictionless user experiences that enable participation in predicting the future (and possibly making some money from that outcome).

We envision main users of Prediction Markets and Gambling as being: Bettors, Social Researchers and Crypto Traders.

Summary

We have looked over the first group of use cases that we envision playing a role in Ethereum’s future. Decentralised Trade currently is a core fundamental use case for Ethereum, and has historically grown alongside the network. Note that the above is not an exhaustive collection of possible ways to conduct decentralised trade, but it offers an overview of the core uses that fit into the use-case umbrella.

In part 2 and 3 of this blog-series, we will explore, at a high level, the remaining use case groups: Tokenization, Governance and DAO’s, and Digital Identity/Credentials.