Author: Kaori, BlockBeats
After a recent bull market correction phase, the ETH price has once again crossed the $3,900 mark. Reflecting on Ethereum's development over the past year, it involves many complex factors and emotions. On the one hand, the Cancun upgrade was successfully completed, and the spot ETF was officially approved, ushering in a new bullish appearance in both technology and fundamentals; on the other hand, with Bitcoin, SOL, and BNB continuously breaking historical highs, ETH's price remains hovering around the $4,000 mark.
From the above chart of ETH's price trend this year, it can be seen that Ethereum has gone through three major phases, each corresponding to different reasons for the price increases. At the beginning of the year, the approval of the Bitcoin spot ETF led to Ethereum's price rising in line with market sentiment, briefly breaking through $4,100, but by the end of March, it began to decline along with the broader market. Furthermore, due to the strong surge of SOL and its ecosystem, Ethereum's ecosystem faced a significant outflow of liquidity.
In May, the Ethereum spot ETF was approved, and the price briefly surged; however, its demand was not as strong as Bitcoin's. The market's initial reaction to the launch of the Ethereum ETF was negative, as speculative investors who bought Grayscale Ethereum Trust and anticipated its conversion to an ETF took profits, resulting in a $1 billion outflow of funds, putting downward pressure on Ethereum's price. Furthermore, the narrative of ETH being more inclined towards tech products is less appealing to the traditional market compared to BTC's 'digital gold'. Additionally, the SEC's prohibition of Ethereum spot ETFs from involving staking functions has objectively weakened its attractiveness.
After this, the Ethereum Foundation, re-staking ecosystem, and roadmap disputes followed, ushering in a dark period for Ethereum.
In November, with the US elections settled, the pro-crypto Republican Party and Trump brought stronger confidence and liquidity injections to the entire crypto ecosystem, leading to Ethereum experiencing its third wave of growth this year. This rise is different from previous ones, with institutions openly participating. The improvement in liquidity fundamentals signals to us what institutions recognize and are optimistic about; and Ethereum is destined to continue its original vision as a 'world computer'.
Improvement in Liquidity Fundamentals
Since December, Ethereum spot ETFs have seen over $2.2 billion in net inflows for half a month. Nate Geraci, president of The ETF Store, stated on social media that advisors and institutional investors have only just begun to focus on this area.
In the third quarter of this year, banks such as Morgan Stanley, JPMorgan, and Goldman Sachs significantly increased their holdings in Bitcoin ETFs, nearly doubling their quarter-on-quarter positions. However, their investment scope is not limited to Bitcoin; according to the latest 13F filings, these institutions have also started purchasing Ethereum spot ETFs since then.
Moreover, in the past two quarters, the Wisconsin State Investment Board and the Michigan Retirement System purchased Bitcoin spot ETFs, with Michigan further buying over $13 million worth of Ethereum spot ETFs in the third quarter. This indicates that pension funds, which symbolize low-risk preferences and long-term investments, not only recognize Bitcoin's role as a digital value store but also value Ethereum's growth potential.
At the beginning of the approval of the Ethereum spot ETF, JPMorgan pointed out in a report that demand for Ethereum spot ETFs would be far lower than for Bitcoin spot ETFs. However, the report estimated that the remaining period of this year could attract up to $3 billion in net inflows for Ethereum spot ETFs, which could rise to $6 billion if staking is allowed.
Jay Jacobs, head of U.S. thematic and active ETFs at BlackRock, stated at the 'ETFs in Depth' conference, 'Our current exploration of Bitcoin, especially Ethereum, is just the tip of the iceberg. Only a very small number of clients hold (IBIT and ETHA), so our current focus is on this area, rather than launching new altcoin ETFs.'
In a survey report by Blockworks Research, the vast majority (69.2%) of respondents currently hold ETH, with 78.8% being investment firms or asset management companies. This indicates that under the impetus of yield generation and network security contributions, institutional participation in ETH staking has reached a critical scale.
Institutions are actively participating in ETH staking, but the extent and methods of participation vary. Regulatory uncertainties have led different parties to adopt different attitudes; some institutions are cautious, while others are less concerned, and institutional participants have a high awareness of the operations and risks associated with staking.
Trend Reversal
Since the FTX collapse, Coinbase, Kraken, Ripple, and others have been severely hit by regulatory bodies such as the SEC, with many crypto projects unable to open accounts with mainstream banks in the US. Meanwhile, traditional financial institutions that entered due to DeFi in the last bull market, such as Toma Bravo, Silver Lake, Tiger, and Cotu, suffered huge losses. These large funds not only faced setbacks on FTX but also invested in some crypto projects that failed to deliver on their grand promises, with funds yet to return.
In the second half of 2022, many DeFi projects were forced to relocate outside the US. According to Alliance DAO co-founder qw, 'Two years ago, about 80% of compliant crypto startups were located in the US; however, this proportion has continued to decline since then, with only about 20% remaining now.'
But on November 6, after Trump's victory, the green light awaited by the US financial system lit up.
Trump Saves the Crypto Circle
Trump's victory undoubtedly cleared regulatory clouds for institutions.
After establishing the Department of Government Efficiency, directly gathering a series of Wall Street financial elites such as Musk, Peter Thiel, and Marc Andreessen under its wing, and appointing Paul Atkins as the SEC chairman, Trump then appointed PayPal co-founder David Sacks as the 'White House Chief of Artificial Intelligence and Cryptocurrency Affairs'. A series of actions indicate that Trump is likely to create a government with relaxed crypto regulations.
JPMorgan analysts state that several stalled cryptocurrency bills may swiftly gain approval after Trump's inauguration, including the Financial Innovation and Technology Act of the 21st Century (FIT21), which may provide urgently needed regulatory clarity for the crypto industry by clarifying the regulatory responsibilities of the SEC and CFTC. They also mentioned that as the regulatory framework becomes clearer, the SEC's strategy of increasing enforcement might evolve into a more collaborative approach, and its restrictions on banks holding digital assets (SAB 121) may be abolished.
Lawsuits against companies like Coinbase may also ease, settle, or even be withdrawn. Regulatory notices sent to companies like Robinhood and Uniswap could be reconsidered, thereby reducing the litigation risk for the broader crypto industry.
In addition to departmental and bill reforms, Trump's team is also considering significant reductions, mergers, or even the elimination of major banking regulatory agencies in Washington. Insiders reveal that Trump’s advisors asked potential candidates for banking regulatory agencies whether some personnel from the Department of Government Efficiency could eliminate the Federal Deposit Insurance Corporation (FDIC) among other questions. Trump's advisors also inquired about potential candidates for the FDIC and the Office of the Comptroller of the Currency. Additionally, they proposed plans to merge or completely reform the FDIC, OCC, and the Federal Reserve.
As policy dividends are gradually released, larger-scale institutional funds from the US are expected to return to the crypto market.
DeFi Renaissance in Progress
Family offices, donation funds, pension plans, and other more robust capital will not only invest in Ethereum spot ETFs but will also re-enter the DeFi space, which has previously been validated in the last cycle.
Compared to 2021, the total supply of stablecoins has reached its highest level, and in the month following Trump's victory, the total amount of stablecoins increased by nearly $25 billion, bringing the total market capitalization of stablecoins to $202.2 billion.
As the leading US crypto publicly traded company, Coinbase has made strides in the DeFi field this year, contributing politically and serving as the largest crypto ETF custodian while also launching cbBTC.
As cbBTC faces the same custodial and counterparty risks as most Bitcoin ETFs, some traditional financial institutions may reevaluate whether to continue paying fees to hold Bitcoin ETFs and instead opt to participate in the DeFi ecosystem at almost zero cost. This shift could lead to an influx of funds into market-tested DeFi protocols, especially if the yields offered in DeFi are more attractive than those in traditional finance.
Another major DeFi segment in this cycle is RWA. In March of this year, BlackRock, through a partnership with the US tokenization platform Securitize, issued the tokenized fund BUIDL (BlackRock USD Institutional Digital Liquidity Fund), making a high-profile entry into the RWA space. Capital giants like Apollo and Blackstone, which manage large pools of funds, are also preparing to enter this market, bringing a significant influx of liquidity.
After the Trump family launched a DeFi project, compliant DeFi has been a hotly debated topic. Established blue-chip DeFi projects on Ethereum, such as Uniswap, Aave, and Lido, immediately reacted to Trump's victory with price increases, while emerging stars in the DeFi sector, such as COW, ENA, and ONDO, also reached new highs.
Meanwhile, Trump's crypto DeFi project WLFI has recently been very active in trading Ethereum-related tokens, exchanging 5 million USDC for 1,325 ETH through multiple transactions, and its multi-signature address has separately purchased $10 million in ETH, $1 million in LINK, and $1 million in AAVE. Recent news of whales increasing their ETH holdings suggests that both institutions and whale accounts are refocusing on the Ethereum ecosystem.
WLFI Multi-signature Address Holdings Information
Recently, the performance of new and old projects in the DeFi space in terms of price speaks for itself. Currently, DeFi's TVL is about $100 billion, while the total value of cryptocurrencies and related assets is approximately $4 trillion, of which only 2% is actively engaged in the DeFi space, which remains small compared to the overall cryptocurrency market size. This indicates that, as regulatory winds warm, DeFi still has enormous growth potential.
Aave is a typical beneficiary of this 'funds return' phase, with its price breaking through before Trump's victory. Subsequently, its TVL and revenue exhibited explosive growth: TVL broke through the historical high of $22 billion in October 2021; the token price surged from a year-low of $80 USDT, breaking the March high of $140 USDT in early September and accelerating upward by the end of November; the protocol's daily total revenue exceeded the second-highest peak in September 2021, with weekly revenue reaching a new historical high.
Despite Aave recently upgrading to V4, the innovative momentum on a technical level may not be sufficient to support such a large-scale increase. Regulatory and funding dynamics are clearly more important, and this push may even overflow into the NFT track, which also gained institutional favor in the last cycle.
The Future of Ethereum
Ethereum faced a series of controversies and discussions related to ecosystem development this mid-year. With the rise of Solana, both new and old public chains are starting to capture Ethereum's developers and user base, causing the ecosystem to begin to shake, and Ethereum seems to have forgotten its original goal. As the first blockchain to create smart contracts, Ethereum successfully attracted major institutional investors in the last cycle through its first-mover advantage. Whether in DeFi, chain games, NFTs, or the metaverse, none can escape the Ethereum ecosystem, and its initial concept as a 'world computer' has deeply resonated.
Although Ethereum's liquidity fundamentals have shown optimistic improvements, on the Ethereum side, metrics such as daily transaction volume, gas fees, and active address counts have not seen significant growth. This indicates that Ethereum's on-chain activity has not increased in tandem with its price, and block space remains excessive.
Ethereum Gas Fee Levels
In the past few years, Ethereum's focus has been on building cryptocurrency infrastructure, providing the market with a large amount of cheap block space. This move has improved Dapp's access performance to blocks and reduced the transaction costs of L2 expansion solutions. However, due to insufficient market liquidity and weak trading demand, Ethereum's vast block space has not been fully utilized.
However, from a long-term perspective, this is not a real problem. As mentioned earlier, institutional funds are gradually returning and even beginning to create dedicated blockchain use cases. For Ethereum, which boasts security and a flexible architecture, to B is where its advantages lie. It not only has an overwhelming advantage in security but is also compatible with numerous EVM projects, providing developers with an option that is almost 'impossible to be fired'.
The long-term value of Ethereum will depend on the scarcity of its block resources, that is, the actual and sustained demand for Ethereum block settlement in the world. As institutions and applications continue to pour in, this scarcity will increasingly become prominent, thereby establishing a more solid value foundation for Ethereum. Ethereum is an institutional world computer; starting with DeFi, institutions will address Ethereum's block surplus and roadmap disputes in the future.
In early December, Ethereum researcher Jon Charbonneau published a lengthy analysis on why Ethereum needs a more defined 'North Star' goal, suggesting that Ethereum's ecosystem power should converge on the idea of a 'world computer', akin to Bitcoin's 'digital gold' and Solana's 'on-chain Nasdaq'.
Ten years have passed, and Ethereum is no longer in its startup phase. The next decade will clearly reveal Ethereum's future.
