Original author: Kaori, BlockBeats
After the recent bull market correction phase, ETH price has once again risen above $3,900. Looking back at Ethereum's development over the past year, there are many complex factors and emotions. On one hand, the Cancun upgrade was successfully completed, and the spot ETFs were officially approved, leading to a new face of the bull market in technology and fundamentals; on the other hand, as Bitcoin, SOL, and BNB repeatedly broke historical highs, ETH's price still hovers around the $4,000 mark.
From the ETH price chart above, it can be seen that Ethereum has experienced three main stages this year, with the increases in the three stages corresponding to different reasons. At the beginning of the year, the approval of Bitcoin spot ETFs caused Ethereum's price to rise in line with market sentiment, briefly breaking above $4,100, but at the end of March, it also began to decline with the broader market. Furthermore, due to the strong rise of SOL and its ecosystem, Ethereum's ecosystem faced significant liquidity outflows.
In May, Ethereum spot ETFs were approved, and the price briefly surged, but the demand did not prove as strong as for Bitcoin. The initial market reaction to the launch of Ethereum ETFs was negative, as speculative investors who had purchased 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. Additionally, the narrative of ETH leaning towards tech products is less compelling to traditional markets compared to BTC's 'digital gold', and the SEC's prohibition on Ethereum spot ETFs engaging in staking functions objectively diminished its attractiveness.
Following this, the Ethereum Foundation, re-staking ecology, and roadmap disputes ensued, leading Ethereum to a dark moment.
In November, with the U.S. election results in place, the crypto-friendly Republican Party and Trump brought stronger confidence and liquidity injection to the entire crypto ecosystem, leading to Ethereum's third wave of increase this year. This increase is different from previous ones, as institutions are clearly entering the market, and the improvement in liquidity fundamentals is telling us what institutions recognize and are optimistic about; Ethereum is destined to continue its original aspiration as a 'world computer'.
Improvement in liquidity fundamentals
Since December, Ethereum spot ETFs have seen a net inflow of over $2.2 billion for half a month, with The ETF Store president Nate Geraci stating on social media that consultants and institutional investors are just beginning to pay attention to this field.
In the third quarter of this year, Morgan Stanley, JPMorgan, and Goldman Sachs significantly increased their holdings in Bitcoin ETFs, nearly doubling their quarterly positions, but 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 first two quarters, the investment boards of Wisconsin and Michigan purchased Bitcoin spot ETFs, with Michigan further purchasing over $13 million in 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 as a digital store of value but also value Ethereum's growth potential.
At the beginning of Ethereum spot ETFs approval, JPMorgan pointed out in a report that the demand for Ethereum spot ETFs would be far lower than that for Bitcoin spot ETFs. However, the report projected that the remaining time this year could attract up to $3 billion in net inflow for spot Ethereum ETFs, and if staking is allowed, this number could rise to $6 billion.
Jay Jacobs, head of U.S. thematic and active ETFs at BlackRock, stated at the 'ETFs in Depth' conference that 'our exploration of Bitcoin, especially Ethereum, is just the tip of the iceberg, with only a very small number of clients holding (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, indicating that driven by yield generation and network security contributions, institutional willingness to participate in ETH staking has reached a critical scale.
Institutions are actively participating in ETH staking, but the level and methods of participation vary. The uncertainty in regulation has led different parties to adopt different attitudes; some institutions proceed cautiously while others are less concerned, and institutional participants have a high level of awareness regarding the operations and risks associated with staking.
Trend Reversal
Since the FTX collapse, Coinbase, Kraken, Ripple, and others have been severely impacted by U.S. regulatory agencies like the SEC, with many crypto projects unable to open accounts at mainstream U.S. banks. In the last bull market, traditional financial institution investors who entered through DeFi also suffered significant losses. Large funds like Toma Bravo, Silver Lake, Tiger, and Cotu not only faced setbacks with FTX but also invested in some crypto projects that failed to deliver on their grand promises at high valuations, with funds yet to return.
In the second half of 2022, many DeFi projects were forced to relocate outside the U.S. According to Alliance DAO co-founder qw, 'Two years ago, about 80% of compliant crypto startups were located in the U.S., but this proportion has continued to decline since then, and now it's only about 20%.
However, on November 6, after Trump's victory, the green light that the U.S. financial system had been waiting for lit up.
Trump Saves the Crypto Circle
Trump's victory undoubtedly cleared regulatory clouds for institutional adoption.
Establishing the Department of Government Efficiency directly brings together a series of Wall Street financial elites such as Musk, Peter Thiel, and Marc Andreessen under its umbrella. After appointing Paul Atkins as SEC chairman, Trump also appointed PayPal co-founder David Sacks as the 'White House Director of Artificial Intelligence and Cryptocurrency Affairs'. A series of measures indicate that Trump will create a government with relaxed crypto regulations.
JPMorgan analysts indicate that several stalled cryptocurrency bills may quickly gain approval following Trump's election, including the 21st Century Financial Innovation and Technology Act (FIT21), which could provide the urgently needed regulatory clarity for the crypto industry by clarifying the regulatory responsibilities of the SEC and CFTC. They also stated that as the regulatory framework becomes clearer, the SEC's enforcement strategy may evolve into a more collaborative approach, and its restrictions on banks holding digital assets (Staff Accounting Bulletin No. 121) may be abolished.
The high-profile lawsuits against companies like Coinbase may also be alleviated, settled, or even withdrawn. Regulatory notices issued 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, the Trump team is also considering significant cuts, consolidations, or even the elimination of major bank regulatory agencies in Washington. Informed sources revealed that Trump advisors asked potential candidates for banking regulators whether certain members of the government efficiency department could be removed, including inquiries about the Federal Deposit Insurance Corporation (FDIC). Trump 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, the Office of the Comptroller of the Currency, and the Federal Reserve.
As policy dividends are gradually released, larger institutional funds in the U.S. market are expected to return to the crypto market.
DeFi Renaissance in Progress
More stable capital, such as family offices, endowment funds, and pension plans, will not only allocate to Ethereum spot ETFs but will also re-enter the DeFi field that was validated in the previous cycle.
Compared to 2021, the total supply of stablecoins has reached an all-time high, and in the more than a month since Trump's victory, the total amount of stablecoins has increased by nearly $25 billion, currently reaching a total market value of $202.2 billion.
Coinbase, as the leader of publicly listed crypto companies in the U.S., has made strides in the DeFi field this year, not only politically but also operationally, as it serves as the largest crypto ETF custodian and has launched cbBTC.
Due to cbBTC facing the same custody and counterparty risks as most Bitcoin ETFs, some traditional financial institutions may reassess whether to continue paying fees to hold Bitcoin ETFs and instead participate in the DeFi ecosystem at almost zero cost. This shift may bring funding inflows to market-tested DeFi protocols, especially as the yields offered by DeFi are more attractive compared to traditional finance.
Another major DeFi sector in this cycle is RWA. In March of this year, BlackRock officially entered the RWA track by partnering with the U.S. tokenization platform Securitize to issue the tokenized fund BUIDL (BlackRock USD Institutional Digital Liquidity Fund), making a significant splash. Capital giants like Apollo and Blackstone, which control large pools of funds, are also beginning to prepare to enter this market, bringing a significant injection of liquidity.
After the Trump family launched the DeFi project, compliant DeFi has been a hot topic of discussion. Established Ethereum blue-chip DeFi projects like Uniswap, Aave, and Lido immediately reacted to Trump's victory with price increases, while emerging DeFi projects like COW, ENA, and ONDO also reached new highs.
Meanwhile, Trump's crypto DeFi project WLFI has been frequently trading Ethereum-based tokens, exchanging 5 million USDC for 1,325 ETH in multiple transactions, after which its multi-signature address purchased $10 million in ETH, $1 million in LINK, and $1 million in AAVE. Recent news of whales accumulating ETH suggests that both institutional and whale accounts are turning their attention back to the Ethereum ecosystem.
WLFI multi-signature address holding information
Recently, the performance of new and old projects in the DeFi sector in terms of pricing speaks for itself. Currently, the TVL of DeFi is approximately $100 billion, and the total value of cryptocurrencies and related assets is around $4 trillion, of which only 2% is truly active in the DeFi sector, which is still relatively small compared to the entire cryptocurrency market scale. This indicates that there is still significant room for growth in DeFi as regulatory winds shift.
Aave is a typical beneficiary of this round of 'capital inflow', with its price breaking through before Trump's victory, followed by explosive growth in TVL and revenue: TVL surpassed the historical high of $22 billion in October 2021; the token price rose from an intra-year low of $80 USDT, breaking the March high of $140 USDT in early September, and accelerated upward by the end of November; the protocol's daily total revenue exceeded the second highest peak of September 2021, with weekly revenue setting a new historical high.
Despite Aave's recent upgrade to V4, the technological innovation may not be sufficient to support such a large-scale increase. The driving force from regulation and capital clearly represents a more important logic, and this push may even spill over into the NFT sector, which also received institutional favor in the last cycle.
The Future of Ethereum
However, Ethereum faced a series of controversies and discussions related to ecological development in mid-year. With the rise of Solana, new and old public chains began to capture Ethereum's developers and user base, shaking the ecosystem as Ethereum seemed to forget its original goal. As the first blockchain to create smart contracts, Ethereum successfully made major institutional investors pay for it through first-mover advantage in the last cycle. Whether in DeFi, chain games, NFTs, or the metaverse, none could escape Ethereum's ecosystem, and its original aspiration of being a 'world computer' has deeply rooted in people's hearts.
Despite the optimistic improvement in Ethereum's liquidity fundamentals, on the Ethereum side, its daily trading volume, gas fees, active address count, and other on-chain data indicators have not significantly increased. This indicates that Ethereum's on-chain activity has not risen in tandem with its price, and block space remains excessive.
Ethereum Gas Fee Level
In recent years, Ethereum has focused on building the infrastructure for cryptocurrencies, providing a large amount of cheap block space to the market. This initiative, on one hand, improves Dapp access performance to blocks and reduces transaction costs for L2 scaling solutions, while on the other hand, due to insufficient market liquidity and weak trading demand, Ethereum's vast block space has not been fully utilized.
However, this is not truly an issue in the long run. As mentioned earlier, institutional funds are gradually flowing back, even beginning to create dedicated blockchain use cases. For Ethereum, which possesses security and flexible architecture, its advantages lie in B2B. It not only has an overwhelming advantage in security but is also compatible with numerous EVM projects, providing developers with an almost 'unfireable' choice.
The long-term value of Ethereum will depend on the scarcity of its block resources, that is, the actual and sustained demand for Ethereum's block settlement in the world. As institutions and applications continue to flood in, this scarcity will become increasingly prominent, thereby establishing a firmer value foundation for Ethereum. Ethereum is a world computer for institutions, and starting from DeFi, institutions will address the issues of Ethereum's block excess and roadmap disputes in the future.
At the beginning of December, Ethereum researcher Jon Charbonneau wrote a lengthy analysis on why Ethereum needs a clearer 'North Star' goal, suggesting that the ecological power of Ethereum should be focused on the point of 'world computer', similar 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 future of Ethereum is already clear for the next decade.
