Article sourced from: BlockBeats

Author: Kaori, BlockBeats

After a recent bull market pullback, the 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 ETF was formally approved, ushering in a new bullish face in terms of technology and fundamentals; but on the other hand, with Bitcoin, SOL, and BNB continuously breaking historical highs, the price of ETH still hovers around $4,000.

From the ETH price chart above, it can be seen that Ethereum has gone through 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 along with market sentiment, briefly surpassing $4,100, but also started to decline as the market fell at the end of March. Then, due to the strong surge 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 its demand was not as strong as Bitcoin's. The initial market reaction to the launch of Ethereum ETFs was negative because speculative investors who bought into Grayscale's Ethereum Trust and anticipated its conversion to ETF took profits, resulting in a $1 billion outflow, putting downward pressure on Ethereum's price. Moreover, the narrative of ETH being more inclined towards tech innovation products is less appealing to traditional markets compared to BTC's 'digital gold,' and the SEC's prohibition of Ethereum spot ETFs from engaging in staking functions has objectively weakened its attractiveness.

After that, the Ethereum Foundation, re-staking ecosystem, and roadmap disputes followed, leading Ethereum into a dark period.

In November, after the U.S. elections concluded, the crypto-friendly Republican Party and Trump brought stronger confidence and liquidity injection to the entire crypto ecosystem, leading Ethereum to usher in its third wave of increase this year. This time, the increase is different from before, as institutions clearly entered the market, and the improvement in liquidity fundamentals is telling us what institutions recognize and are optimistic about; Ethereum is bound to continue its original intention 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. Nate Geraci, president of The ETF Store, stated on social media that advisors and institutional investors are just beginning to pay attention to this field.

In the third quarter of this year, banks such as Morgan Stanley, JPMorgan, and Goldman Sachs significantly increased their holdings of Bitcoin ETFs, with quarter-on-quarter holdings nearly doubling. 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.

Additionally, in the first two quarters, the Wisconsin State Investment Board and the Michigan State Retirement System purchased Bitcoin spot ETFs, with Michigan further purchasing over $13 million worth of Ethereum spot ETFs in the third quarter. This indicates that pension funds, which symbolize low-risk preference and long-term investment, not only recognize Bitcoin as a digital value storage role but also value Ethereum's growth potential.

At the beginning of Ethereum spot ETF 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 estimated that Ethereum spot ETFs would attract up to $3 billion in net inflows for the remainder of the year, and if staking is allowed, this figure could reach $6 billion.

Jay Jacobs, the 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, with only a small number of clients holding (IBIT and ETHA). Therefore, 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, of which 78.8% are investment firms or asset management companies. This indicates 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 degree and methods of participation vary. Regulatory uncertainties lead different parties to adopt different attitudes; some institutions act cautiously, 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 crash, Coinbase, Kraken, Ripple, and others have faced severe crackdowns from U.S. regulatory agencies like the SEC. Many crypto projects have even been unable to open accounts at mainstream U.S. banks. In the last bull market, traditional financial institutional investors who entered through DeFi also suffered significant losses, as large funds like Toma Bravo, Silver Lake, Tiger, and Cotu 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 flow back.

In the second half of 2022, many DeFi projects were forced to migrate outside the U.S. According to Alliance DAO co-founder qw, 'Two years ago, about 80% of qualified crypto startups were located in the U.S., but this proportion has continued to decline since then, and now it is only about 20%.'

But 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 a 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 SEC chairman, Trump also appointed PayPal co-founder David Sacks as the 'White House Head of AI and Cryptocurrency Affairs.' A series of moves indicate that Trump will build a government with relaxed crypto regulation.

JPMorgan analysts stated that several stalled cryptocurrency bills could quickly be approved after Trump's inauguration, including the Financial Innovation and Technology Act of the 21st Century (FIT21), which may provide the urgently needed regulatory clarity for the crypto industry by clarifying SEC and CFTC's regulatory responsibilities. They also stated that as the regulatory framework becomes clearer, the SEC's strategy of increasing enforcement may evolve into a more collaborative approach, and restrictions on banks holding digital assets (Staff Accounting Bulletin No. 121) may be abolished.

The high-profile lawsuits against companies like Coinbase may also see a reduction, settlement, or even withdrawal. Regulatory notices sent to companies like Robinhood and Uniswap could be reconsidered, thereby lowering the litigation risk for the broader crypto industry.

In addition to department and bill reforms, the Trump team is also considering significantly reducing, merging, or even abolishing major banking regulatory agencies in Washington. Insider sources revealed that Trump advisors in discussions with potential candidates for banking regulatory agencies asked whether some government efficiency department personnel could abolish the Federal Deposit Insurance Corporation (FDIC) and other questions. Trump advisors also inquired about potential candidates for the FDIC and the Office of the Comptroller of the Currency. Additionally, plans to merge or completely reform the FDIC, the Office of the Comptroller of the Currency, and the Federal Reserve were proposed.

As policy dividends are gradually released, larger-scale institutional funds in the U.S. 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 layout Ethereum spot ETFs but will also re-enter the DeFi field that has been validated in the previous cycle.

Compared to 2021, the total supply of stablecoins has reached its highest level, and in the more than a month since Trump's victory, the total amount of stablecoins has increased by nearly $25 billion, bringing the total market capitalization of stablecoins to $202.2 billion.

Coinbase, as the leader of U.S. crypto-listed companies, has made strides in the DeFi space this year besides contributing politically. On one hand, it acts as the largest crypto ETF custodian, and on the other hand, it launched cbBTC.

As cbBTC faces the same custody and counterparty risks as most Bitcoin ETFs, some traditional financial institutions may reconsider whether to continue paying fees to hold Bitcoin ETFs and instead opt to participate in the DeFi ecosystem at almost no cost. This shift could bring funding inflows to market-tested DeFi protocols, especially when the yields offered by DeFi are more attractive compared to traditional finance.

Another major DeFi sector in this cycle is RWA. In March this year, BlackRock officially entered the RWA track by issuing the tokenized fund BUIDL (BlackRock USD Institutional Digital Liquidity Fund) in partnership with the U.S. tokenization platform Securitize, making a high-profile move. Capital giants like Apollo and Blackstone, which manage large pools of funds, are also beginning to prepare to enter this market, bringing in a significant injection of liquidity.

After the Trump family launched the DeFi project, compliant DeFi has been a hot topic. Established Ethereum blue-chip DeFi projects such as Uniswap, Aave, and Lido saw immediate price reactions after Trump's victory, all breaking through and rising, while up-and-coming projects in the DeFi sector 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 bought $10 million worth of ETH, $1 million worth of LINK, and $1 million worth of AAVE. Recent news about whales increasing their ETH holdings suggests that both institutions and whale accounts are refocusing on the Ethereum ecosystem.

WLFI multi-signature address holding information

Recently, the performance of new and old projects in the DeFi sector in terms of price speaks for itself. Currently, the TVL of DeFi is about $100 billion, and the total value of cryptocurrencies and related assets is about $4 trillion, of which only 2% of the funds are truly active in the DeFi space, which is still small compared to the overall scale of the cryptocurrency market. This indicates that with the warming of regulatory winds, DeFi still has huge growth potential.

Aave is a typical beneficiary of this round of 'capital return.' Its price had already broken through before Trump's victory, and subsequently, TVL and revenue showed explosive growth: TVL surpassed the historical high of $22 billion in October 2021; the token price surged from a low of $80 USDT earlier this year, breaking the March high of $140 USDT in early September and accelerating upward by the end of November; the total daily revenue of the protocol exceeded the second peak in September 2021, with weekly revenue reaching a historical high.

Although Aave recently upgraded to V4, the innovation momentum on a technical level may not be sufficient to support such a large scale of increase; the push from regulatory and funding levels is clearly a more important logic, and this push may even spill over into the NFT sector, which also gained institutional favor in the previous cycle.

The Future of Ethereum

However, midway through this year, Ethereum encountered a series of controversies and discussions related to ecological development. With the rise of Solana, new and old public chains began to snatch Ethereum's developers and user base, and the ecosystem started to shake, as Ethereum seemed to have forgotten its original goal. As the first blockchain to create smart contracts, Ethereum successfully got major institutional investors to pay for it in the previous cycle due to its first-mover advantage. Whether in DeFi, chain games, NFTs, or the metaverse, none can escape the Ethereum ecosystem, and its original intention as a 'world computer' has deeply resonated with people.

Although the current liquidity fundamentals of Ethereum have improved optimistically, looking at Ethereum itself, its on-chain data indicators such as daily average transaction volume, Gas fees, and active addresses 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 recent years, Ethereum's focus has been on building the infrastructure for cryptocurrency, providing the market with a large amount of inexpensive block space. This move has improved Dapp's access performance to blocks and reduced transaction costs for L2 expansion plans. However, due to insufficient market liquidity and sluggish trading demand, Ethereum's vast block space has not been fully utilized.

However, in the long run, this is not a real issue. As mentioned earlier, institutional funds are gradually returning, even beginning to create exclusive blockchain use cases. For Ethereum, which possesses security and flexible architecture, B2B is precisely its advantage. It not only has an overwhelming advantage in security but also can accommodate numerous EVM projects, providing developers with an almost 'unfireable' option.

The long-term value of Ethereum will depend on the scarcity of its block resources, which is, in other words, the real and sustainable demand for Ethereum block settlements in the world. As institutions and applications continue to pour in, this scarcity will become increasingly prominent, thereby laying a more solid value foundation for Ethereum. Ethereum is an institutional world computer; starting from DeFi, institutions will solve the issues of excess Ethereum blocks and roadmap disputes in the future.

In early December, Ethereum researcher Jon Charbonneau wrote a lengthy article analyzing why Ethereum needs a clearer 'North Star' goal. He also suggested that Ethereum's ecological strength should be gathered around the concept of a '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 now clear for the next decade.