Author: Kaori, BlockBeats
After the recent bull market's correction phase, the price of ETH has once again climbed above $3,900. Reflecting on 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 officially approved, bringing a new bullish outlook in both technology and fundamentals; on the other hand, as Bitcoin, SOL, and BNB successively broke historical highs, ETH's price still hovers around the $4,000 mark.
From the price chart of ETH this year, it can be seen that Ethereum has experienced three major phases this year, with the increases in each phase corresponding to different reasons. At the beginning of the year, the approval of Bitcoin spot ETFs led to a surge in Ethereum prices following market sentiment, briefly surpassing $4,100, but fell when the broader market began to decline at the end of March. Additionally, due to the strong rally 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 soared, but 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's Ethereum trust and anticipated its conversion to an ETF took profits, resulting in an outflow of $1 billion, putting downward pressure on Ethereum's price. Additionally, the narrative of ETH being more inclined towards tech innovation products compared to BTC's 'digital gold' is less likely to resonate with traditional markets, and the SEC's prohibition of staking functionalities in Ethereum spot ETFs objectively weakened its appeal.
After this, the Ethereum Foundation, re-staking ecosystem, and roadmap disputes followed, leading to a dark period for Ethereum.
In November, after the U.S. elections were settled, the pro-crypto Republican Party and Trump brought stronger confidence and liquidity injection to the entire crypto ecosystem, leading to Ethereum's third wave of increases this year. This increase is different from previous ones, as institutional players are entering the market clearly, and the improvement in liquidity fundamentals is telling us what institutions recognize and favor; Ethereum is destined to continue its original intention as a 'world computer.'
Improvement in liquidity fundamentals
Since December, the Ethereum spot ETF has 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 just begun to pay attention to this area.
In the third quarter of this year, banks such as Morgan Stanley, JPMorgan, and Goldman Sachs significantly increased their holdings of Bitcoin ETFs, with quarterly holdings nearly doubling, but their investment scope is not limited to Bitcoin. According to the latest 13F filings, these institutions have also begun purchasing Ethereum spot ETFs since then.
Moreover, in the first two quarters, the investment boards of Wisconsin and Michigan purchased Bitcoin spot ETFs, and Michigan further purchased over $13 million in Ethereum spot ETFs in the third quarter. This indicates that pension funds, symbolizing low risk appetite and long-term investment, not only recognize Bitcoin as a digital store of value but also value Ethereum's growth potential.
Initially, when the Ethereum spot ETF was approved, 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 see net inflows into spot Ethereum ETFs reach up to $3 billion, and if staking is allowed, this figure might rise to $6 billion.
Jay Jacobs, head of BlackRock's U.S. thematic and active ETFs, 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, among 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 level of participation and methods vary. Regulatory uncertainty has led different parties to adopt different attitudes; some institutions are cautious, while others are less worried, and institutional participants are highly aware 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 bodies like the SEC, and many crypto projects have been unable to open accounts with mainstream banks in the U.S. In the previous bull market, traditional financial institutional investors who entered through DeFi also suffered significant losses; large funds such as Toma Bravo, Silver Lake, Tiger, and Cotu not only faced setbacks on FTX but also invested in some crypto projects that did not fulfill their grand promises at high valuations, and funds have yet to flow back.
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.; however, this percentage 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 was finally lit.
Trump saves the crypto space
Trump's victory undoubtedly cleared regulatory clouds for institutional adoption.
Establishing the Department of Government Efficiency, directly gathering a series of Wall Street financial elites including Musk, Peter Thiel, and Marc Andreessen under his leadership, Trump appointed Paul Atkins as SEC Chairman and also appointed PayPal co-founder David Sacks as 'White House Chief of Artificial Intelligence and Cryptocurrency Affairs.' A series of measures indicate that Trump will create a government with relaxed crypto regulation.
JPMorgan analysts stated that several stalled cryptocurrency bills could quickly gain approval after Trump's ascension, 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 regulatory responsibilities. They also indicated that as the regulatory framework becomes clearer, the SEC's strategy of increasing enforcement intensity may evolve into a more collaborative approach, and its restriction on banks holding digital assets (Staff Accounting Bulletin No. 121) may be abolished.
And the high-profile lawsuits against companies like Coinbase may be eased, settled, or even withdrawn. Regulatory notices sent to companies like Robinhood and Uniswap may be reconsidered, thereby reducing the litigation risk for the broader crypto industry.
In addition to departmental and legislative reforms, Trump's team is also considering significant cutbacks, mergers, or even the elimination of major banking regulatory bodies in Washington. Insiders revealed that Trump's advisors asked some government efficiency department personnel whether the Federal Deposit Insurance Corporation (FDIC) could be abolished during discussions with potential banking regulatory candidates. Trump's advisors also inquired about potential candidates for the FDIC and the Office of the Comptroller of the Currency. Additionally, plans were proposed to merge or completely reform the FDIC, the Office of the Comptroller of the Currency, and the Federal Reserve.
As policy dividends gradually release, larger institutional capital in the U.S. market is expected to return to the crypto market.
DeFi revival in progress
Family offices, endowment funds, and pension plans are more stable capital not only expected to invest in Ethereum spot ETFs but also to re-enter the already proven DeFi space from the previous 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 has increased by nearly $25 billion, currently reaching a total market value of $202.2 billion.
As the leader of U.S. crypto-listed companies, Coinbase has made significant contributions not only politically but also in the DeFi space this year. On one hand, it serves as the largest custodian of crypto ETFs, and on the other hand, it 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 turn to participating in the DeFi ecosystem at almost zero cost. This shift could bring capital inflows to market-tested DeFi protocols, especially when the yields offered by DeFi are more attractive compared to traditional finance.
Another significant DeFi sector in this cycle is RWA. In March of this year, BlackRock, in partnership with the U.S. 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 hold large pools of funds, are also beginning to prepare to enter this market, bringing a large influx of liquidity.
After the Trump family launched a DeFi project, compliant DeFi has been a hot topic. Established Ethereum blue-chip DeFi projects like Uniswap, Aave, and Lido reacted immediately to Trump's victory, surging past previous highs, while up-and-coming DeFi projects such as COW, ENA, and ONDO also reached new highs in succession.
Meanwhile, Trump's crypto DeFi project WLFI has been actively trading Ethereum-related tokens, exchanging $5 million USDC for 1,325 ETH in multiple transactions, followed by purchases of $10 million ETH, $1 million LINK, and $1 million AAVE. Recent news of whales increasing their holdings of ETH suggests that both institutions and whale accounts are turning their attention back to the Ethereum ecosystem.
WLFI multi-signature address holding information
Recent price performance of new and old projects in the DeFi space speaks for itself. Currently, the TVL of DeFi is approximately $100 billion, while the total value of cryptocurrencies and related assets is around $4 trillion, of which the funds truly active in the DeFi space only account for 2%. Compared to the scale of the entire cryptocurrency market, this is still very small. This indicates that under the warming regulatory winds, DeFi still has enormous growth potential.
Aave is a typical beneficiary of this round of 'capital inflow,' having broken through before Trump's victory, and subsequently experiencing explosive growth in both TVL and revenue: TVL surpassed the historical high of $22 billion in October 2021; the token price surged from a low of $80 USDT earlier in the year to exceed the March high of $140 USDT in early September and accelerated upward by the end of November; the protocol's daily total income exceeded the second peak in September 2021, with weekly income setting a new historical high.
Although Aave recently upgraded to V4, the innovative momentum on a technical level may not be enough to support such a large-scale increase; the push from regulatory and financial aspects is obviously a more important logic, and this push may even spill over to the NFT sector that also gained institutional favor in the previous cycle.
The future of Ethereum
However, in the middle of this year, Ethereum encountered a series of controversies and discussions related to ecosystem development. With the rise of Solana, new and old public chains began to compete for Ethereum's developers and user base, and the ecosystem started to shake, as if Ethereum had forgotten its original goal. As the first blockchain to create smart contracts, Ethereum successfully made institutional investors pay for it in the previous cycle through 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 been deeply ingrained.
Despite the optimistic improvement in Ethereum's liquidity fundamentals, on-chain data indicators such as daily transaction volume, gas fees, and active address counts have not shown significant growth. This indicates that Ethereum's on-chain activity has not increased in tandem with its price, and block space remains oversupplied.
Ethereum Gas fee levels
In the past few years, Ethereum's focus has been on building the infrastructure for cryptocurrencies, providing the market with a large amount of cheap block space. This move not only improved Dapp's access performance to blocks and reduced transaction costs for L2 scaling solutions, but also, due to insufficient market liquidity and low trading demand, Ethereum's vast block space has not been fully utilized.
However, from a long-term perspective, this is not a real issue. As mentioned earlier, institutional funds are gradually flowing back and even starting to create dedicated blockchain use cases. For Ethereum, which has security and flexible architecture, its advantage lies in its ability to cater to B2B needs. It not only has overwhelming advantages in security but also can accommodate 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, i.e., the actual and sustained demand for Ethereum block settlements in the world. As institutions and applications continue to flow in, this scarcity will become increasingly prominent, thereby establishing a more solid value foundation for Ethereum. Ethereum is an institutional world computer; beginning with DeFi, institutions will tackle the issues of Ethereum's block oversupply 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. He also suggested that the ecological forces of Ethereum should converge on the 'world computer' aspect, just like 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.
