Author: Kaori, BlockBeats
After a recent correction phase in the bull market, the price of ETH has once again surpassed $3,900. Reflecting on Ethereum's development over the past year, there are many complex factors and sentiments: on one hand, the Cancun upgrade was successfully completed, and the spot ETF was officially approved, welcoming a new bull market from both a technical and fundamental perspective; on the other hand, with Bitcoin, SOL, and BNB all breaking through historical highs, ETH's price is still hovering around the $4,000 mark.
From the ETH price chart this year, it can be seen that Ethereum has gone through three major phases this year, with the increases in each phase corresponding to different reasons. At the beginning of the year, the approval of the Bitcoin spot ETF drove Ethereum's price up in line with market sentiment, briefly breaking $4,100, but by the end of March, it similarly began to decline with the broader market. Additionally, due to the strong surge of SOL and its ecosystem, the Ethereum ecosystem faced significant liquidity outflows.
In May, the Ethereum spot ETF was approved, with prices briefly spiking, but the demand has not been as strong as for Bitcoin. 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 ETF took profits, leading to a $1 billion outflow of funds, putting downward pressure on Ethereum's price. Additionally, the narrative of ETH leaning towards tech innovation products is less compelling to traditional markets compared to BTC's "digital gold," and the SEC's prohibition on Ethereum spot ETFs involving staking functions has objectively weakened its attractiveness.
After this, the Ethereum Foundation, re-staking ecosystem, and roadmap disputes followed, leading Ethereum into a dark period.
In November, as the U.S. election results were finalized, the pro-crypto Republican party and Trump brought stronger confidence and liquidity into the entire crypto ecosystem, leading to Ethereum's third wave of increase this year. This rise is different from previous ones; institutions have openly entered the market, and the improvement in liquidity fundamentals is telling us what is recognized and favored by institutions; Ethereum is destined to continue its original aim as a "world computer."
Liquidity fundamentals improvement
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 have only just begun to pay attention to this field.
In the third quarter of this year, banks like 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 begun purchasing Ethereum spot ETFs since then.
Additionally, in the previous two quarters, the Wisconsin State Investment Board and the Michigan Retirement System purchased Bitcoin spot ETFs, with Michigan further purchasing over $13 million in Ethereum spot ETFs in the third quarter. This indicates that pension funds, symbolizing a low-risk preference and a focus on long-term investments, not only recognize Bitcoin's role as a digital value store but also value Ethereum's growth potential.
Initially, after the approval of the Ethereum spot ETF, JPMorgan pointed out in a report that demand for Ethereum spot ETFs would be far lower than that for Bitcoin spot ETFs; however, the report projected that the remaining time in the year would attract net inflows of up to $3 billion for spot Ethereum ETFs, and if staking were allowed, this number could reach $6 billion.
Jay Jacobs, head of U.S. thematic and actively managed ETFs at BlackRock, stated at the "ETFs in Depth" conference that "our current 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 Blockworks Research survey, the vast majority (69.2%) of respondents currently hold ETH, with 78.8% being 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. The uncertainty in regulation has led to different attitudes; some institutions proceed with caution while others are less worried, 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 faced severe crackdowns from U.S. regulatory agencies like the SEC, with many crypto projects unable to open accounts at mainstream banks in the U.S. Traditional financial institutions that entered through DeFi during the last bull market, such as Toma Bravo, Silver Lake, Tiger, and Cotu, have also suffered significant losses, not only being thwarted on FTX but having invested in some crypto projects with inflated valuations that have yet to deliver on their grand promises; 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 qw, co-founder of Alliance DAO, "Two years ago, about 80% of compliant crypto startups were located in the U.S., but this proportion has continually decreased since then, and now it is 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 the regulatory fog for institutional adoption.
After establishing a Department of Government Efficiency, gathering a series of Wall Street financial elites like Musk, Peter Thiel, and Marc Andreessen, and appointing Paul Atkins as SEC chairman, Trump also appointed PayPal co-founder David Sacks as the head of "White House Artificial Intelligence and Cryptocurrency Affairs." These measures indicate that Trump intends to create a government with relaxed crypto regulation.
JPMorgan analysts indicate that several stalled cryptocurrency bills may quickly receive approval following Trump's presidency, including the 21st Century Financial Innovation and Technology Act (FIT21), which could provide much-needed regulatory clarity for the crypto industry by clearly defining the regulatory responsibilities of the SEC and CFTC. They also state that as the regulatory framework becomes clearer, the SEC's strategy of increasing enforcement may evolve into a more collaborative approach, and its restriction on banks holding digital assets (Staff Accounting Bulletin No. 121) (SAB 121) may be abolished.
The high-profile lawsuits against companies like Coinbase may also be eased, settled, or even withdrawn. Regulatory notices sent to companies like Robinhood and Uniswap could be reconsidered, thereby reducing the litigation risks for the broader crypto industry.
In addition to departmental and bill reforms, the Trump team is also considering significantly reducing, merging, or even eliminating major banking regulatory agencies in Washington. Insiders revealed that Trump’s advisors in discussions with potential candidates for banking regulators inquired whether some personnel from the Department of Government Efficiency could abolish the Federal Deposit Insurance Corporation (FDIC) among other issues. Trump’s advisors also inquired about potential candidates for the FDIC and the Office of the Comptroller of the Currency. Moreover, plans to merge or completely reform the FDIC, OCC, and the Federal Reserve were also proposed.
As policy benefits gradually unfold, larger-scale institutional funds in the U.S. are expected to return to the crypto market.
DeFi revival in progress
Family offices, endowment funds, pension plans, and other more stable capital will not only invest in Ethereum spot ETFs but will also re-enter DeFi sectors that have been validated in the previous cycle.
Compared to 2021, the total supply of stablecoins has reached an all-time high, and during the month following Trump's victory, the total amount of stablecoins has increased by nearly $25 billion, with the current total market value of stablecoins reaching $202.2 billion.
As the leading U.S. crypto-listed company, Coinbase has made strides in the DeFi field this year, besides contributing politically; on one hand, it acts as the largest crypto ETF custodian, and on the other hand, it has launched cbBTC.
As cbBTC faces 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 opt to participate in the DeFi ecosystem with almost zero costs. This shift could bring inflows to market-tested DeFi protocols, especially given the more attractive yields provided by DeFi compared to traditional finance.
Another major DeFi sector in this cycle is RWA. In March of this year, BlackRock, through a 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 sector. Capital giants like Apollo and Blackstone, which control large pools of funds, are also beginning to prepare to enter this market, bringing in substantial liquidity.
After the Trump family's launch of the DeFi project, compliant DeFi has been a hot topic of discussion. Established Ethereum blue-chip DeFi projects like Uniswap, Aave, and Lido saw immediate price reactions after Trump's victory, all rising and breaking through, while up-and-coming DeFi projects like COW, ENA, and ONDO also reached new highs.
Meanwhile, Trump's crypto DeFi project WLFI has been trading Ethereum-based tokens very frequently, exchanging 5 million USDC for 1,325 ETH in multiple transactions, and then its multi-signature address bought 10 million USD in ETH, 1 million USD in LINK, and 1 million USD in AAVE. Recent news of whales accumulating ETH suggests that both institutions and whale accounts are refocusing on the Ethereum ecosystem.
WLFI multi-signature address holding information
Recent price performances of new and old projects in the DeFi space need no further elaboration. Currently, the total value locked (TVL) in DeFi is about $100 billion, while the total value of cryptocurrency and related assets is around $4 trillion, with only about 2% of the funds actively involved in the DeFi space. Compared to the overall scale of the cryptocurrency market, this is still quite small. This indicates that under the warming regulatory environment, DeFi still has significant growth potential.
Aave is a typical beneficiary of this round of "funds flowing back," as its price had already broken through before Trump's victory, after which its TVL and revenue exhibited explosive growth: TVL surpassed the historical high of October 2021, reaching $22 billion; token prices rose from a low of 80 USDT earlier in the year, 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 of September 2021, with weekly revenue hitting a record high.
Although Aave recently upgraded to V4, the technological innovation may not be sufficient to sustain such a large-scale increase; the driving force of regulation and funds is evidently a more important logic, and this push may even spill over to the NFT track, which also gained institutional favor in the last cycle.
The future of Ethereum
However, in the middle of this year, Ethereum faced a series of controversies and discussions regarding ecological development. With the rise of Solana, new and old public chains began to compete for Ethereum's developers and user base, causing the ecosystem to start to shake, and Ethereum seemed to forget its original goal. As the first blockchain to build smart contracts, Ethereum successfully secured major institutional investors in the last cycle through its first-mover advantage; whether in DeFi, blockchain gaming, NFTs, or the metaverse, all are part of the Ethereum ecosystem, and its original aim as a "world computer" has deeply ingrained itself in people's minds.
Although the liquidity fundamentals of Ethereum have seen optimistic improvements, from Ethereum's perspective, key on-chain data indicators such as daily transaction volume, gas fees, and active addresses have not shown significant growth. This indicates that Ethereum's on-chain activity has not increased in sync with its price, and block space remains excessive.
Ethereum Gas fee levels
Over the past few 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 improved Dapp access performance to blocks and reduced transaction costs of L2 scaling solutions; however, due to a lack of 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 issue. As mentioned earlier, institutional funds are gradually flowing back and even starting to build exclusive blockchain use cases. For Ethereum, which possesses security and flexible architecture, its B2B advantage lies here. It not only has an overwhelming advantage in security but can also accommodate numerous EVM projects, providing developers with an almost "undismissable" option.
The long-term value of Ethereum will depend on the scarcity of its block resources, that is, the actual and sustained demand for block settlement on Ethereum. As institutions and applications continue to influx, this scarcity will become more pronounced, thereby establishing a stronger value foundation for Ethereum. Ethereum is a world computer for institutions, 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 strength of Ethereum be focused on the "world computer" concept, akin to Bitcoin's "digital gold" and Solana's "on-chain Nasdaq."
Ten years later, Ethereum is no longer in its startup phase, and the future of Ethereum is becoming increasingly clear for the next decade.
