Author: Kaori, BlockBeats
After the recent bull market correction phase, 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 officially approved, ushering in a new bullish face both technically and fundamentally; but on the other hand, as Bitcoin, SOL, and BNB successively broke historical highs, ETH's price still hovered around the $4,000 mark.
From the ETH price chart this year, we can see that Ethereum has gone through three main phases this year, and the rises in these three phases correspond to different reasons. At the beginning of the year, the Bitcoin spot ETF was approved, and Ethereum's price rose with market sentiment, briefly breaking through $4,100, but by the end of March, it also began to decline with the broader market. Due to the strong surge of SOL and its ecosystem, Ethereum's ecosystem faced a large outflow of liquidity.
In May, the Ethereum spot ETF was approved, and the price briefly surged, 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 expected its conversion to ETF took profits, resulting in a capital outflow of $1 billion, putting downward pressure on Ethereum's price. Furthermore, the narrative of ETH leaning towards innovative products is less likely to impress the traditional market compared to BTC's 'digital gold', and the SEC's prohibition of Ethereum spot ETFs from involving staking functions objectively weakened its appeal.
After this, the Ethereum Foundation, re-staking ecosystem, and roadmap disputes followed, leading Ethereum into a dark period.
In November, after the U.S. elections, the pro-crypto Republican Party and Trump brought stronger confidence and liquidity injection to the entire crypto ecosystem, leading Ethereum to welcome its third wave of rise this year. This rise is different from the past, as institutions have clearly entered the market, and the improvement of liquidity fundamentals is telling us what institutions recognize and value; Ethereum is destined to continue its original intention as a 'world computer'.
Improvement in liquidity fundamentals
Since December, the Ethereum spot ETF has seen a net inflow of over $2.2 billion for half a month. The ETF Store president Nate Geraci stated on social media that advisors and institutional investors have just begun 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, as recent 13F filings show that these institutions have also begun purchasing Ethereum spot ETFs since then.
In addition, in the previous two quarters, the Wisconsin State Investment Board and the Michigan Retirement System purchased Bitcoin spot ETFs, and Michigan further bought more than $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.
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 anticipated that the remaining time this year would see the spot Ethereum ETF attract net inflows of up to $3 billion, and if staking is allowed, this figure could rise to $6 billion.
BlackRock’s U.S. themed and active ETF head Jay Jacobs stated at the 'ETFs in Depth' conference that 'our exploration of Bitcoin, especially Ethereum, is still just the tip of the iceberg; only a very small number of clients hold (IBIT and ETHA), so our current focus is on this aspect, 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 extent and methods of participation vary. Regulatory uncertainty has led various parties to adopt different attitudes; some institutions proceed with caution while others are less concerned, and institutional participants have a high awareness of the operations and risks related to staking.
Trend reversal
Since the FTX collapse, Coinbase, Kraken, Ripple, and others have faced severe crackdowns from the SEC and other U.S. regulatory agencies, and many crypto projects are unable to open accounts with mainstream banks in the U.S. Traditional financial institution investors who entered through DeFi in the last bull market have also suffered huge losses. Large funds such as Toma Bravo, Silver Lake, Tiger, and Cotu not only faced setbacks on FTX, but they also invested in some crypto projects that have not fulfilled their grand promises at high valuations, and the funds have 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 qualified crypto startups were located in the U.S., but this proportion has continued to decline since then, currently only about 20%.'
However, on November 6, after Trump's election victory, the green light that the U.S. financial system had been waiting for was finally lit.
Trump saves the crypto space
Trump's election victory undoubtedly cleared regulatory clouds for institutions.
After 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 leadership, and appointing Paul Atkins as SEC chairman, Trump appointed PayPal co-founder David Sacks as the 'White House AI and Cryptocurrency Affairs Director'. A series of moves indicate that Trump intends to create a government with relaxed crypto regulations.
JPMorgan analysts stated that several stalled cryptocurrency bills may quickly gain approval after Trump's ascension, including the (21st Century Financial Innovation and Technology Act) (FIT21), which could provide urgently needed regulatory clarity to the crypto industry by clearly defining the regulatory responsibilities of the SEC and CFTC. They also indicated that as the regulatory framework becomes clearer, the SEC's enforcement strategy may evolve into a more collaborative approach, potentially eliminating restrictions on banks holding digital assets (SAB 121).
Additionally, the high-profile lawsuits against companies like Coinbase may also be eased, settled, or even dismissed. Regulatory notices issued to companies like Robinhood and Uniswap can be reconsidered, thus reducing the broader crypto industry's litigation risks.
In addition to departmental and legislative reforms, the Trump team is also considering significant reductions, mergers, or even the elimination of major banking regulatory agencies in Washington. Insiders revealed that Trump's advisors asked potential candidates for banking regulatory agencies whether some individuals from the Department of Government Efficiency could abolish the Federal Deposit Insurance Corporation (FDIC) and other issues during interviews. Trump's advisors also inquired about potential candidates for the FDIC and the Office of the Comptroller of the Currency. Furthermore, they proposed plans to merge or completely reform the FDIC, the OCC, and the Federal Reserve.
As the 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 an all-time high, and during the month following Trump's election 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 leading U.S. crypto-listed company, has made contributions in the DeFi field this year besides political efforts. On the one hand, it serves as the largest crypto ETF custodian, while on the other hand, it launched cbBTC.
Due to cbBTC facing the same custody and counterparty risk as most Bitcoin ETFs, some traditional financial institutions may reassess whether to continue paying fees to hold Bitcoin ETFs and instead turn to participate in the DeFi ecosystem at almost zero cost. This shift may bring capital inflow to market-tested DeFi protocols, especially when the yields offered by DeFi are more attractive than traditional finance.
Another major DeFi sector in this cycle is RWA. In March of this year, BlackRock, in collaboration with the U.S. tokenization platform Securitize, launched the tokenized fund BUIDL (BlackRock USD Institutional Digital Liquidity Fund), officially entering the RWA track in a high-profile manner. Capital giants like Apollo and Blackstone, which control large pools of funds, are also beginning to prepare to enter this market, bringing a significant influx of liquidity.
After the Trump family launched a DeFi project, compliant DeFi has been a hot topic of discussion. Established Ethereum blue-chip DeFi projects like Uniswap, Aave, and Lido immediately reacted with price increases after Trump's election victory, while newcomers in the DeFi sector, such as COW, ENA, and ONDO, also reached new highs.
Meanwhile, Trump's crypto DeFi project WLFI has been frequently trading Ethereum-related tokens, exchanging 5 million USDC for 1,325 ETH in multiple transactions, and its multi-signature address has respectively bought $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 shifting their focus back to the Ethereum ecosystem.
WLFI multi-signature address holding information
Recent performance of new and old projects in the DeFi track does not require much explanation. Currently, DeFi's TVL is about $100 billion, and the total value of cryptocurrencies and related assets is approximately $4 trillion, of which only 2% of the funds are truly active in the DeFi space, still relatively small compared to the overall cryptocurrency market size. This indicates that under the warming regulatory winds, DeFi still has significant growth potential.
Aave is a typical beneficiary of this round of 'capital inflow'. Its price broke through before Trump's election victory, and subsequently, its TVL and revenue showed explosive growth: TVL broke the historical high of $22 billion in October 2021; the token price rose from a low of $80 USDT earlier in the year and broke through the March high of $140 USDT in early September, accelerating its rise by the end of November; the protocol's daily total revenue exceeded the second highest peak in September 2021, and weekly revenue set a new historical high.
Although Aave recently upgraded to V4, the innovation momentum at the technical level may not be sufficient to support such a large-scale rise. Regulatory and capital-driven motivations are clearly more important logic, and this drive may even spill over to the NFT track that also gained institutional favor in the last cycle.
The future of Ethereum
Ethereum encountered a series of controversies and discussions related to ecological development in the middle of this year. With the rise of Solana, both new and old public chains began to seize 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 build smart contracts, Ethereum successfully made major institutional investors pay for it in the last cycle through its first-mover advantage. Whether DeFi, chain games, NFTs, or the metaverse, none can escape the Ethereum ecosystem, and its original intention as a 'world computer' has deeply rooted in people's hearts.
Despite the optimistic improvement in Ethereum's liquidity fundamentals, from Ethereum's own perspective, its daily transaction volume, gas fees, active address count, and other on-chain data metrics 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 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 cheap block space. This move improved Dapp's access performance to blocks and reduced the transaction costs of L2 expansion solutions. However, due to insufficient market liquidity and sluggish 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 flowing back, even beginning to create dedicated blockchain use cases. For Ethereum, which possesses security and a flexible architecture, its advantage lies in B2B. It not only has an overwhelming advantage 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, which is the actual and sustained demand for Ethereum's block settlement in the world. As institutions and applications continue to pour in, this scarcity will become increasingly prominent, thus laying a more solid value foundation for Ethereum. Ethereum is a world computer for institutions, and starting with DeFi, institutions will address the issues of Ethereum's excess blocks and roadmap disputes in the future.
At the beginning of December, Ethereum researcher Jon Charbonneau wrote a long article analyzing why Ethereum needs a clearer 'North Star' goal, suggesting that Ethereum's ecological power should converge on the concept of a 'world computer', 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. In the next decade, Ethereum's future is already clearly visible.
