Author: Kaori, BlockBeats
After the recent bull market correction, the price of ETH has once again risen above $3,900. Looking back on the development of Ethereum over the past year, there are many complex factors and emotions. On the one hand, the successful completion of the Cancon upgrade and the official approval of the spot ETF have brought a new bullish outlook in terms of technology and fundamentals; on the other hand, with the consecutive breakthroughs of new highs in Bitcoin, SOL, and BNB, the price of ETH is still hovering around the $4,000 mark.
From the price trend chart of ETH this year, we can see that Ethereum has experienced three major stages this year, and the three stages of the rally correspond to different reasons. At the beginning of the year, the approval of the Bitcoin spot ETF led to a rise in the price of Ethereum following the market sentiment, and it even broke through $4,100, but it also started to decline at the end of March along with the broader market. Due to the strong surge of SOL and its ecosystem, Ethereum's ecosystem also faced a large outflow of liquidity.
In May, the Ethereum spot ETF was approved, and the price briefly surged, but the demand was not as strong as that of Bitcoin. The initial market reaction to the launch of the Ethereum ETF was negative, as speculative investors who had bought the Grayscale Ethereum Trust and expected it to be converted to an ETF took profits, resulting in a $1 billion capital outflow, putting downward pressure on the price of Ethereum. In addition, the narrative of ETH as a technology-driven product is less appealing to traditional markets compared to BTC's "digital gold", and the SEC's restriction on the staking function of Ethereum spot ETFs has also objectively weakened its attractiveness.
After that, a series of events such as the Ethereum Foundation, the re-staking ecosystem, and the debate over the roadmap came one after another, and Ethereum entered a dark period.
In November, with the dust settling on the U.S. election, the pro-crypto Republican and Trump have brought stronger confidence and liquidity injection to the entire crypto ecosystem, and Ethereum has also ushered in the third wave of this year's rally. This rally is different from the past, with institutions openly entering the market, and the improvement of the liquidity fundamentals, the market is telling us with its capital what institutions recognize and are optimistic about; and Ethereum is destined to continue its original intention of being the "world computer".
Improvement of Liquidity Fundamentals
Since December, Ethereum spot ETFs have seen net inflows of over $2.2 billion for half a month, and Nate Geraci, president of The ETF Store, said on social media that advisors and institutional investors are just beginning to focus on this area.
In the third quarter of this year, major banks such as Morgan Stanley, JPMorgan, and Goldman Sachs have significantly increased their holdings of Bitcoin ETFs, with their quarterly holdings nearly doubling, but their investment scope is not limited to Bitcoin, according to the latest 13F filings, these institutions have also started buying Ethereum spot ETFs since then.
In addition, the Wisconsin State Investment Board and the Michigan Retirement System purchased Bitcoin spot ETFs in the first two quarters, and Michigan further purchased more than $13 million worth of Ethereum spot ETFs in the third quarter. This indicates that pension funds, which represent low-risk preferences and long-term investments, not only recognize Bitcoin as a digital store of value, but also value the growth potential of Ethereum.
When the Ethereum spot ETF was first approved, JPMorgan had pointed out in a report that the demand for Ethereum spot ETFs would be far lower than that for Bitcoin spot ETFs, but the report estimated that Ethereum spot ETFs would attract net inflows of up to $3 billion for the rest of the year, and if staking was allowed, this figure could reach $6 billion.
Jay Jacobs, head of U.S. thematic and active ETFs at BlackRock, said at the "ETFs in Depth" conference that "our exploration of Bitcoin, especially Ethereum, is just the tip of the iceberg, with only a small number of clients holding (IBIT and ETHA), so our focus is on this area rather than launching new Altcoin ETFs.
In a Blockworks Research survey report, the vast majority (69.2%) of respondents currently hold ETH, of which 78.8% are investment firms or asset management companies, indicating that driven by yield generation and network security contribution, the willingness of institutions to participate in ETH staking has reached a critical mass.
Institutions are actively participating in ETH staking, but the degree and method of participation vary, and the uncertainty of regulation has led to different attitudes, with some institutions being cautious and others not too concerned, and institutional participants have a high awareness of the operational aspects and risks associated with staking.
Reversal of Trends
Since the FTX collapse, Coinbase, Kraken, Ripple and others have been severely cracked down by U.S. regulators such as the SEC, and many crypto projects cannot even open accounts with mainstream U.S. banks. The traditional financial institutions that entered the market through DeFi in the previous bull market have also suffered huge losses, such as Toma Bravo, Silver Lake, Tiger, Cotu and other major funds, not only suffered setbacks on FTX, but also invested in some crypto projects that did not fulfill their grand promises at high valuations, and the funds have not yet flowed back.
In the second half of 2022, many DeFi projects were forced to migrate outside the U.S., and according to qw, the co-founder of Alliance DAO, "about 80% of crypto startups that met the standards were located in the U.S. two years ago, but this proportion has been declining since then and is now only about 20%."
But on November 6, Trump won the election, and the green light that the U.S. financial system has been waiting for has lit up.
Trump Saves the Crypto World
Trump's victory undoubtedly cleared the regulatory clouds for institutional adoption.
By establishing the Department of Government Efficiency and directly gathering a series of Wall Street financial elites such as Musk, Petty, and Andreessen under its banner, and then appointing Paul Atkins as the new SEC chairman, Trump also appointed PayPal co-founder David Sacks as the "White House AI and Cryptocurrency Affairs Coordinator". A series of measures all indicate that Trump will build an administration with a relaxed crypto regulatory environment.
JPMorgan analysts said that several stalled crypto bills, including the FIT21 Act, which could provide much-needed regulatory clarity for the crypto industry by clarifying the regulatory responsibilities of the SEC and CFTC, are likely to be quickly approved after Trump takes office. They also said that as the regulatory framework becomes clearer, the SEC's enforcement-heavy strategy may evolve into a more collaborative approach, and its restrictions on banks holding digital assets under SAB 121 may be repealed.
The high-profile lawsuits against companies like Coinbase may also be eased, settled or even withdrawn. The regulatory notices issued to companies like Robinhood and Uniswap can be reconsidered, reducing litigation risks across the broader crypto industry.
In addition to departmental and legislative reforms, the Trump team is also considering significantly reducing, merging or even abolishing the major bank regulatory agencies in Washington. Insiders revealed that Trump advisors have asked some Department of Government Efficiency personnel whether the FDIC can be abolished when interviewing potential bank regulatory candidates. Trump advisors have also inquired about potential candidates for the FDIC and the Office of the Comptroller of the Currency, and have proposed plans to merge or completely reform the FDIC, OCC and the Federal Reserve.
As policy dividends are gradually released, larger-scale institutional capital in the U.S. market is expected to return to the crypto market.
DeFi Revival in Progress
Family offices, endowments, pension plans and other more conservative capital will not only invest in Ethereum spot ETFs, but will also re-enter the DeFi sector that has been validated in the previous cycle.
Compared to 2021, the total supply of Altcoins has reached its highest level, and in the more than a month since Trump's election victory, the total Altcoin supply has already increased by nearly $25 billion, with the current total Altcoin market value reaching $202 billion.
As the leading US crypto-listed company, Coinbase has not only contributed politically this year, but also made some achievements in the DeFi field. On the one hand, it is the largest crypto ETF custodian, and on the other hand, it has launched cbBTC.
Due to the same custody and counterparty risks faced by cbBTC and most Bitcoin ETFs, some traditional financial institutions may re-evaluate 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 DeFi protocols that have been tested by the market, especially as the yields offered by DeFi are more attractive than traditional finance.
Another major DeFi sector this cycle is RWA. In March this year, BlackRock, in cooperation with the US tokenization platform Securitize, issued the tokenized fund BUIDL (BlackRock USD Institutional Digital Liquidity Fund), making a high-profile entry into the RWA track. Capital giants like Apollo and Blackstone, who control huge pools of funds, are also preparing to enter this market, bringing a large influx of liquidity.
At the same time, the Trump family's DeFi project WLFI has been frequently trading Ethereum-based tokens recently, exchanging 5 million USDC for 1,325 ETH in multiple transactions, and then buying 10 million dollars worth of ETH, 1 million dollars worth of LINK and 1 million dollars worth of AAVE in its multi-signature address. Recent news of whales increasing their ETH holdings suggests that both institutions and whale accounts are refocusing on the Ethereum ecosystem.
WLFI multi-signature address holdings information
The performance of new and old DeFi projects in terms of price has been remarkable recently. 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% is actively engaged in DeFi, which is still very small compared to the overall crypto market. This means that under the warming regulatory environment, DeFi still has huge growth potential.
Aave is a typical beneficiary of this "capital inflow" cycle, with its price having already broken through before Trump's election victory, and its TVL and revenue have since experienced explosive growth: TVL has surpassed the October 2021 historical high of $22 billion; the token price has risen from the year's low of 80 USDT to break the March high of 140 USDT in early September, and has accelerated its rise since late November; the protocol's daily revenue has exceeded the September 2021 second highest peak, and its weekly revenue has set a new high.
Although Aave has recently upgraded to V4, its technical innovation may not be sufficient to support such a massive increase, and the driving forces of regulation and capital are obviously more important, and this driving force may also spill over to the NFT track, which also gained the favor of institutions in the previous cycle.
The Future of Ethereum
However, Ethereum has encountered a series of controversies and discussions related to ecosystem development in the middle of this year, and with the rise of Solana, new and old public chains have begun to seize Ethereum's developers and user base, and the ecosystem has begun to shake, as if Ethereum has forgotten its original goal. As the first blockchain to build smart contracts, Ethereum has successfully made various major institutions invest in it through its first-mover advantage in the last cycle, whether it's DeFi, chain games, NFTs or the metaverse, they cannot escape the Ethereum ecosystem, and its "world computer" vision has already taken root in people's minds.
Although Ethereum's fundamental liquidity has generally improved, from Ethereum's own perspective, its on-chain indicators such as daily transaction volume, Gas fees, and active address count have not shown significant growth. This indicates that Ethereum's on-chain activity has not risen in sync with its price, and its block space is still oversupplied.
Ethereum Gas fee level
Over the past few years, Ethereum's focus has been on building the infrastructure for cryptocurrencies, providing a large amount of cheap block space for the market. This measure has on the one hand improved the access performance of Dapps to blocks and reduced the transaction costs of L2 scaling solutions, and on the other hand, due to the lack of market liquidity and low transaction demand, Ethereum's huge block space has not been fully utilized.
However, this is not a real problem in the long run. As mentioned earlier, institutional capital is gradually flowing back, and is even starting to build dedicated blockchain use cases. For Ethereum, which has security and flexible architecture, B2B is its advantage. It not only has an overwhelming advantage in security, but can also be compatible with many EVM projects, providing developers with an almost "impossible to be fired" choice.
Ethereum's long-term value will depend on the scarcity of its block resources, i.e. the actual, sustained demand for Ethereum block settlement in the world. As more and more institutions and applications flow in, this scarcity will become increasingly prominent, laying a more solid foundation for Ethereum's value. Ethereum is an institutional world computer, and starting from DeFi, institutions will solve the problems of Ethereum's block oversupply and roadmap disputes in the future.
In early December, Ethereum researcher Jon Charbonneau wrote a long article analyzing why Ethereum needs a clearer "North Star" goal, and also suggested that Ethereum's ecological power be focused on the "world computer" point, just as Bitcoin's "digital gold" and Solana's "on-chain Nasdaq".
After 10 years, Ethereum is no longer in the startup stage, and in the next 10 years, Ethereum's future is already clear.
