Author: Kaori, BlockBeats
After the recent bull market correction, the ETH price has once again stood 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 Cancun upgrade was successfully completed and the spot ETF was officially approved, and the technical and fundamental aspects have ushered in a new bull market outlook; but on the other hand, with the consecutive breakthroughs of Bitcoin, SOL, and BNB to new highs, the ETH price is still hovering around the $4,000 mark.
From the price trend chart of ETH this year, it can be seen that Ethereum has experienced three major stages this year, and the three stages of the rise correspond to different reasons. At the beginning of the year, the approval of the Bitcoin spot ETF pushed up the price of Ethereum, which once broke through $4,100, but at the end of March, it also began to decline with the overall market. Due to the strong rise of SOL and its ecosystem, a large amount of liquidity has flowed out of the Ethereum ecosystem.
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 Ethereum price. In addition, the narrative of Ethereum as a technology-driven product is less appealing to traditional markets compared to BTC's "digital gold", and the SEC's restriction on Ethereum spot ETFs from engaging in staking functions has also objectively weakened its attractiveness.
After that, 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, the dust of the U.S. election settled, and the pro-crypto Republican and Trump brought stronger confidence and liquidity injection to the entire crypto ecosystem, and Ethereum also ushered in the third wave of rise this year. But this rise 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 had 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 Chase, 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 Chase 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 companies or asset management companies, indicating that driven by yield generation and network security contributions, institutional willingness 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 from various parties, with some institutions being cautious and others not too concerned, and institutional participants have a high awareness of the operations and risks associated with staking.
Reversal of Trends
After the FTX collapse, Coinbase, Kraken, Ripple and others have been severely cracked down by US regulators such as the SEC, and many crypto projects cannot even open accounts with mainstream US banks. And the traditional financial institutions that entered the market due to DeFi in the previous bull market 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 US, according to qw, the co-founder of Alliance DAO, "About 80% of crypto startups that met the standards were located in the US 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 US 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, Pittell, and Andreessen under its banner, and then appointing Paul Atkins as the SEC chairman, Trump also appointed PayPal co-founder David Sacks as the "White House AI and Cryptocurrency Affairs Officer". A series of measures all indicate that Trump will build an administration with a relaxed crypto regulation.
JPMorgan Chase analysts said that several stalled crypto currency bills, including the FIT21 Act, which clarifies the regulatory responsibilities of the SEC and CFTC, could be quickly approved after Trump takes office, potentially providing the much-needed regulatory clarity for the crypto industry. And they said the SEC's enforcement-heavy strategy could evolve into a more collaborative approach, and its restriction on banks holding digital assets under SAB 121 could be repealed.
The high-profile lawsuits against companies like Coinbase may also be eased, settled or even withdrawn. Regulatory notices issued to companies like Robinhood and Uniswap can be reconsidered, reducing litigation risks across the broader crypto industry.
In addition to department and legislative reforms, the Trump team is also considering drastically cutting, merging or even abolishing the major bank regulatory agencies in Washington. Insiders revealed that Trump advisers, when interviewing potential candidates for bank regulatory agencies, asked some Department of Government Efficiency personnel whether they could abolish the FDIC. Trump advisers also inquired about potential candidates for the FDIC and the Office of the Comptroller of the Currency. In addition, they 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 US market is 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 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 victory, the total amount of Altcoins has already increased by nearly $25 billion, with the current total market value of Altcoins reaching $202 billion.
As the leading crypto-listed company in the US, Coinbase has made contributions in the political arena this year, and has 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 participate in the DeFi ecosystem at almost zero cost. This shift may bring capital inflows to DeFi protocols that have been tested by the market, especially when the yields provided 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.
After the Trump family launched a DeFi project, compliant DeFi has been a hot topic of discussion. Ethereum blue-chip DeFi projects such as Uniswap, Aave, and Lido immediately reacted with price increases after Trump's victory, while newcomers in the DeFi sector such as COW, ENA, and ONDO also hit new highs.
At the same time, the Trump crypto 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. The news of whales increasing their ETH holdings has been constant recently, indicating that both institutions and whale accounts are turning their attention back to the Ethereum ecosystem.
WLFI multi-signature address holdings information
The price performance of new and old projects in the recent DeFi track is self-evident. 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 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. Its price had already broken through before Trump's victory, and since then its TVL and revenue have shown 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 the end of November; the protocol's daily total revenue has exceeded the second highest peak in September 2021, 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. 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 institutional investors buy in 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 the fundamentals of Ethereum's liquidity have generally improved, from Ethereum's own perspective, its on-chain indicators such as average 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
In 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. On the one hand, this has 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, that is, the actual and sustained demand for Ethereum block settlement in the world. As institutions and applications continue to flow in, this scarcity will become more and more prominent, thereby 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" concept, 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.
