Morgan Stanley analysts point out that despite Ethereum's recent consecutive upgrades, on-chain activity has not shown substantial growth. Analysts believe that Ethereum's recent market value surge is likely driven by institutional investors' interest following the Pectra upgrade.
Morgan Stanley analysts led by Managing Director Nikolaos Panigirtzoglou wrote in a report to The Block: "While the Pectra upgrade is good news that makes Ethereum and its network more attractive to institutions and distinguishes it from competing platforms, the consecutive upgrades so far have not significantly enhanced Ethereum network activity."
The Pectra upgrade implemented earlier this month integrated multiple Ethereum Improvement Proposals (EIPs). These proposals aim to improve staking efficiency, increase rewards, and enable faster deposit and withdrawal operations - Morgan Stanley analysts stated that these features make Ethereum more attractive to institutional investors.
Analysts noted that Ethereum's adoption of security token standards like ERC-3643 and ERC-1400 further reinforces this institutional positioning. These specialized technical standards are designed to help security tokens (such as tokenized stocks or bonds) comply with traditional financial regulatory requirements, including mandatory know-your-customer (KYC) and anti-money laundering (AML) checks. The adoption of these standards enhances Ethereum's compatibility with real-world financial infrastructure, including the Depository Trust & Clearing Corporation (DTCC) in the United States.
"This strategic shift encouraging institutional participation is very similar to Bitcoin's development trend, where enterprise and institutional involvement significantly enhanced Bitcoin's appeal," the analysts stated, "In this way, Ethereum is distinguishing itself from competing platforms that primarily rely on individual user participation, as evidenced by the extensive meme coin activity on those platforms."
Analysts also pointed out that Ethereum CME futures positions reflect this institutional transformation. Morgan Stanley's institutional capital flow indicator based on CME Ethereum futures open interest and price trends shows a sharp increase in institutional investors' long positions. However, spot Ethereum ETF inflows remain relatively limited - especially compared to the strong demand for spot Bitcoin ETFs after Trump's election - indicating weaker retail participation.
Overall, analysts noted that despite these upgrades and institutional signals, Ethereum's on-chain activity remains sluggish. They observed that daily transaction volume and active addresses have not shown significant growth. While total value locked (TVL) in ETH terms has increased - possibly due to increased decentralized exchange lending activity - TVL in dollar terms has grown weakly.
Analysts specifically noted that with the proliferation of Layer 2 networks and the increase in ETH circulating supply after the Dencun upgrade, Ethereum transaction fees have declined. They concluded that this situation raises concerns about Ethereum potentially moving towards an inflationary state amid weak trading activity.
Morgan Stanley analysts maintain a relatively conservative stance on Ethereum. Earlier this year, they had suggested that Ethereum might continue to face "fierce competition" from competing public chains and predicted Bitcoin's dominance over Ethereum and Altcoins would persist until 2025.
