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 Cancun 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, it can be seen 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, 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 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 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 outflow of funds, putting downward pressure on the price of Ethereum. In addition, the narrative of ETH as a technology-driven product is less appealing to the traditional market 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 went through a dark period.
In November, with the dust settling on the US election, the crypto-friendly Republican and Trump administration brought stronger confidence and liquidity injection to the entire crypto ecosystem, and Ethereum 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 aspiration as 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 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 over $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 US 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, 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, companies like Coinbase, Kraken, and Ripple have been severely cracked down on by US regulators like the SEC, and many crypto projects can't even open accounts with mainstream US banks. The traditional financial institutions that entered the DeFi market during the last bull market have also suffered huge losses, such as Toma Bravo, Silver Lake, Tiger, and Cotu, who not only suffered setbacks on FTX, but also invested at high valuations in some crypto projects that failed to fulfill their grand promises, and their 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, Pettifor, 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 Coordinator". A series of measures all indicate that Trump will build an administration with a relaxed crypto regulatory environment.
Morgan 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. They also said that as the regulatory framework becomes clearer, the SEC's enforcement strategy may evolve into a more collaborative approach, and its restriction 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 sent to companies like Robinhood and Uniswap can be reconsidered, thereby reducing litigation risks across the broader crypto industry.
In addition to departmental 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, in interviews with potential candidates for bank regulatory agencies, asked whether some Department of Government Efficiency personnel could abolish the FDIC, and also inquired about potential candidates for the FDIC and the Office of the Comptroller of the Currency. They also 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, endowments, 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 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 participate in the DeFi ecosystem at almost zero cost. This shift could bring capital inflows to well-tested DeFi protocols, especially when 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.
After the Trump family launched a DeFi project, compliant DeFi has been a hot topic. Ethereum blue-chip DeFi projects like Uniswap, Aave, and Lido immediately reacted with price increases after Trump's victory, while newcomers in the DeFi sector like 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 ETH, $1 million LINK, and $1 million AAVE. The news of whales increasing their ETH holdings has been constant, indicating that both institutions and whale accounts are refocusing on the Ethereum ecosystem.
WLFI multi-signature address holdings information
The performance of new and old projects in the DeFi sector has been remarkable in terms of price. 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 involved 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 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 accelerated its rise at the end of November; the protocol's daily total 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 sector, which also gained the favor of institutions in the previous cycle.
The Future of Ethereum
However, Ethereum has faced 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 major institutional investors buy in through its first-mover advantage in the last cycle, whether it's DeFi, GameFi, or NFTs and the metaverse, they cannot escape the Ethereum ecosystem, and its "world computer" vision has already taken root.
Although Ethereum's fundamental liquidity has generally improved, in terms of Ethereum itself, its on-chain 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 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 even starting to build their own 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, 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 ecosystem power be focused on the "world computer" concept, just as Bitcoin is the "digital gold" and Solana is the "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.
