Limited institutional interest in Ethereum in the context of a bear marketIn the context of the crypto bear market, starting from October 2nd, six different Ethereum futures financial instruments officially began trading, but have not yet reignited institutional investors' enthusiasm for ETH. The total trading volume of ETH futures ETFs on their first day was less than $1
Limited institutional interest in Ethereum in the context of a bear market
In the context of the crypto bear market, starting from October 2nd, six different Ethereum futures financial instruments officially began trading, but have not yet reignited institutional investors' enthusiasm for ETH. The total trading volume of ETH futures ETFs on their first day was less than $1.5 million, compared to Bloomberg data, the first BTC futures ETF (BITO) in 2021 had a trading volume of over $1 billion on its first day. That is to say, the net inflow of funds on the first day of ETH futures ETFs is less than 2% of BITO.
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Duong, the head of Coinbase Research, believes that there are several main reasons for the above differences:
Firstly, the market timing for the launch of ETFs varies. Proshares' BTC futures ETF was launched during the 2021 crypto bull market cycle, with ample market liquidity funds, while ETH futures ETF was launched during the current bear market cycle, with severe funding shortages.
Secondly, the familiarity level of investment advisors varies. Investment advisors are usually more familiar with BTC, which makes it easier for BTC to integrate into their clients' investment portfolios. ETH is often considered a more complex investment product and has not yet been well understood and accepted in the traditional investment community.
Thirdly, changes in expectations at the legal level. Judge Katherine PolkFaila marked ETH as an encrypted product in a recent court ruling by RiselyvsUniswap. This may have raised market expectations for ETH spot ETFs, while there has been a lack of enthusiastic market reaction towards ETH futures ETFs.
From the perspective of capital flow, the cryptobear market is still having a huge impact on institutional capital. According to Coinshares' statistics, there have been 24 net outflows of funds in the 39 weeks since 2022, accounting for 61.5% of the entire period. From the capital flow data, it can also be seen that the interest of institutions in encrypted assets has changed: as of October 4th, ETH's capital outflow this year reached $101 million, while BTC had $219 million in capital inflows during the same time frame. However, the weekly net inflows of BTC and ETH have been relatively similar recently, at $16.4 million and $12.9 million, respectively.
Overall, despite the cooling of ETH futures ETFs, their trading volume is still at a normal level for new ETFs and has played a positive role in institutional investment interest. However, due to the bearish market background and other factors, it is necessary for the cryptocurrency market to warm up as a whole in order to attract more institutional capital inflows.
Potential Risks of Ethereum Pledge
On October 5th, JPMorgan released a research report pointing out the centralization issue of Ethereum's network and pointing out that the ETH pledge yield has decreased from 7.3% before the upgrade in Shanghai to 5.5%. Compared with the still rising traditional financial market yield, the attractiveness of ETH as an investment target has decreased.
The report points out that the top five liquid collateral providers Lido, Coinbase, Segment, Binance, and Kraken control 50% of ETH collateral, with Lido accounting for almost one-third of the total ETH collateral.
Lido, a mobile collateral platform, is seen by the cryptocurrency community as a better alternative to centralized exchange collateral platforms. Currently, in order to mitigate the risk of centralization, Lido has been expanding its list of node operators, aiming to prevent any single entity from controlling most of the pledged ETHs.
In addition, in order to combat the centralization risk of Ethereum blockchain, the Ethereum community has begun to promote distributed validator technology (DVT), such as SSV, Obol, etc. DVT allows multiple node operators to run a validator. This is done to reduce the risks associated with validators without affecting the blockchain.
Another concern raised by JPMorgan is the practice of rehypothecating liquid pledged assets. This involves the reuse of liquidity tokens as collateral in various DeFi agreements. If the value of pledged assets suddenly plummets or is damaged due to malicious attacks or protocol vulnerabilities, this approach may trigger a chain reaction of liquidation.
Ethereum gas fee bottoms out
According to the on chain analysis platform Santiment, Ethereum gas fees have dropped to their lowest level in nearly a year. The average cost of Ethereum on chain transactions in the past week was only $1.13, significantly lower than in early May. It is worth noting that the last time the gas fee was below $1.15, the ETH price was at the bottom.
L2 is paving the way for expanding Ethereum
The significant decrease in Ethereum gas costs is related to the adoption of L2 extension solutions. Due to its advantages in cost and efficiency, a large number of users have flooded into L2, resulting in a significant increase in the demand for block space in L2.
According to L2Beat's data, the trading activity of L2 extension solutions showed a significant increase in 2023. According to data from the past week, L2's TPS has reached 5.78 times that of Ethereum blockchain.
Essentially, L2 is fulfilling its original intention, even if the transaction burden on the Ethereum main chain is alleviated and assisted in its expansion. Santiment believes that lower gas fees can promote the utilization of Ethereum networks and attract more decentralized applications and smart contracts. In the long run, as Ethereum networks become more adopted, the price of ETH will also increase.
Recently, Grayscale Research also pointed out that L2 is paving the way for expanding Ethereum. From a functional perspective, L2 can enhance the scalability of Ethereum, reducing users' network costs by 100 times. In August of this year, Coinbase launched BASE (Ethereum's L2 blockchain), marking a strong recognition of the Ethereum ecosystem and opening its decentralized applications to 100 million Coinbase users.
Coinbase is attempting to clear the way for the large-scale adoption of DAPP based on its own Ethereum L2BASE. If some alternative L1 cannot gain attractiveness due to low security budget and lack of liquidity, integrating into Ethereum L2 may become a more attractive option.
The usage of Ethereum L2 extension solutions has been increasing over the past year, with L2's total daily active addresses surpassing the leading L1.
In addition to active addresses, Total Value Locking (TVL) is equally important as it reflects the degree to which users trust their funds in a specific blockchain. The TVL of the best-performing L2 (including Arbitrum and Optimism) surpasses that of Ethereum's competitors L1 (Solana and Avalanche), indicating the widespread trust in the Ethereum ecosystem and the attractiveness of extended solutions in the market.
As the network scale expands, more activities will shift to cheaper L2. In return, L2 directly accumulates value back into Ethereum. Specifically, for each transaction on L2, users are required to pay a transaction fee. L2 retains a portion of the cost (currently with an average profit margin of approximately 1/4), while Ethereum network validators capture the remaining approximately 3/4.
For each transaction sent by L2, the Ethereum network will also burn a small portion of the total ETH supply. Therefore, the incremental activities of Ethereum L2 directly accumulate value for ETH. If Ethereum's L2 continues to maintain a positive development trajectory, they will consolidate Ethereum's position as a leading L1 blockchain.
ETH balance of centralized platform reaches a new low in 5 years
According to Santiment data on October 5th, the number of ETHs in cryptocurrency trading platforms has dropped to 10.66 million, the lowest since May 2018. In contrast, there are 115.88 million ETHs stored outside the centralized trading platform, which is also the highest value in history.
On October 4th, approximately 110000 ETHs (worth over $180 million) were proposed from the centralized trading platform, which has been in operation since August 21st
The largest single day ETH outflow since then. The above phenomena are often seen as the long-term optimism of the market towards the valuation of ETH assets, demonstrating investors' long-term confidence.
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