Ethereum Monthly Outlook: Looking Ahead

Ethereum Monthly Outlook: Looking AheadEthereum, the world's leading smart contract platform, is constantly evolving in its role and significance. This article will delve into Ethereum's potential development directions, analyze its challenges and opportunities, and ultimately provide an outlook on its future trajectory

Ethereum Monthly Outlook: Looking Ahead

Ethereum, the world's leading smart contract platform, is constantly evolving in its role and significance. This article will delve into Ethereum's potential development directions, analyze its challenges and opportunities, and ultimately provide an outlook on its future trajectory.

Ethereum's Narrative: Multiple Identities, Complex Value

Ethereum plays a multifaceted role. It is hailed as "ultrasonic money" due to its supply control through a reduction mechanism, "internet bonds" for offering inflation-resistant staking rewards, and even assigned new concepts like "settlement layer asset" and "general proof-of-work asset." These diverse narratives converge to form Ethereum's intricate value system.

1. Ultrasonic Money and Internet Bonds:

Under the Proof-of-Stake (PoS) mechanism, users can participate in network maintenance and earn rewards by staking ETH, similar to buying bonds for interest but with a more decentralized character. These staking rewards come from network transaction fees and newly issued ETH, while the total supply control strategy limits excessive issuance. Therefore, compared to traditional inflation, ETH's staking return model is viewed as a more inflation-resistant internet bond.

2. Settlement Layer Asset and General Proof-of-Work Asset:

With the rise of Layer 2 scaling and re-staking technologies, Ethereum begins to play the role of a "settlement layer asset," offering efficient settlement services. Simultaneously, as a "general proof-of-work asset," it drives network operation through staking mechanisms and provides verifiable proof of work.

3. Complex Value Assessment:

The interwoven nature of these multiple concepts makes assessing Ethereum's value more complex. A single metric is difficult to define, and contradictions between concepts can distract market participants, obscuring the true drivers behind Ethereum's value appreciation.

Impact of Spot ETFs: Reshaping the Industry Landscape

Spot ETFs are crucial for Bitcoin, as they not only clarify the regulatory framework but also attract new capital inflow. These ETFs fundamentally reshape the industry landscape, overturning the previous cyclical pattern where funds moved from Bitcoin to Ethereum and then to higher-risk alternatives.

1. Breaking Down Capital Barriers:

Investments in ETFs are subject to barriers that are not present for funds held on centralized exchanges, which can access a wider range of crypto assets. Once spot Ethereum ETFs are approved, this hurdle will be removed, and Ethereum will gain access to capital sources currently open only to Bitcoin.

2. Universality of Regulatory Logic:

The logic behind approving Bitcoin spot ETFs also applies to Ethereum spot ETFs, as the Chicago Mercantile Exchange (CME) futures prices closely align with spot prices, effectively monitoring and preventing market misconduct.

3. Precedent Set by Ethereum Futures:

The timeframe for relatedness studies used in the Bitcoin spot ETF approval process conveniently began a month after the CME launched Ethereum futures, in March 2021. We speculate this was intentional, enabling the application of the same logic to the Ethereum market in the future.

4. Market Structure Adjustment:

The US approval of Bitcoin spot ETFs has shifted the market structure, attracting different investor groups like investment advisors and wealth management firms, whose approach to BTC differs from traditional crypto investors. This change in capital flow and market structure, driven by the shifted role of BTC, has already affected the trading interactions between BTC and ETH.

Challenges from Other Layer 1s: Competition and Cooperation

High-performance integrated chains, notably Solana, are gradually encroaching on Ethereum's market share. These chains offer high-speed, low-cost transactions, leading to an increasing shift in trading activity away from the Ethereum mainnet.

1. Competitive Advantages:

Compared to the previous bull market cycle, the differentiation between these L1s and Ethereum is now more pronounced. They no longer rely on the Ethereum Virtual Machine, and their DApps are designed from scratch, creating unique user experiences. Additionally, these chains employ an integrated/holistic strategy, enhancing synergy between different applications and addressing issues like poor user experience and dispersed liquidity in bridging processes.

2. Limitations of Early Activity Metrics:

While these unique value propositions are crucial, we believe it is premature to judge success based solely on incentive-driven activity metrics. For instance, some Ethereum Layer 2s saw user transaction volume decline by over 80% after airdrop peaks.

3. Stablecoin Supply Comparisons:

Another more enduring metric for measuring network adoption is stablecoin supply. Stablecoin circulation and issuance/redemption are subject to bridging limitations, making their changes relatively slow. Measured by stablecoin issuance, activity remains concentrated on Ethereum.

4. Preferences of Large Capital Holders:

Large capital holders tend to be less sensitive to Ethereum's higher transaction fees (relative to transaction size). They prioritize reducing liquidity disruption time and minimizing bridge trust to mitigate risks.

5. Stablecoin Supply Growth:

In reality, stablecoin supply has grown faster on Ethereum Layer 2s than on Solana. Since early 2024, Arbitrum has surpassed Solana in stablecoin supply, while Base has increased its stablecoin supply from $160 million to $2.4 billion year-to-date.

Flourishing Layer 2 Technology: Fostering Ethereum Value Appreciation

The burgeoning growth of Layer 2 technology has sparked discussions: Layer 2s reduce Layer 1 block space requirements (thus reducing the amount of ETH burned as transaction fees) and potentially support non-ETH gas fees within their ecosystems (further reducing ETH burns).

1. Changing ETH Burn Rate:

Since Ethereum transitioned to PoS in 2022, the annualized inflation rate for ETH has reached its peak. While inflation is generally considered a structurally important component of BTC supply, we argue this doesn't apply to ETH. In essence, all newly issued ETH is directly allocated to stakers, whose ETH holdings are growing at an impressive rate, far exceeding the issuance rate.

2. Staking and Liquidity Tightening:

Unlike the Bitcoin mining economy where miners need to frequently sell BTC for operational maintenance, the staking cost for ETH is low, allowing stakers to accumulate ETH for extended periods without selling. At the same time, staking has become a magnet for ETH liquidity, with the growth rate of staked ETH more than 20 times faster than ETH issuance.

3. Liquidity Tightening from Layer 2 Migration:

The emergence of Layer 2s further intensifies ETH liquidity tightening. Over 3.5 million ETH have been migrated to Layer 2s, not only directly transferring ETH but also prompting users to prepare ETH as reserves for Layer 2 transactions, effectively locking up ETH.

4. Core Financial Services Still Rely on Layer 1:

Despite the growing Layer 2 ecosystem, core financial services and governance activities, including EigenLayer re-staking, Aave, Maker, Uniswap, etc., still rely on Layer 1, ensuring fundamental demand for ETH.

5. Positive Impact of Layer 2s:

Instead of undermining ETH, Layer 2 development has fostered ETH value appreciation in a complex way. It drives ETH demand growth and reinforces ETH's core value by increasing ETH applications and its role as Layer 1 fees and Layer 2 pricing basis unit.

Ethereum's Advantages: Incalculable Core Value

Beyond common data-driven narratives, Ethereum possesses other intangible yet critical advantages. These may not be short-term tradable narratives but represent a set of core strengths that can sustain its dominant position over the long term.

1. Premium Collateral Asset and Pricing Benchmark:

ETH plays a central role in DeFi. It is widely used in L1 and L2, serving as low-risk collateral in borrowing platforms like Maker and Aave, and acts as the base trading pair in numerous DEXs.

2. Limitations of WBTC:

While BTC is recognized as the premier store-of-value asset, WBTC, a wrapped version used on Ethereum, involves additional trust bridging issues. Currently, it's unlikely that WBTC will replace ETH's position in Ethereum DeFi.

3. Continued Innovation and Decentralization in Parallel:

Ethereum's uniqueness lies in its ability to push decentralization while maintaining robust innovation. While some critics criticize Ethereum's delayed upgrade plans, they fail to fully appreciate the difficulty of coordinating diverse developers to achieve technological progress.

4. Decentralization Ensures Security and Fairness:

Decentralization may lead to a more cumbersome decision-making process, even rigid to some extent, but it is a necessary price to pay for security and fairness. For other ecosystems that may embark on a similar decentralized journey in the future, the ability to establish a system that is both efficient and inclusive of various stakeholders is crucial for success.

5. Fostering a Collaborative Ecosystem:

Ethereum has fostered a highly collaborative ecosystem, with developers, researchers, and entrepreneurs continuously contributing to its growth. This collaborative spirit has led to the emergence of various tools, resources, and communities that support the development and adoption of Ethereum.

6. A Robust and Secure Network:

The Ethereum network is known for its robustness and security. The Proof-of-Stake consensus mechanism, along with the decentralized nature of the network, ensures the integrity and security of transactions.

7. Continued Development and Upgrades:

Ethereum's development team continues to make improvements and upgrades to the network. The implementation of Ethereum 2.0, for instance, has significantly enhanced scalability, security, and efficiency.

8. A Strong Community and Advocacy:

Ethereum boasts a vibrant and passionate community that actively contributes to the network's