This article provides an in-depth analysis of the recent price surge of Ethereum and its underlying reasons. The focus is on the development of the Ethereum ecosystem, including the deflationary trend, the rapid growth of staking and restaking mechanisms, and the upcoming London upgrade to improve network performance.
Table of Contents:
Deflationary Trend of Ethereum
Rapid Development of Restaking
London Upgrade
Probability of Ethereum Spot ETF Approval
Conclusion
Recently, Ethereum has experienced a strong upward trend. After surpassing $3,500 and reaching a new high since May 2022, it has now surpassed $4,000 in the past two days. With a 62% increase in the past 30 days, Ethereum has outperformed Bitcoin, which is beyond many people’s expectations.
However, when examining the development of the Ethereum ecosystem, including the increasing deflationary data, the upcoming successful launch of the London upgrade, the soaring amount of staked and restaked ETH, and the expected approval of the Ethereum spot ETF in May, it is evident that there are multiple positive factors contributing to the continuous rise of Ethereum’s price.
So, will these positive factors materialize? How is the development of the Ethereum ecosystem? Let’s look at the data.
Since January 16, 2023, Ethereum has officially entered a deflationary phase, where the daily newly generated ETH is less than the burned ETH. Specifically, the current annual deflation rate of ETH is 0.239%. In comparison, Bitcoin, as the industry leader, has an annual inflation rate of 1.716%, continuously producing new Bitcoins every day despite its limited supply. Therefore, the deflationary state of ETH highlights its value when we say “Bitcoin has a limited supply, so each Bitcoin is precious.”
With the thriving development of the Ethereum ecosystem, the total amount of burned Ethereum continues to increase, leading to a higher deflation rate and a decreasing circulating supply of Ethereum in the market.
It is not only the increasing deflation rate of Ethereum that results in a decreasing circulating supply; the rapid development of liquidity staking and restaking mechanisms in the Ethereum network has also locked a significant amount of Ethereum on-chain, further reducing the circulating Ethereum supply. According to OKLink’s Ethereum staking contract data, the total staked ETH has exceeded 40 million, accounting for over 34% of the circulating market value of Ethereum, with over 1.26 million validators. Although most validators are attracted by the appreciation and staking rewards of Ethereum, it is undoubtedly a significant boon for the overall security of the Ethereum network.
Moreover, according to Stakingrewards data, Ethereum, as the leading blockchain in terms of staked amount, has seen a continuous net inflow of staking in the past 7 days. This indicates its attractiveness to investors compared to other lower-ranked blockchains.
Of course, the recent surge in Ethereum staking is inseparable from the rapid development of the restaking mechanism. Restaking was initially proposed by the founder of Eigenlayer, aiming to allow re-staking ETH that has already been staked on the Ethereum mainnet to other protocols, enabling these protocols to benefit from the security of the Ethereum network and reduce their own security costs. Investors participating in restaking not only earn rewards from staking ETH but also enjoy additional restaking rewards.
Therefore, restaking creates a three-way win-win situation: for the protocols using restaking, it reduces their security costs while enjoying nearly the same level of security as Ethereum, attracting a large number of ETH holders to participate in the ecosystem and contribute to its development; for ETH stakers, they earn rewards from both Ethereum staking and restaking, along with the anticipation of airdrops; and for the Ethereum mainnet, the restaking mechanism provides more use cases for its assets and stimulates ETH holders to lock their assets, bringing greater potential for appreciation.
As a result, the restaking race led by Eigenlayer has experienced rapid development in recent months and has attracted more institutional capital. For example, Eigenlayer has completed four rounds of financing in less than two years since May 2022, with the latest round receiving a $100 million investment from a16z. The total cumulative financing has exceeded $160 million. As an emerging trend, restaking has indeed entered the spotlight.
Currently, Eigenlayer’s total TVL (Total Value Locked) has exceeded $11 billion, ranking third among all DeFi projects, following Lido and AAVE. The TVL of projects related to the liquidity restaking trend has shown significant growth, with an increase of over 10% in the past 7 days.
The rapid development of restaking protocols and the expectation of ecosystem airdrops have attracted more ETH holders to participate in ETH staking and restaking. This further reduces the circulating supply of ETH and provides new upward potential for its price.
Of course, the London upgrade is also a significant positive factor for Ethereum. The article has previously discussed the London upgrade in detail. For Ethereum’s mainnet, the London upgrade is an important hardware upgrade that primarily improves the scalability, security, and usability of the Ethereum mainnet.
From a user’s perspective, the most noticeable change after the London upgrade is the significant reduction in fees on Layer2, which could be reduced by more than 14 times compared to the current level, roughly equivalent to the gas fees of other public chains like Solana. It will also greatly increase the throughput of Layer2. This is mainly due to the EIP-4844 in the London upgrade, which significantly reduces the cost of data on the Ethereum mainnet for Layer2 protocols and promotes the Ethereum shard plan.
In addition, the London upgrade also includes an important improvement, EIP-4788, which optimizes the information exchange between the Ethereum consensus layer and execution layer. This improvement greatly benefits liquidity staking, restaking protocols, and cross-chain bridge projects, enhancing their security and operational efficiency.
Overall, the London upgrade not only significantly reduces the fees on Layer2 and improves throughput, benefiting the development of Layer2 on Ethereum and facilitating the influx of a large amount of new capital into Layer2 for ecosystem construction, but also provides a significant advantage for the liquidity staking and restaking trend. The successful implementation of the London upgrade will bring about another breakthrough in the Ethereum ecosystem.
The London upgrade has already been successfully deployed on all Ethereum testnets, including Georli, Sepolia, and Holesky. It is planned to go live on the mainnet on March 13th this year, and the launch date is approaching. The price of Ethereum and related projects in the ecosystem has to some extent reflected the expectations for the London upgrade.
Since the SEC approved 10 Bitcoin spot ETFs on January 10th this year, people have shifted their focus to Ethereum spot ETFs. After all, the approval of Bitcoin spot ETFs has been a significant positive factor for Bitcoin and the Bitcoin ecosystem, as evidenced by its recent price surge.
But will Ethereum ETFs be approved as scheduled?
Currently, seven institutions, including BlackRock, Hashdex, ARK 21Shares, and VanEck, have applied for Ethereum spot ETFs. After several delays by the SEC, the decision on whether to approve these applications is expected to be made in May this year (see the chart below).
The key to the approval of Ethereum spot ETFs lies in whether the SEC categorizes Ethereum as a commodity or a security. The current disagreement stems from the fact that Ethereum’s mechanism is significantly different from Bitcoin. Ethereum does not have a fixed total supply, and Ethereum holders can stake their ETH to earn rewards.
This has led some to believe that there is a risk of Ethereum being classified as a security.
However, in the SEC’s lawsuit against Ripple in June last year, the SEC listed 67 tokens that it deemed as securities, and ETH was not among them. Furthermore, the SEC has sued several centralized exchanges for listing tokens classified as securities by the SEC, but ETH was not included. In other words, the SEC has not publicly and explicitly stated that ETH is a security.
What’s more, the U.S. Securities and Exchange Commission approved Ethereum futures ETFs last year, implying that ETH is considered a commodity rather than a security. Therefore, the approval of Ethereum spot ETFs is likely to be a matter of time.
The future approval of Ethereum spot ETFs will undoubtedly bring a significant amount of funds and resources to Ethereum and its ecosystem, opening up the development landscape and potential for the entire ecosystem.
If last year was the year when the Bitcoin ecosystem dominated the crypto industry spotlight, will the spotlight now shift to Ethereum’s staking and restaking trend in 2024? We eagerly await to see.
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