This article provides an in-depth analysis of the recent price surge of Ethereum and the reasons behind it. The focus is on the development of the Ethereum ecosystem, including the deflationary phenomenon, the rapid growth of staking and restaking mechanisms, and the upcoming London upgrade for network performance improvement.
Table of Contents:
Deflationary Situation of Ethereum
Rapid Development of Restaking Track
London Upgrade
Probability of Ethereum Spot ETF Approval
Conclusion
Recently, Ethereum has been experiencing a strong upward trend. After breaking through 3,500U and reaching a new high since May 2022, it has surpassed 4,000U in the past few 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 growing deflationary data, the upcoming successful deployment of the London upgrade, the surge in staked and restaked ETH, and the expected approval of the Ethereum spot ETF in May, it is evident that multiple positive factors are contributing to the continuous rise in the price of ETH.
So, will these positive factors really materialize one by one? What is the current situation of the development of the Ethereum ecosystem? Let’s look at the data.
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Since January 16, 2023, Ethereum has officially entered the deflationary phase, where the daily newly generated ETH is less than the ETH being burned. 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%, although its total supply is limited, new Bitcoins are continuously generated every day. Therefore, when we say “Bitcoin has a limited supply, so each Bitcoin is very valuable,” it highlights the value of ETH under the current deflationary state.
With the flourishing development of the Ethereum ecosystem, the total amount of burned Ethereum continues to increase, resulting in a higher deflation rate, which leads to a decreasing supply of Ethereum in the market.
Not only does the increasing deflation rate of Ethereum contribute to the decreasing supply, but also the rapid development of liquidity staking and restaking tracks, which has locked a significant amount of Ethereum on the chain and further reduced the circulating supply of Ethereum.
According to OKLink’s Ethereum staking contract data, the total staked amount of Ethereum has exceeded 40 million ETH, accounting for more than 34% of the circulating market value of Ethereum, with over 1.26 million validators. Although most validators are attracted by the potential appreciation and staking rewards of Ethereum, it is undoubtedly a significant advantage for the overall network security of Ethereum.
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Moreover, according to data from Stakingrewards, as a leading public chain in terms of staked amount, Ethereum has been experiencing net inflows in staking volume in the past 7 days, which is significantly different from the lower-ranked public chains. This demonstrates the attractiveness of Ethereum staking to investors.
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Of course, the recent surge in Ethereum staking volume cannot be separated from the rapid development of the restaking track. Restaking was first proposed by the founder of Eigenlayer, and its core allows ETH already staked on the Ethereum mainnet to be restaked on other protocols, enabling these protocols to share the security of Ethereum and reduce their own security costs. Investors participating in restaking can not only receive rewards from staking Ethereum but also earn restaking rewards.
Therefore, restaking creates a triple win situation: for protocols using restaking, it reduces their security costs while enjoying almost the same level of security as Ethereum, and attracts a large number of ETH holders to participate in their ecosystem development; for ETH stakers, they can enjoy both staking and restaking rewards, as well as expect airdrops; for the Ethereum mainnet, the restaking mechanism empowers its assets with more use cases and stimulates holders to lock ETH, bringing greater potential for appreciation.
Thus, the restaking track led by Eigenlayer has experienced rapid development in the past few months and has attracted more institutional capital. Taking Eigenlayer as an example, in less than two years from May 2022, it has completed four rounds of financing, with the latest round led by a16z injecting $100 million, bringing the total financing to over $160 million. As an emerging track, restaking has indeed entered a period of rapid growth.
Currently, Eigenlayer’s total TVL has exceeded $11 billion, ranking third among all DeFi projects, only behind Lido and AAVE. The TVL of related projects in the liquidity restaking track has also grown significantly, with a 7-day increase of over 10%.
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The rapid development of restaking protocols and the expectation of ecosystem airdrops have attracted more ETH holders to participate in staking and restaking, as evidenced by the increasing staking ratio of ETH and the rapidly growing TVL of restaking protocols. These factors further reduce the circulating supply of ETH and create new upward potential for its price.
Of course, the London upgrade is also a significant positive factor for Ethereum. The article has already covered many aspects of the London upgrade in previous articles. Interested readers can refer to our previous article “What Substantial Benefits Will Ethereum’s Legendary London Upgrade Bring?” In terms of the Ethereum mainnet, the London upgrade is an important hardware upgrade that primarily improves its scalability, security, and usability.
Of course, the most noticeable change for users after the London upgrade is that the fees on Ethereum’s Layer2 will be significantly reduced. With the current baseline, the reduction could be more than 14 times, roughly equivalent to the gas fees level of public chains like Solana, and it will also greatly increase the throughput of Layer2. This is mainly due to EIP-4844 in the London upgrade, which significantly reduces the cost of data on the Ethereum mainnet for Layer2 protocols and promotes the implementation of Ethereum’s sharding plan.
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In addition, another important upgrade in the London upgrade is EIP-4788, which optimizes the information exchange between the consensus layer and the execution layer of Ethereum. This improvement greatly benefits liquidity staking, restaking protocols, and cross-chain bridge projects, enhancing their security and operational efficiency.
In summary, the London upgrade not only significantly reduces the fees of Layer2 and improves throughput, which benefits the development of Layer2 on Ethereum, but also provides a major boost to the liquidity staking and restaking tracks. The successful implementation of the London upgrade will bring about a breakthrough in the Ethereum ecosystem.
Currently, the London upgrade has been successfully deployed on all Ethereum testnets, including Georli, Sepolia, and Holesky, and is planned to go live on the mainnet on March 13th this year. The launch date is approaching, and the price of Ethereum and related projects in the ecosystem has already partially 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 boost for Bitcoin and its ecosystem, as evidenced by the 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 the Ethereum spot ETF applications from these institutions will be made no later than May this year, as shown in the chart below.
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Of course, the key to the approval of Ethereum spot ETFs lies in whether the SEC considers Ethereum as a commodity or a security. The current disagreement stems from the significant differences between the mechanism of Ethereum and Bitcoin. Ethereum has no fixed total supply, and Ethereum holders can stake their ETH to earn rewards.
This has led many to believe that there is a risk of Ethereum being classified as a security.
However, in the SEC’s lawsuit against Ripple last June, the SEC listed 67 tokens 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, last year, the U.S. Securities and Exchange Commission approved Ethereum futures ETFs, which implies 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 capital and resources to Ethereum and its ecosystem, opening up the development pattern and potential of the entire ecosystem.
If last year was dominated by Bitcoin and its ecosystem on the crypto stage, will the spotlight shift to Ethereum’s staking and restaking track in 2024? We will wait and see.
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