The Old Dream and New Reality of Ethereum: Buyers Becoming Increasingly Institutionalized, Reducing Expectations for Price Volatility

Authors: @c0xswain, @0xkinnif, 0xlaiyuen & @0xZhouYeMen

Compiled by: Shenchao TechFlow

The continuous development of Ethereum over the past decade has spawned various use cases for ETH and differing views on its value. Crypto investors who have experienced the rise in ETH prices may see it as "ultrasound money." Technological purists may view it as a trustworthy, neutral global computer. New participants may see it as "digital oil" that powers decentralized, open-source app stores.

Investment Case for Ethereum: What is the Investment Value of Ethereum?

The value of Ethereum lies in its flexibility and its ability to support more complex applications beyond simple value transfer. Ethereum has the largest and most active community of software contributors who implement upgrades to enhance the platform's capabilities. These developers are not only focused on the platform's continued relevance but are also committed to contributing to a platform that can adapt and scale, laying a solid foundation for current and future assets and activities. Currently, the most notable applications on Ethereum include stablecoins (payment tokens pegged to the US dollar), decentralized finance (rebuilding traditional financial services like lending on the blockchain), and tokenization (issuing financial assets on the blockchain).

When applications run on Ethereum, the ether token serves as the currency required for transactions within the Ethereum ecosystem. These ethers are consumed when paying transaction fees and removed from circulation, potentially reducing the supply of ether as platform usage increases. Therefore, investing in ether expresses a viewpoint that more applications will be built on Ethereum's open and permissionless programming infrastructure, aiming to attract more users and revenue, and expand the use of ether as a currency.

We believe that for Ethereum's adoption to continue increasing, there needs to be ongoing recognition from new market participants who have unique views on the value of ETH. The marginal buyers of ETH may not share the same ideological leanings as crypto natives, and we should accept this. As we enter the post-ETF timeline with increased institutional adoption, we expect applications built on Ethereum that are attractive to institutions to benefit the most from traffic, fees, and ultimately price.

The approval of the ETH ETF will have a long-term impact on investors' perceptions of the legitimacy of the Ethereum ecosystem and the applications built on it. The most obvious beneficiaries will be Real World Assets (RWA) and decentralized finance (DeFi) protocols.

RWA

The RWA space is very broad, covering asset classes such as real estate, bonds, stocks, and even luxury goods. Many protocols are currently involved in the tokenization of government bond yields and private credit. There are many other tokenization cases, but the long-term viability of some of these protocols is questionable due to various factors, including:

• Regulatory hurdles;
• Questions about KYC controls;
• Self-branded products launched by large banks may be more trustworthy;
• Lack of integration with existing traditional financial infrastructure.

There seems to be a divergence on how institutions will execute their RWA strategies. On one hand, institutions are pursuing private blockchain approaches, while on the other hand, they wish to integrate existing solutions. J.P. Morgan's Onyx is a private blockchain based on the Avalanche Evergreen subnet, while BlackRock's BUIDL fund is a tokenized dollar yield fund issued on Ethereum. Although many crypto natives believe that the debate over private versus open blockchains was settled during the 2018 cycle, true institutional adoption today may revive this debate.

Cobie on Institutional Adoption, Source: Cobie

In the realm of private/consortium blockchains, interoperability may be key to facilitating the flow of assets across platforms, similar to interbank transfers. Infrastructure that connects various blockchain assets, such as trustless oracles and bridges (LINK, ZRO, AXL), may see some value accumulation. On the other hand, institutions leveraging existing infrastructure may tokenize their high-value assets on Ethereum due to security budgets and trusted neutrality.

DeFi: Financialization of Everything

DeFi ignited a bull market in 2020 as many envisioned a thriving future for finance. Its permissionless and decentralized nature allows anyone to interact with protocols, lend in money markets, swap assets on decentralized exchanges (DEX), and form decentralized autonomous organizations (DAOs) to vote on proposals and conduct transactions.

This emerging industry has opened up many opportunities beyond what traditional markets offer. In addition to DAOs and DEXs, there are interesting game theory experiments, such as Curve Wars and Olympus DAO (3,3), attracting many participants dreaming of the opportunities that new decentralized frontiers may bring.

Top 20 Crypto Projects Ranked by Revenue in the Past 90 Days, Source: DeFi Projects Tagged on Token Terminal

DeFi as a sector has also attracted fundamental-driven investors looking for revenue. Among the top 20 crypto projects ranked by revenue, DeFi occupies 13 spots, second only to L1 and L2.

P/F Ratios of Selected DeFi Protocols, Source: Token Terminal

Funds looking to deploy capital into crypto assets beyond ETH may purchase those time-tested products and relatively higher-valued mature DeFi applications, rather than new protocols with lower liquidity and fully diluted valuations (FDV). In terms of price/fee ratios (the multiple the market is willing to pay for each $1 of fees), many DeFi protocols are significantly discounted compared to when ETH traded around $1,850 a year ago. While fees may be influenced by asset prices, the broader takeaway is that these protocols with proven product-market fit are trading at significant discounts in today's more favorable environment. Given the broader context of increasing institutional investor share, this seems to be an attractive investment opportunity.

Moreover, over time, the ample supply distribution among market participants reduces the risk of large structural sellers. Established DeFi protocols like MKR, LDO, and AAVE may be favored among fundamental-driven capital deployers, while perpetual decentralized exchanges (perp DEXs) like DYDX and GMX may see potential growth if on-chain trading volume rebounds.

A New Reality

The influx of institutional capital through the ETH ETF may lead to a revival of blockchain activity, thanks to the economic effects of Ethereum and the inherent leverage within its ecosystem. However, it is worth noting that passive buyers of the ETH ETF will not convert ETH into altcoins like BTC ETF buyers do. While this may dampen investor expectations, we believe that the reflexive characteristics of ETH will allow it to gain greater upside potential per dollar invested in the ETF compared to BTC.

Ethereum's Trickle Down Economy

Whether the inflow from the ETH ETF will bring unexpected upside, cryptocurrency investors should be aware that as the buyer base becomes increasingly institutionalized, market dynamics are also changing. In the post-ETF era, we should expect ETH to reduce volatility as assets mature, but while embracing the new reality, we should not forget to revisit old dreams.