Ethereum ETFs have started to be traded in major US exchanges. By providing a regulated and secure way to invest in Ethereum, these ETFs have the potential to attract substantial capital and further increase interest in blockchain-native applications.
Since Ethereum's value position differs from Bitcoin's, more investors will be willing to get exposure. Bitcoin's narrative was that it is “Digital Gold,” while Ethereum is more seen as an “Appstore of Blockchain” or “Cash flow driven tech platform,” which could further increase the attention to its diverse use cases.
Then what would be the implications for the Ethereum ecosystem? The inflow of capital and increased trading activities can further impact protocols like Ethena since its yield for its synthetic dollar is generated from basis trading (Check out an article by Four Pillars for deeper analysis). However, the actual effect of Ethereum ETF won’t be directly substantial for onchain protocols. As the trading activities will happen in the exchanges, and as assets will be held as an unstaked assets, there won't be much utilization of these ETH.
However, on-chain protocols should grab the attention of Ethereum and try to bring assets on-chain.
According to the estimates from the investment firms, Ethereum's unique value proposition as a technological platform could drive inflow over time. The increased institutional investment, enhanced market liquidity, and curiosity in Ethereum's technology are likely to contribute to the growing interest. Current estimates on inflow ranges from 15% to 50% of Bitcoin ETF inflow. The chart below outlines projected inflow estimations from various financial sources following regulatory approval of Ethereum ETF.
The launch of the first-ever spot Ethereum ETFs in U.S. on July 23, 2024, had daily inflow of $106.8 million. It also had reached $120 million trading volumes within the first 15 minutes, and by the end of the day, volumes had surpassed $1 billion. Despite this, Ethereum's price experienced a slight decline of about 1% on the launch day, suggesting a cautious approach from market participants. Also, analysts drew comparisons between the Ethereum ETF launch and the earlier Bitcoin ETF launch, noting that the Ethereum ETF's initial trading volume was 50% of Bitcoin's first-day volume.
One thing to note, ETHE, Grayscale's Ethereum Trust saw decline since is not an ETF, instead, it is a grantor trust so it was converted into an ETF, allowing investors to redeem their shares for the first time. This conversion provided an opportunity for long-time holders to exit their positions, especially given the availability of new, lower-cost options as ETHE had 2.5% fee, where others have around 0.25% fee.
The impact of Ethereum ETFs will be significant in bringing attention to onchain activities but will primarily benefit custodians and issuers for now. Issuers will have more fee revenus if there are continuous inflow to the ETF. Custodians, particularly Coinbase Custody (chosen by 6 out of 8 issuers), will hold more Ethereum and be able to charge an annual custody fee ranging from 0.1% to 0.2% of assets under custody.
However, as ETF holders become more aware of the opportunity costs associated with holding unstaked ETH, there may be a growing interest to move assets on-chain. Unlike Bitcoin, Ethereum offers various yield opportunities through staking and DeFi participation. This fact could stimulate exploration of various on-chain opportunities, including liquid staking, restaking, and providing liquidity to DEXs and money markets. Below is a comparison table by galaxy research on the return between staked and unstaked ETH.
To drive more assets on-chain, protocols may focus on two key areas:
Developing more institution-level content: DeFi teams should create more content focused on institutional audience. Although relevant information is abundant on the internet, it is difficult for newcomers to grasp the landscape, understand what the protocols offer, and recognize potential risks.
Creating institution-focused DeFi platforms: Projects like Definitive, Kinto, and Concrete Protocol could drive adoption by offering better interfaces and support for institutional investors. This presents an opportunity for DeFi projects to showcase the potential of "money legos" in building new financial infrastructure.
The introduction of Ethereum ETFs could serve as a catalyst for bringing more attention and assets on-chain. This shift presents opportunities for institutional investors to explore on-chain dapps and for DeFi protocols to serve a new segment of on-chain users.
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