Ethereum futures ETF falls short of expectations, ETH on-chain data remains low

Institutional interest in Ethereum is limited amid bear market

In the context of the crypto bear market, six different Ethereum futures financial instruments officially began trading on October 2, but they have not yet rekindled institutional investors' enthusiasm for ETH. The total trading volume of the ETH futures ETF on the first day was less than $1.5 million. In contrast, according to Bloomberg data, the first-day trading volume of the first BTC futures ETF (BITO) in 2021 exceeded $1 billion. In other words, the net inflow of funds on the first day of the ETH futures ETF was less than 2% of BITO.

Duong, head of Coinbase Research, believes that there are several main reasons for the above differences:

First, the market timing of the ETF launch is different. Proshares' BTC futures ETF was launched during the 2021 crypto bull market cycle, when market liquidity was abundant, while the ETH futures ETF was launched during the current bear market cycle, when funds were severely scarce.

Secondly, investment advisors have different levels of familiarity. Investment advisors are generally more familiar with BTC, and BTC is easier to integrate into their clients' portfolios. ETH is generally considered a more complex investment and has not been well understood and accepted in the traditional investment community.

Third, expectations change at the legal level. Judge Katherine Polk Failla marked ETH as a crypto commodity in the recent court ruling of Risely vs Uniswap. This may have raised market expectations for ETH spot ETFs, while ETH futures ETFs have lost their enthusiastic market response.

Judging from the flow of funds, the crypto bear market is still having a huge impact on institutional capital. According to Coinshares, there have been net outflows of funds in 24 of the 39 weeks since 2022, accounting for 61.5% of the entire period. The change in institutional interest in crypto assets can also be seen from the fund flow data: as of October 4, ETH has had an outflow of $101 million this year, while BTC has had an inflow of $219 million in the same time frame. However, the recent weekly net inflows of BTC and ETH are similar, at $16.4 million and $12.9 million, respectively.

Overall, although the ETH futures ETF has been cold, its trading volume is still at a normal level for a new ETF, and it has also played a positive role in institutional investment interest. However, due to the bear market background and other reasons, it will take the overall crypto market to warm up before it can attract more institutional funds.

Potential risks of Ethereum staking

On October 5, JP Morgan released a research report pointing out the centralization problem of Ethereum's network and pointed out that the ETH staking yield has dropped from 7.3% before the Shanghai upgrade to 5.5%. Compared with the still rising yields in traditional financial markets, ETH's attractiveness as an investment target has declined.

The report states that the top five liquidity staking providers, Lido, Lido, Coinbase, Figment, Binance, and Kraken, control 50% of ETH staking, with Lido accounting for almost a third of the total ETH staking.

Liquidity staking platform Lido is seen by the cryptocurrency community as a better alternative to centralized exchange staking platforms. Currently, in order to mitigate centralization risks, Lido has been expanding its list of node operators, aiming to prevent any single entity from controlling most of the staked ETH.

In addition, in order to combat the centralization risk of the Ethereum blockchain, the Ethereum community has begun to promote distributed validator technology (DVT), such as SSV, Obol, etc. DVT allows multiple node operators to run a validator. This is done to reduce the risks associated with validators without affecting the blockchain.

Another concern raised by JP Morgan is the practice of re-hypothecation of liquidity pledged assets. This involves the problem of reusing liquidity tokens as collateral in various DeFi protocols. If the value of the pledged assets suddenly plummets or is compromised due to malicious attacks or protocol vulnerabilities, this practice may trigger a chain reaction of liquidations.

Ethereum gas fees hit bottom

According to statistics from the on-chain analysis platform Santiment, Ethereum gas fees have fallen to their lowest level in nearly a year. The average cost of Ethereum on-chain transactions in the past week was only $1.13, which is significantly lower than in early May. It is worth noting that the last time the gas fee was below $1.15, the ETH price was at the bottom.

L2 is paving the way for scaling Ethereum

The significant drop in Ethereum gas fees is related to the adoption of L2 expansion solutions. Due to its advantages in cost and efficiency, a large number of users have flocked to L2, causing a significant increase in the demand for L2 block space.

According to L2Beat, transaction activity for L2 scaling solutions has seen a significant uptick in 2023. Based on data from the most recent week, L2’s TPS has reached 5.78 times that of the Ethereum blockchain.

Essentially, L2 is fulfilling its original purpose, easing the transaction burden on the Ethereum main chain and assisting its expansion. Santiment believes that lower gas fees can promote the use of the Ethereum network and attract more decentralized applications and smart contracts. In the long run, when the Ethereum network is more adopted, the price of ETH will also be boosted.

Recently, Grayscale Research also pointed out that L2 is paving the way for the expansion of Ethereum. From a functional point of view, L2 can enhance the scalability of Ethereum and reduce the network cost of users by 100 times. In August this year, Coinbase launched BASE (Ethereum's L2 blockchain), which also marked a strong recognition of the Ethereum ecosystem and opened its decentralized applications to 100 million Coinbase users.

Coinbase is trying to pave the way for mass adoption of DAPPs based on its own Ethereum L2 BASE. If some alternative L1s fail to gain traction due to small security budgets and lack of liquidity, integrating into Ethereum L2 may become a more attractive option.

Usage of Ethereum’s L2 scaling solution has been growing over the past year, with total daily active addresses for L2 surpassing the leading L1.

In addition to active addresses, the total value locked (TVL) is equally important, reflecting the degree to which users trust their funds in a particular blockchain. The TVL of the best performing L2 (including Arbitrum and Optimism) exceeds that of Ethereum's L1 competitors (Solana and Avalanche), which shows the market's general trust in the Ethereum ecosystem as a whole and the attractiveness of scaling solutions.

As the network scales, more activity will move to the cheaper L2. In return, L2 accumulates value directly back to Ethereum. Specifically, for every transaction on L2, users pay a transaction fee. L2 keeps a portion of the fee (currently the average profit margin is about 1/4), while the Ethereum network validators capture the remaining approximately 3/4.

For every transaction sent by L2, the Ethereum network also burns a small portion of the total ETH supply. Therefore, the incremental activity of Ethereum L2 directly accumulates value for ETH. If Ethereum's L2 continues to maintain a positive development trajectory, they will consolidate Ethereum's position as the leading L1 blockchain.

The ETH balance on centralized platforms hit a 5-year low

According to Santiment data on October 5, the number of ETH in cryptocurrency trading platforms has dropped to 10.66 million, the lowest since May 2018. In contrast, 115.88 million ETH are stored outside centralized trading platforms, which is also the highest value in history.

On October 4, approximately 110,000 ETH (worth more than $180 million) were withdrawn from centralized trading platforms, which was the largest single-day ETH outflow from centralized trading platforms since August 21. The above phenomena are generally regarded as the market's long-term optimism about the valuation of ETH assets, demonstrating investors' long-term confidence.