Ethereum Monthly Outlook: Future is Promising

The approval of Bitcoin spot ETFs in the United States has strengthened BTC's position as a store of value. In contrast, Ethereum's positioning in the crypto space remains unclear. Competing public chains like Solana have impacted Ethereum's status as the preferred platform for DApps. The development of Ethereum Layer 2 and the decrease in ETH burn also seem to have affected its value accumulation.

However, we believe that the long-term outlook for Ethereum is optimistic, as it holds unique advantages among smart contract platforms, including a robust developer ecosystem with Solidity, widespread adoption of EVM, the importance of ETH as collateral in DeFi, and the decentralization and security of the mainnet. As the trend of tokenizing real-world assets accelerates, ETH may receive more positive momentum in the short term.

Historical data shows that ETH possesses both store of value and innovation characteristics. It is highly correlated with BTC but can perform independently during BTC's long-term upward trend, following technology-driven market rules. It is expected that ETH will continue to integrate these two characteristics and may achieve unexpected growth in the second half of 2024.

ETH plays multiple roles, being regarded as Ultrasound money, internet bonds, settlement layer assets, etc. However, these singular descriptions cannot fully reflect the vitality of ETH. The increasing uses of ETH make its value assessment more complex, and a single standard is difficult to define. The intertwining of multiple concepts can sometimes create confusion, obscuring the true drivers behind the rise in ETH's value.

Spot ETFs are extremely important for Bitcoin, clarifying the regulatory framework and attracting new funds. It disrupts the cycle of funds moving from BTC to Ether and then to high-risk assets. Once the Ethereum spot ETF is approved, it will be able to access capital currently only available to BTC. The logic for approving the BTC spot ETF also applies to the ETH spot ETF, as CME futures prices are closely tied to the spot.

Some high-performance public chains are eating into Ethereum's market share. They offer fast and low-cost transactions, causing activities to shift from the Ethereum mainnet. Compared to the previous bull market, these public chains are more distinct from Ethereum, no longer relying on EVM, with new DApp designs and adopting an overall strategy to enhance synergy.

However, it is premature to judge success solely based on activity driven by incentives. The trading volume of some Layer2 users has significantly decreased after the airdrop. In contrast, leading Ethereum Layer2 accounts for 17% of the total DEX trading volume, along with Ethereum itself at 33%. In terms of stablecoin supply, activity is still concentrated in the Ethereum ecosystem. Large capital holders tend to favor Ethereum, are insensitive to high transaction fees, and place more importance on risk reduction.

Layer 2 development has sparked discussions: it reduces the demand for Layer 1 block space and may support non-ETH gas fees. However, analysis shows that this does not negatively impact ETH. The growth of ETH staking far exceeds the issuance rate, making it a liquidity absorption point. Layer 2 further exacerbates ETH liquidity tightening, prompting users to reserve ETH. Core financial services still rely on Layer 1 to ensure the fundamental demand for ETH.

In summary, Layer 2 not only does not undermine ETH, but instead promotes its appreciation in a complex way. It both drives the demand for ETH and reinforces ETH's role as a Layer 1 fee and Layer 2 pricing unit.

Ethereum has some difficult-to-quantify but important advantages:

1. ETH is the core collateral asset and pricing benchmark of DeFi, widely used in L1 and L2.

2. Ethereum has achieved several significant upgrades in recent years while promoting decentralization and maintaining its innovative capabilities.

3. L2 innovations are rapidly advancing, providing diverse application scenarios for ETH.

4. EVM is widely spread to other blockchains, consolidating the position of the Ethereum ecosystem.

5. The trend of tokenization is beneficial for Ethereum, as its maturity and developer base have advantages.

6. The supply dynamics of ETH are unique, reducing selling pressure from staking.

ETH and BTC are closely related, but they may temporarily decouple during specific periods. In 2023, BTC price fluctuations became a leading indicator of changes in the ETH market correlation. However, after the approval of the BTC spot ETF, this pattern has changed. If an ETH spot ETF is launched in the future, its trading model may be adjusted again.

Overall, ETH still has upward potential in the coming months. Staking and L2 growth continue to absorb ETH liquidity. The widespread application of EVM and L2 innovations have solidified ETH's position in DeFi. The potential impact of the U.S. spot ETH ETF should not be underestimated. The structural demand and technological innovations of ETH will enable it to transcend multiple narratives and maintain its unique position.