Ethereum Monthly Outlook: Future Development and Potential

The approval of the Bitcoin spot ETF solidifies BTC's position as a store of value asset. In contrast, Ethereum's positioning in the crypto space remains unclear. Some competing public chains like Solana have impacted Ethereum's status as the preferred application platform. The growth of Ethereum's layer two networks and the decrease in the amount of ETH burned also seem to affect its value accumulation.

However, the long-term outlook for Ethereum remains optimistic. It has unique advantages in the smart contract platform, including a strong developer ecosystem, widespread application of the EVM, the importance of ETH in DeFi, and the decentralization and security of the mainnet. As the trend of tokenization accelerates, ETH may gain more positive momentum compared to other public chains.

Historical data shows that ETH embodies both value storage and innovation traits. It is highly correlated with BTC but can perform independently during BTC's upward trend. It is expected that ETH will continue to merge these two characteristics and may reverse its current performance in the second half of 2024, achieving unexpected growth.

The role of ETH is diverse; it is seen both as a super currency that controls supply through reduction and as an internet bond that provides non-inflationary staking yields. With the expansion of layer two networks and the rise of re-staking technology, new concepts such as "settlement layer assets" have also emerged. However, a single narrative can hardly comprehensively showcase the vitality of ETH, and the intertwining of multiple concepts can sometimes lead to confusion.

Spot ETFs are crucial for Bitcoin, as they not only clarify the regulatory framework but also attract new capital. They disrupt the cyclical pattern of funds shifting from Bitcoin to Ether and then to high-risk assets. Once the Ether spot ETF is approved, it will gain access to capital currently only available to Bitcoin. The logic for approving the Bitcoin ETF equally applies to the Ethereum ETF, as futures prices are closely linked to spot prices.

Some high-performance public chains are gradually seizing market share from Ethereum. They offer high-speed, low-cost transactions, causing activity to shift from the Ethereum mainnet. These chains adopt a holistic strategy to enhance inter-application synergy and resolve issues in bridging. However, it is still too early to judge success based solely on activity metrics driven by incentives.

From the perspective of stablecoin supply, activities are still concentrated on Ethereum. Large capital holders are less sensitive to the higher transaction fees on Ethereum and prefer to reduce risks by minimizing interruptions and bridging trust. The growth rate of stablecoins on Ethereum's layer two network exceeds that of other public chains.

The development of layer 2 networks may actually benefit the Ethereum ecosystem. Although it reduces the demand for mainnet block space, a deeper analysis shows that this is not negative for ETH. Since Ethereum transitioned to PoS, newly issued ETH is directly distributed to stakers, and the growth rate of stakers' ETH holdings far exceeds the issuance rate. Staking has become a magnet for ETH liquidity, with the growth rate of staked ETH being more than 20 times the issuance rate.

The layer two network has further exacerbated the liquidity contraction of Ether, with over 3.5 million Ether migrating to the layer two network. Core financial services and governance activities still rely on the mainnet, ensuring the fundamental demand for Ether. Overall, the development of the layer two network has not weakened Ether; rather, it has promoted the appreciation of Ether in a complex manner.

In addition to the common data-driven narratives, Ethereum has some difficult-to-quantify but important advantages:

1. ETH plays a core role in the DeFi space and is widely used for lending and trading.
2. The Ethereum community has maintained strong innovative capabilities while promoting decentralization.
3. Layer 2 network innovations are rapidly advancing, enhancing the diversity of the Ethereum ecosystem.
4. The EVM is widely adopted, solidifying Ethereum's position among developers.
5. The trend of tokenization may first benefit Ethereum.
6. The supply dynamics of Ether are different from Bitcoin, as staking reduces selling pressure.

Historically, ETH and BTC have had a close relationship, but there are periods where they briefly decouple. In 2023, when the price of BTC rose, the correlation between ETH and BTC actually weakened. This pattern changed after the U.S. approved Bitcoin spot ETFs. If Ethereum spot ETFs are approved in the future, the trading patterns of ETH may adjust again.

Overall, ETH still has upward potential in the coming months. Staking and the growth of layer two networks have become important absorption points for ETH liquidity. The widespread application of EVM and its layer two innovations make ETH's position as the center of DeFi difficult to replace. The potential impact of the US spot ETH ETF should not be underestimated. The structural demand for ETH and the technological innovations within the ecosystem will enable ETH to transcend multiple narratives and continue to maintain its unique position.