ETH’s Price Surge Fails to Boost Spot Ethereum ETF Demand

Ethereum, the second-largest cryptocurrency by market capitalization, continues to evolve with significant upgrades aimed at improving its network’s efficiency and accessibility. Recently, ETH saw a price surge of 9.4% between Oct. 10 and Oct. 15, although its broader performance over the past three months remains down by 25%, reflecting concerns about onchain activity and lackluster demand for its newly launched spot ETFs. Meanwhile, Ethereum co-founder Vitalik Buterin has outlined key goals for the network’s transition to proof of stake, known as The Merge, with a focus on enhancing transaction finality and democratizing staking. 

ETH’s Surge Offers Hope, but Investor Sentiment Remains Weak Amid DApp Decline and ETF Disappointment

ETH witnessed a notable surge of 9.4% between Oct. 10 and Oct. 15, briefly reaching $2,687—its highest price in two weeks. However, despite this upward momentum, Ethereum remains down by 25% over the past three months, highlighting investor disappointment with Ethereum’s performance, particularly in light of the lackluster demand for the newly launched Ethereum spot exchange-traded funds (ETFs) and concerns about Ethereum’s on-chain activity.

While ETH’s recent price rally is encouraging, the Ethereum network has been grappling with a significant decline in decentralized application (DApp) volumes. In the past seven days alone, Ethereum’s onchain DApp activity has dropped by 23%, sparking speculation that ETH’s price may face further downward pressure if this trend continues.

It is important to note that ETH’s price has been impacted by various factors since mid-July, even as the broader cryptocurrency market capitalization has remained relatively stable. In fact, over the past three months, excluding stablecoins, the total cryptocurrency market cap has declined by only 2%, from $2.14 trillion to $2.09 trillion. By contrast, ETH has seen a more pronounced drop, plummeting from $3,450 to $2,590 during the same period.

This discrepancy between ETH’s price and the broader market suggests that investor sentiment towards Ethereum may be faltering. A key contributing factor to this underperformance is the stagnation of Ethereum’s total value locked (TVL).

Data from DefiLlama reveals that Ethereum’s TVL has remained relatively flat over the past two months, hovering around 19 million ETH. Although Ethereum continues to dominate the decentralized finance (DeFi) space, with a TVL of $48 billion and a 55% market share, the lack of growth in TVL is seen by some investors as a sign that Ethereum’s potential may be waning.

For comparison, the BNB Chain, Ethereum’s closest competitor, has also experienced stability in its TVL, which remains at around 8.1 million BNB. Despite this, Ethereum’s stagnating TVL has done little to boost investor confidence in the network’s near-term growth potential.

Ethereum’s recent decline in DApp volumes, which fell to $21.5 billion over the past seven days, is concerning but not unique to the network. Other blockchain ecosystems have faced similar downturns, including BNB Chain, which saw a 33% drop in DApp volumes, and Solana, which experienced a 26% decline.

Notably, key decentralized applications within the Ethereum ecosystem, such as Uniswap and Balancer, also posted weaker performances during the week ending on Oct. 14. Uniswap, one of Ethereum’s flagship DApps, saw a 16% decline in activity, while Balancer experienced a dramatic 54% drop. Other prominent players, including CoW Swap and 1inch Network, recorded onchain volume decreases of 18% and 23%, respectively.

While these declines reflect broader market trends, they have added to the concerns of Ether investors who fear that the cryptocurrency’s recent gains may not be sustainable without a significant rebound in onchain activity.

Disappointing Demand for Ether ETFs Compounds Investor Worries

Further dampening investor sentiment is the underwhelming performance of Ethereum spot ETFs, which have failed to attract significant capital inflows since their launch. Data from Farside Investors shows that US-based ETH ETFs saw net outflows of $6 million in October. By contrast, Bitcoin spot ETFs experienced net inflows of $810 million between Oct. 11 and Oct. 14.

This lack of demand for Ethereum ETFs has left many investors questioning the long-term investment thesis for ETH, especially as Ethereum’s supply continues to increase despite strong network usage. In an Oct. 14 blog post, Ethereum co-founder Vitalik Buterin acknowledged this issue, proposing potential solutions to enhance transaction times and reduce network congestion. Currently, Ethereum transactions can take up to 15 minutes to settle, which limits the network’s efficiency and has contributed to user frustration.

One of the contributing factors to Ethereum’s recent struggles is the growing adoption of lower-fee layer-2 solutions, which has, in turn, reduced Ethereum’s supply burn rate. Layer-2 solutions like Arbitrum and Optimism have become increasingly popular as users seek to avoid Ethereum’s high transaction fees, leading to fewer transactions being processed directly on the Ethereum mainnet.

A Binance spokesperson explained that the Ethereum network upgrades, particularly the activation of EIP-4844 in April 2023, have facilitated this transition to layer-2 rollups. EIP-4844 was specifically designed to improve the efficiency of layer-2 rollups by bundling and processing transactions more effectively. However, while this has improved scalability, it has also reduced the amount of ETH burned through transaction fees, which many investors view as a critical component of Ethereum’s deflationary potential.

Vitalik Buterin’s Vision for Ethereum’s Future: The Merge and Beyond

Ethereum’s transition from proof of work (PoW) to proof of stake (PoS) marks a significant milestone in its evolution as a leading blockchain network. Yet, according to Ethereum co-founder Vitalik Buterin, the journey is far from over. In a recent post, Buterin laid out his vision for the next major phase of this transition, known as The Merge, which promises to be a game-changer for Ethereum’s staking mechanism and the network’s overall efficiency.

Buterin describes The Merge as the “most important” aspect of Ethereum’s transition to PoS, with two key goals: achieving single-slot finality and democratizing staking. These advancements are seen as critical steps toward improving the efficiency, security, and inclusivity of the Ethereum network.

The current Ethereum PoS system, which was activated through the Beacon Chain in December 2020, requires 32 ETH (about $84,000 at current prices) to participate in staking. While this has worked to some extent, it has created a barrier to entry for smaller investors who may not have the capital to participate directly. Buterin envisions a future where this deposit requirement could be reduced to just 1 ETH, dramatically lowering the entry threshold and allowing more participants to contribute to Ethereum’s security. This move is aimed at enhancing Ethereum’s decentralization and broadening the staking pool, ensuring that the network remains secure by involving a more diverse range of participants.

One of the most ambitious goals in The Merge is achieving single-slot finality, which represents a significant deviation from Ethereum’s current system. Currently, it takes about 15 minutes (two to three epochs) for Ethereum to finalize a block, during which validators must confirm that transactions are legitimate and cannot be reversed. This extended time frame limits Ethereum’s ability to compete with other blockchain networks that offer faster transaction speeds.

Buterin proposes a radical improvement—reducing the time it takes to finalize a block to just a few seconds or, at most, a couple of minutes. This shift would be a major leap forward in terms of speed and efficiency, enabling Ethereum to process transactions faster and at lower costs, thereby enhancing its competitiveness in the broader cryptocurrency space.

Single-slot finality would also improve the user experience for decentralized applications (DApps) running on Ethereum, as faster transaction confirmations would reduce delays and network congestion. This advancement could have far-reaching implications for sectors like decentralized finance (DeFi), where time-sensitive transactions are critical.

Buterin outlines three distinct solutions to achieve the goals of The Merge:

1. Improving the Signature Aggregation Protocol: Ethereum currently relies on a system of validators who sign blocks to confirm their legitimacy. Buterin proposes an improvement to the signature aggregation protocol to enhance efficiency and reduce the computational burden on validators. This would allow the network to process more transactions in a shorter time frame while maintaining security and decentralization.
2. Introducing the Orbit Committee Mechanism: This mechanism would further decentralize the validation process by allowing smaller, randomized committees of validators to participate in block confirmations. This system would not only make staking more accessible but also reduce the likelihood of any single entity gaining too much control over the network.
3. Implementing a Two-Tier Staking System: Buterin’s proposed two-tier staking system would separate larger validators from smaller participants, ensuring that both have a role in securing the network. Larger validators would continue to play a central role in block confirmations, while smaller stakers would participate in secondary validation tasks. This approach would democratize staking without compromising Ethereum’s security.

Ethereum’s Evolving Ecosystem: Layer-2 Solutions and New Chains

Beyond The Merge, Buterin has been vocal about Ethereum’s ongoing improvements and future plans. One of his recent points of focus is the relationship between Ethereum’s main chain and layer-2 (L2) scaling solutions. L2 solutions, such as Optimism and Arbitrum, have been instrumental in reducing Ethereum’s transaction fees and enhancing scalability by processing transactions off-chain while using Ethereum for security.

However, Buterin recently hinted that Ethereum may withdraw support from layer-2 solutions that have not yet achieved sufficient decentralization—a key requirement for the long-term security of the network. Decentralization is a crucial feature of any blockchain, ensuring that no single entity can control the network or influence its operations. In this regard, Buterin’s comments suggest that Ethereum’s support for L2 projects will be contingent on their ability to operate in a decentralized manner.

Ethereum’s commitment to improving its ecosystem was underscored by the recent Dencun Upgrade, which empowered L2 protocols with very low-fee updates, further enhancing their efficiency. These upgrades have helped Ethereum maintain its position as the dominant Layer-1 (L1) blockchain, even as new players emerge.

For instance, Uniswap, one of Ethereum’s most successful decentralized exchanges, recently launched its own blockchain, known as Unichain. This move illustrates how Ethereum’s ecosystem is evolving, with projects branching out to create their own chains while still being connected to the Ethereum mainnet.