Commentary

Ether ETFs Green-Lit, Uniswap's Treasure, The ETH Triumvirate

Week in Review

Commentary

Ether ETFs Green-Lit, Uniswap's Treasure, The ETH Triumvirate

Introduction

Week in Review

  • Spot ether ETFs receive official approval from the SEC
  • Uniswap Foundation shares balance sheet as fee vote nears
  • Ethereum supply to shrink after 'Merge' upgrade, says Vitalik

Ether ETFs given the green light, Uniswap's treasure trove

The crypto markets experienced a modest weekly decline of 1.6% in total market capitalization, while bitcoin dominance remained mostly unchanged above 52%. Among the blue-chip names, bitcoin fell by 2.2% compared to the previous week, whereas ether outperformed with a weekly increase of 0.7%. US-listed spot bitcoin ETFs saw healthy inflows over the past ten trading days, though net inflows have diminished a bit in the past few days. Conversely, HK-listed spot bitcoin and ether ETFs continue to struggle to attract net inflows.

Among the decentralized exchanges, Uniswap demonstrated an impressive 12.1% uptick this week. The Uniswap Foundation, the nonprofit entity behind Uniswap, recently disclosed its financial status ahead of the community's vote to autonomously enable and distribute fees. According to the Foundation's balance sheet shared with the public, it held $41.41 million in fiat and stablecoins at the end of the first quarter, along with 730,000 UNI tokens. The fiat and stablecoin reserves are earmarked for grant commitments and operational activities, while the UNI tokens are allocated for employee awards. 

Later this week, UNI token holders will cast their votes on a new fee mechanism that aims to reallocate some rewards from the decentralized exchange's liquidity providers to its token holders. Previous snapshot polls indicate a high likelihood of approval for this proposal. If approved, control of the mainnet UniswapV3Factory will be transferred to a new V3FactoryOwner contract. Activation of the new fee distribution plan will require a second vote, the scheduling of which is yet to be determined.

The US Securities and Exchange Commission (SEC) has approved the spot Ether Exchange-Traded Funds (ETFs). This approval follows the SEC's consolidation of proposals from the Nasdaq, NYSE, and CBOE exchanges, which sought amendments to existing rules to permit Ether Exchange-Traded Products (ETPs) and ETFs.  On May 23, the SEC approved 19b-4 applications from VanEck, BlackRock, Fidelity, Grayscale, Franklin Templeton, ARK 21Shares, Invesco Galaxy, and Bitwise to issue spot Ether ETFs. However, these entities must wait for the SEC to greenlight their Form S-1 filings before the ETFs can commence trading.

BlackRock recently filed an amended S-1 registration statement for its proposed Ethereum fund, marking the latest move as firms work to list and trade their products. In the amended form, BlackRock disclosed information about its seed capital investor, stating in the revised filing "On May 21, 2024, the Seed Capital Investor, an affiliate of the Sponsor, subject to conditions, purchased the Seed Creation Baskets, comprising 400,000 Shares at a per-Share price equal to $25.00."

The asset manager also mentioned that the shares will be listed and traded under the ticker symbol "ETHA." While it is unclear how long this process will take, some analysts speculate that it could take weeks.

The ETH triumvirate- high beta, demand surge, and shrinking supply

As the markets prepare for the debut of the spot ether ETF, there is anticipation that it may generate demand similar to that of the bitcoin ETF, potentially leading to a comparable price trajectory. However, the supply dynamics of ether are distinct from those of bitcoin. According to data from Dune Analytics, approximately 27.2% of the ether supply is currently locked in staking, effectively taking it out of circulation and earning yield for its owners. Additionally, renewed activity on the Ethereum network will result in a substantial amount of ether being burned over time, further constraining supply.

Following the activation of Ethereum’s highly anticipated Dencun upgrade on March 13 2024, Ethereum gas prices plummeted. Dencun introduced proto-danksharding, which drastically reduced Layer 2 transaction costs by replacing gas-intensive calldata with lightweight Binary Large Objects (blobs) via EIP-4844. 

Gas fees on top Layer 2 networks dropped by more than 90% post-upgrade, reducing the burden on Ethereum’s mainnet by finalizing L2 transaction bundles. While this reduction in Layer 2 transaction overhead caused gas prices to fall significantly—from $21.58 on March 13 to much lower levels—it also impacted Ethereum’s deflationary narrative. Despite this, Ether’s supply has decreased by 394,678 ETH (worth $1.5 billion) since “The Merge” transitioned the network to Proof of Stake in September 2022. Had the network maintained its former Proof of Work consensus and issuance model, an additional 6.376 million coins worth $24.2 billion would have been added to the supply since September 2022.

Ethereum co-founder Vitalik Buterin outlined the future roadmap for the "smart contract" blockchain at the Ethereum Community Conference (EThCC) in Paris. Buterin discussed the "Merge," which completed Ethereum’s transition from a Proof of Work to a low-energy Proof of Stake mechanism for validating transactions. He announced changes to the blockchain's monetary policy, noting that the switch from Proof of Work to Proof of Stake will reduce Ether issuance from 5 million per year to a model controlled by the amount of ether staked.

If Ethereum maintains its high beta to Bitcoin and experiences significant ETF-driven demand amid a dropping supply, this could lead to significant price action.

Macro pulse 

Among the TradFi risk assets, Oil futures experienced a 2.7% rally compared to the previous week, while US equities recorded a weekly decline of 0.8%. This week's release of the Beige Book indicated modest growth in US economic activity; however, firms expressed increasing pessimism about the future, and inflation rose at a modest pace. Markets are now looking forward to the release of the US PCE inflation data on Friday. Additionally, the US Dollar Index rose by 0.2%, and the 10-year US Treasury yields climbed by 19 basis points, whereas the Gold & Silver index fell by 0.3% week over week.

*Note: Weekly (7 calendar day) performance figures are as of 8am SGT on May 30, 2024 

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