Ether: activity provides silver lining amid capital flight

The increasingly hostile regulatory stance towards crypto in the US has sparked increasing uncertainty amid the sector. 

Amid this storm, Ethereum occupies an interesting position. It was omitted from the list of tokens the SEC had named as securities in the Binance lawsuit in June, which included Solana (SOL), Polygon (MATIC) and Cardano (ADA). SEC chair Gary Gensler had also dodged questions as to whether it constituted a security. 

It seemed to sit in a grey area – certainly not as safe as Bitcoin seems to be from the jaws of the dreaded security tag, but in a far better position than most tokens operating in the DeFi space. Its fall and rise after the (mostly) positive ruling on the Ripple securities phase demonstrated this further.

However, despite the regulatory travails and the drain on the crypto market at large over the past eighteen months (even after the relief rally in 2023, prices are still far below their peak), there are reasons to be somewhat optimistic when assessing the underlying data for Ether. On the other hand, there are some factors which should preach caution, too. 

Activity remains resilient

Crypto’s struggles last year are no secret. Tipped off the cliff by the startling collapse of the Terra ecosystem, crypto kept on falling. With investors seeing first-hand quite how far out on the risk spectrum crypto lies, the sector was ravaged as central banks transitioned to tight monetary policy. 

Prices plunged, volumes were decimated and capital fled the system. ETH was not immune, falling from its high of nearly $4,900 in November 2021 to near-triple digits, before rising back up to near $1,900 today. The below chart plots this price action against the 2-year treasury yield, which demonstrates yield expectations (shown on an inverted scale), highlighting how the asset has struggled as yields have mushroomed. 

But despite this mammoth drawdown, when looking at on-chain data, activity on Ethereum has been more resilient than perhaps one would have expected. 

Transactions fell throughout last year, trending down steadily from around 1.3 million transactions per day at the ETH/USD all-time high in November 2021 to around 1 to 1.1 million at the start of 2023, where they have remained since.

This means transactions are around 20% off the November 2021 levels. Yet, looking at price, Ether is over 60% off its high. This is a more inelastic relationship than some would have predicted, and while the bear market has obviously been gruesome, it does paint somewhat of a silver lining. 

Ether’s long term feasibility will always be predicated on its use – the more people use Ethereum, the more fees are paid, the more staking yield is earned, the more Ether is burned. In short, the more successful Ether is. 

Again, this is not to meant to mean Ether has had a good year. It remains heavily loss-making for anyone who purchased in the hysteric bull market. Additionally, looking at the total value locked (TVL) on the platform, which can be viewed as another gauge on how the network is doing, the outlook is less rosy. 

TVL is down 77% from its peak, a drawdown of $85 billion. While a big portion of this is due to highly speculative tokens and protocols with no real utility jumping upon the Ether bandwagon before getting washed out in the last year, the pullback is severe and highlights how hard DeFi has been hit. Even assessing the TVL in ETH terms rather than dollars, the dip is significant. 

Regulation

This takes us back to regulation. The future of DeFi, and to a large extent Ethereum, may be predicated on the tokenisation of assets. Real-world assets, such as stocks and bonds, has long been dreamt about, with enthusiasts swearing that this is the future. 

If this is to happen, regulators will need to get on board. In order to open up access to the blockchain-domiciled world for trad-fi, clear frameworks need to be put in place. In this sense, the regulatory battle represents a pivotal tussle for the future of DeFi.

It may take years to play out, but at least there is now a movement towards creating a clearer picture, starting with the Ripple ruling. There is a long way to go yet (for both the Ripple case and for the blockchain industry as a whole), but it feels inevitable that we will get lawmakers finally creating a formal framework around the sector. 

Either way, if the usage of Ethereum continues to stay resilient, there will be brighter days ahead. But for now, the barriers remain up. 

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