Ethereum ETFs: A Detailed Coverage

Ethereum ETFs, a Detailed Coverage: Gain Insights
Ethereum ETFs: A Detailed Coverage

Ether and the Ethereum Network

Ether is the name affiliated with the cryptocurrency that is used in the Ethereum blockchain. It is employed to pay fees for mercantile services and compute on the Ethereum platform. Owners of Ether can also assist in the development of the blockchain in the Proof-of-Stake (PoS) model applied in Ethereum. This method proves entries to a distributed database and ensures the data is checked for security at the same time.

Ethereum was launched in 2015 and served as the platform for creating intelligent contracts – algorithms that execute on its blockchain. This created new forms of participating in decentralized finance –DeFi, decentralized applications (dApps), non-fungible tokens (NFTs), and decentralized autonomous organizations (DAOs).

Ethereum has a market capitalization that ranks it second after Bitcoin given by the market value of its coins or tokens. Though, Ethereum is quite distinct from Bitcoin in terms that it is programmable meaning that developers can establish and implement various decentralized applications on the Ethereum platform.

Ethereum's Evolution: From Value Exchange to Global Computing

In all, Ethereum appeared from the start as being bent on doing more than merely enabling the direct exchange of value. It has been attempting to create a global computing network that will extend the applications of blockchain and cryptocurrency.

Last week, it was seen that the SEC green-lightened several issuers' Form 19b-4 filings for spot Ethereum ETFs, which signifies significant progression for such outcomes to list on U.S. exchanges. Like the BTC futures and options spot Bitcoin ETFs that were listed in January, these new products may help bring access to the crypto asset class to a broader investor base. Even though this involves the usage of blockchain technology, Ethereum is a different network with different applications (Plate While Bitcoin at the moment is mostly an object to hold as a new form of money, an embodiment of digital gold, Ethereum is a distributed computing system that hosts a multitude of applications and is often referred to as a decentralized application store. New investors who are keen on this asset might wish to understand that Ethereum works on different fundamentals than many cryptocurrencies and also wish to uncover its competitive stance and the part it plays in the advancement of blockchain-based digital selling.

Smart Contracts: The Backbone of Ethereum's Decentralized Architecture

Smart contracts are the building blocks of the blockchain, or more specifically of the Ethereum blockchain: they are the first layer of the stack (Gasser et al., 2014).

Ethereum was developed by building on the basic concept of Bitcoin and extending it with smart contracts. Smart contracts are software applications based on responsive and automatic code. This means that when one is involved with a smart contract, it will execute an operation as it was defined from the onset and without any intervention from the user. The classic real-world metaphor is a vending machine: for each vending machine, there is a user who inserts a coin, and in his turn, the vending machine releases an item. Thus, when using a smart contract, a user normally ‘Deposits’ a token, and the software executes a certain operation. This operation could range from simple swapping to token trading or lending mechanisms to even authenticate a user.

Therefore, the working of smart contracts can be explained in the context of the Ethereum blockchain. Aside from identifying owners of Passbook assets, the block-by-block nature of the operation can update any change in ‘state,’ a term from computer science that indicates the condition of data sets within a database on the blockchain. As a result, there may exist a well-functioning public blockchain with smart contracts added to it, which makes the concept of a blockchain function as a computer – a software computer rather than a hardware computer. Combined with these fundamentalities, cryptocurrency and other utility token systems can be built on Ethereum and every other smart contract platform blockchain that are capable of hosting any sort of application type and act as the common foundation of a digitalized economy.

Ethereum's Market Dynamics: Analyzing Asset Returns and Fundamentals

Ether is the largest crypto in our index by market capitalization and represents the Ethereum network’s Smart Contract Platform. Until rather recently, starting from the beginning of 2023, ETH’s total return accurately mirrored its proper place in this segment. Still, it has a lower value than Bitcoin, associated with the largest market capital among all Cryptocurrencies, and Solana is positioned in second place within the Smart Contract Platforms Cryptocurrency market capital. Ether has also been more potent as a store of value and as an investment when compared to specific sectors of investment for the period starting from early 2023. Extended rates of both BTC and ETH show that risk-adjusted returns of both cryptocurrencies have been within the range of traditional assets, although the longer bull runs have been volatile.

In Ethereum’s layered architecture, the different layers of blockchains or the sub-systems of Ethereum are planned to provide the end access to the user. Specifically, increased usage is predicted over time through the Ethereum Layer 2 project—further parts of software offering blockchain services linked to the Ethereum mainnet—enabling expansion. The Layer 2s occasionally stabilize and send batches of transaction data to Layer 1, enjoying that Layer’s security and decentralization. This approach is different from blockchains with a structural design characteristic of an individual Layer 1 network, like the Solana, wherein execution, settlement, consensus, and data availability occur in a single comprehensive system.

In March 2024, Ethereum went through a major upgrade that is expected to facilitate its transition to a modular network architecture (for details, see our report Ethereum’s Coming of Age: Aber auch die Investitionen macht viele besorgter; Daher haben sie Dencun und ETH 2. From the standpoint of blockchain activity, the upgrade was a success: Layer-2 networks now represent roughly two-thirds of all activity in the Ethereum space, and the number of active addresses has risen significantly.

Layered Growth: Ethereum's Strategy for Scalability and Efficiency

The above changes in activity distribution also influenced Ether’s tokenomics, although to some extent, it also affected the transition to Layer 2 networks. Smart Contract Platform blockchains derive their value mainly from the platform’s transaction fee; validators are usually rewarded with tokens, or the token circulation balance is adjusted. In the case of Ethereum, for instance, the base fee is burned, and this implies that base fees in every transaction are removed from circulation while the prioritization fee, or what is often referred to as the tip, is paid to the validators. Consequently, as Ethereum’s transaction fee income is more established, token burns frequently surpass the speed of new generations, and in general, the ETH supply decreases. But now, as we witness the shift to traffic the Layer 2s, fee revenue on the Ethereum mainnet has decreased, and the ETH supply has begun to rise again (P.4). The Layer 2 networks also provide some fees for placing their information at the Layer 1 (‘blob fees’, and other transaction costs), but usually these sums specified are negligibly small.

To grow the Ether token with time, it will most probably be necessary to increase the fee revenues in the Ethereum mainnet. This could happen in either of the following ways: a) A gradual increase in the activity on Layer 1 but requiring higher transaction fees, or b) a large increase in Layer 2 networks, requiring comparatively smaller transaction fees. According to the details provided by Grayscale Research, there is an increase in the Layer 1 and Layer 2 activity as well as an overall increase in fee revenue.

According to them, Layer 1 activity is likely to be driven by low-frequency and high-value applications, or it is anything that needs to be very decentralized, at least until Layer 2 infrastructures become decentralized sufficiently. This may include many types of tokenization projects, where the costs constitute a share of the total transaction volume that is much lower than the volume denominated in US dollars. While the Tokenization of some financial assets has been widely adopted in today’s economy, only around 70% of the tokenized U. S. Treasuries are on the Ethereum blockchain. More expensive NFTs, such as those representing unique, valuable goods, services or experiences, will likely continue to reside on Ethereum Mainnet due to the high level of security and decentralization, and given the high frequency of trading in those tokens, it is expected to continue to grow while we observe a similar trend in the use of Bitcoin NFTs.

On the other hand, high frequency and/or low value would be more suitable for Ethereum’s several Layer 2 innovations. It might be used, for example, with the newest experimental hit social media applications experiences, which were built on the top of Ethereum Layer 2, such as Friend. Tech (Base), Farcaster (OP Mainnet), and Fantasy Top (Blast).  *Note: Sdirect is a Deutsche Telekom project that is currently in the development stage. Similar to gaming payments, retail payments would also probably have very low-cost expectations and are more likely to shift to Layer 2 solutions, according to our analysis. Nevertheless, these applications will have to acquire millions of users in the given area in order to significantly affect the possibility of growing the fee for the Ethereum mainnet, which, with low transaction costs, will be highly challenging for most dApps.

Futures and Futures-Based Ethereum ETFs

Futures contracts are financial instruments that enable individuals to participate in prospective price directions of specific commodities and securities. They are binding contracts to purchase or sell a given cash asset at a stipulated price on a fixed future date. Therefore, they enable users to mitigate certain risks or to make an educated prediction about the price fluctuations of a particular asset without actually acquiring it. They are usually applied for indexes, metals like gold & silver, oils, and now cryptocurrencies.

Imagine that you buy a 90-day forward contract on ether at US$1,500. You are locked in the price you must pay in three months, notwithstanding the market price for ether then. Should ether now sell for over US$1,500, a higher profit will accrue from buying ether below market. In case it falls below US$1,500 this would mean that more loss than purchasing it directly from a spot market.

Standard futures contracts have set expiration cycles, requiring investors to roll over their positions into new agreements. For futures, Ethereum ETFs track their contract prices by spreading out the futures' various expiration dates. This provides continuous investment exposure without manually rolling over positions yourself. This also means that these Ethereum ETFs hold futures contracts and do not directly hold the underlying assets they track—in this case, ether.

A normal futures contract will have definitive periods under which it expires, compelling investors to keep buying new contracts when the old ones become due. Rather than focusing on one expiration date of a specific contract, it follows all prices based on those for similar agreements, hence providing seamless access to investments without an individual renewing their rollovers every time. Another thing you must remember about such ETFs is that their assets do not necessarily include what they monitor but rather futures. The result is, for example, ether.

Disclaimer: Analytics Insight does not provide financial advice or guidance. Also note that the cryptocurrencies mentioned/listed on the website could potentially be scams, i.e. designed to induce you to invest financial resources that may be lost forever and not be recoverable once investments are made. You are responsible for conducting your own research (DYOR) before making any investments. Read more here.

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