From being misunderstood to rising, why has ETH been able to become the reserve asset of the on-chain economy?

Author: Kevin Li

Compiled by: Deep Tide TechFlow

Recently, people's interest in Ethereum has surged again, especially after the emergence of ETH as a reserve asset. Our fundamental analysts have explored the valuation framework of ETH and constructed a compelling long-term bull market forecast. As always, we are happy to connect with you and exchange ideas – please remember to do your own research (DYOR).

Let's dive into ETH with our fundamental analyst Kevin Li.

Key Points

• Ethereum (ETH) is transforming from a misunderstood asset into a scarce, programmable reserve asset that provides security and impetus for a rapidly compliant on-chain ecosystem.
• The adaptive monetary policy of ETH is expected to lower the inflation rate — even if 100% of ETH is staked, the inflation rate will be about 1.52% at most, decreasing to around 0.89% by the 100th year (2125). This is far lower than the average annual growth rate of the US M2 money supply at 6.36% (1998-2024), and could even compare with the growth rate of gold supply.
• Institutional adoption is accelerating, with companies like JPMorgan and BlackRock building on Ethereum, thus driving sustained demand for ETH to ensure and settle on-chain value.
• The annual correlation between on-chain asset growth and native ETH staking is as high as 88%, highlighting a strong economic consistency.
• The U.S. Securities and Exchange Commission (SEC) released a policy statement on staking on May 29, 2025, reducing regulatory uncertainty. The filing documents for the Ethereum ETF now include staking provisions, enhancing returns and increasing institutional consistency.
• The deep composability of ETH makes it a productive asset—usable for staking/re-staking, as DeFi collateral (e.g., Aave, Maker), AMM liquidity (e.g., Uniswap), and as a native gas token on Layer 2.
• Although Solana has gained attention in the Memecoin activities, Ethereum's stronger decentralization and security enable it to dominate the issuance of high-value assets - a larger and more sustainable market.
• The rise of Ethereum reserve asset trading began with Sharplink Gaming ($SBET) in May 2025, leading public companies to hold over 730,000 ETH. This new demand trend is reminiscent of the Bitcoin reserve asset trading wave in 2020 and has contributed to ETH recently outperforming BTC.

Not long ago, Bitcoin was widely regarded as a compliant store of value – its characterization as "digital gold" seemed a bit fanciful to many. Today, Ethereum (ETH) is facing a similar identity crisis. ETH is often misunderstood, has performed poorly in annual returns, missed critical meme cycles, and has experienced a slowdown in retail adoption across much of the crypto ecosystem.

A common criticism is that ETH lacks a clear value accumulation mechanism. Critics argue that the rise of Layer 2 solutions is eroding the base layer fees, undermining ETH's status as a monetary asset. When ETH is viewed primarily from the perspective of transaction fees, protocol revenue, or 'real economic value', it begins to resemble a cloud computing security — more like Amazon stock than a sovereign digital currency.

In my opinion, this framework creates a categorization error. Simply evaluating ETH based on cash flows or protocol fees will confuse fundamentally different asset classes. Instead, it is better understood through a commodity framework similar to Bitcoin. More accurately, ETH constitutes a unique asset class: a scarce yet high-yielding, programmable reserve asset, whose value accumulates through the role it plays in securing, settling, and driving an increasingly institutionalized and composable on-chain economy.

Currency Devaluation: Why the World Needs Alternatives

To fully understand the evolving monetary role of ETH, it must be placed within a broader economic context, especially in an era of fiat currency devaluation and monetary expansion. Driven by ongoing government stimulus and spending, inflation rates are often underestimated. Although official CPI data shows inflation hovering around 2% per year, this metric may be subject to adjustment and could obscure the true decline in purchasing power.

From 1998 to 2024, the average annual CPI inflation rate was 2.53%. In comparison, the annual growth rate of M2 money supply in the United States was 6.36%, surpassing the inflation rate and housing prices, and approaching the 8.18% return rate of the S&P 500 index. This even suggests that the nominal growth of the stock market may largely stem from monetary expansion rather than improvements in productivity.

Figure 1: Returns of the S&P 500 Index, Consumer Price Index, M2 Money Supply, and Housing Price Index (HPI)

Source: Federal Reserve Economic Data

The rapid growth of the money supply reflects the government's increasing reliance on monetary stimulus and fiscal spending plans to cope with economic instability. Recent legislation, such as Trump's "Build Back Better" (BBB) plan, has introduced aggressive new spending measures that are widely believed to lead to inflation. At the same time, the launch of the Department of Government Efficiency (DOGE), strongly advocated by Elon Musk, does not seem to have achieved the expected results. These developments have led to a growing consensus that the existing monetary system is inadequate and that there is an urgent need for a more reliable form of asset or currency for value storage.

What constitutes a store of value - and ETH's positioning

A reliable store of value typically meets four criteria:

• Durability - it must withstand the test of time without degrading.
• Value preservation - it should maintain purchasing power throughout the market cycle.
• Liquidity - Must be easy to trade in an active market.
• Adoption and Trust - Must achieve broad trust or adoption.

Currently, ETH performs excellently in terms of durability and liquidity. Its durability comes from Ethereum's decentralized and secure network. Its liquidity is also very high: ETH is the second largest cryptocurrency by trading volume, with a rich market on both centralized and decentralized exchanges.

However, when evaluating ETH from a purely traditional "store of value" perspective, its value retention, application, and trustworthiness remain a contentious standard. This is why the concept of "scarce programmable reserve asset" is more fitting, as it highlights ETH's positive role in value maintenance and trust building, along with its unique mechanism.

ETH's monetary policy: scarce but highly adaptable

One of the most controversial aspects of ETH's role as a store of value is its monetary policy, particularly how it controls supply and inflation. Critics often point out Ethereum's lack of a fixed supply cap. However, this criticism overlooks the architectural complexity of Ethereum's adaptive issuance model.

The issuance of ETH is dynamically related to the amount of ETH staked. Although the issuance will increase with the higher participation in staking, this relationship is sublinear: the rate of increase in inflation is lower than the rate of increase in the total amount staked. This is because the issuance is inversely proportional to the square root of the total amount of staked ETH, which naturally regulates inflation.

Figure 2: Rough formula for the inflation of staked ETH

The mechanism introduces a soft upper limit on inflation, meaning that even as staking participation increases, the inflation rate will gradually decrease over time. In the worst-case scenario simulated (i.e., 100% of ETH staked), the annual inflation rate ceiling is approximately 1.52%.

Figure 3: Illustrative inference of the maximum issuance of ETH, assuming 100% of ETH is staked, with an initial staking amount of 120 million ETH for a term of 100 years.

Importantly, even in the worst-case scenario of this issuance rate, it will decrease with the increase in the total supply of ETH, following an exponential decay curve. Assuming 100% staking and no ETH destruction, the expected inflation trend is as follows:

• Year 1 (2025): ~1.52%
• Year 20 (2045 Year ): ~1.33%
• Year 50 (2075 Year ): ~1.13%
• Year 100 (2125): ~0.89%

Figure 4: Explanatory inference of the maximum issuance of ETH, assuming 100% of ETH is staked, with an initial staking amount of 120 million ETH, as the total supply increases.

Even under these conservative assumptions, Ethereum's continuously declining inflation curve reflects its intrinsic monetary principles — this enhances its credibility as a long-term store of value. If we take into account the burn mechanism introduced by Ethereum through EIP-1559, the situation improves further. A portion of the transaction fees will permanently exit circulation, meaning the net inflation rate could be far lower than the total issuance, and at times may even fall into deflation. In fact, since Ethereum transitioned from proof of work to proof of stake, the net inflation rate has been below the issuance and has periodically dipped into negative territory.

Figure 5: Annualized ETH Supply Inflation Rate

Compared to fiat currencies such as the US dollar (which has an average annual M2 money supply growth rate of over 6%), Ethereum's structural constraints (and potential deflation) enhance its appeal as a store of value asset. Notably, Ethereum's maximum supply growth rate is currently on par with that of gold, and even slightly lower than gold, further solidifying its position as a robust monetary asset.

Figure 6: Growth Rate of Annual Gold Supply

Sources: ByteTree, World Gold Council, Bloomberg, Our World in Data

Institutional Adoption and Trust

While Ethereum's currency design effectively addresses the supply dynamics issue, its actual utility as a settlement layer has now become a major driving force for adoption and institutional trust. Major financial institutions are building directly on Ethereum: Robinhood is developing a tokenized stock platform, JPMorgan is launching its deposit token (JPMD) on Ethereum Layer 2 (Base), and BlackRock is using BUIDL to tokenize a money market fund on the Ethereum network.

This on-chain process is driven by a strong value proposition, capable of addressing legacy inefficiencies and unlocking new opportunities:

• Efficiency and Cost Reduction: Traditional finance relies on intermediaries, manual steps, and slow settlement processes. Blockchain simplifies these processes through automation and smart contracts, thus lowering costs, reducing errors, and shortening processing times from days to seconds.
• Liquidity and fractional ownership: Tokenization enables fractional ownership of illiquid assets such as real estate or art, broadening access for investors and unlocking locked capital.
• Transparency and Compliance: The immutable ledger of blockchain ensures a verifiable audit trail, simplifying compliance and reducing fraud through real-time visibility of transactions and asset ownership.
• Innovation and Market Access: Combinable on-chain assets enable new products (such as automated lending or synthetic assets) to create new revenue streams and expand the financial scope beyond traditional systems.

ETH pledged as collateral and economic coordination

The on-chain migration of traditional financial assets highlights two main drivers of demand for ETH. First, the continuous growth of real-world assets (RWA) and stablecoins has increased on-chain activity, driving up the demand for ETH as a Gas token. More importantly, as Tom Lee observed, institutions may need to purchase and stake ETH to secure the infrastructure they rely on, aligning their interests with the long-term security of Ethereum. In this context, stablecoins represent Ethereum's "ChatGPT moment," a significant breakthrough use case that showcases the platform's transformative potential and broad utility.

As more and more value is settled on-chain, the consistency between Ethereum's security and its economic value becomes increasingly important. Ethereum's finality mechanism, Casper FFG, ensures that blocks can only be finalized when a supermajority (two-thirds or more) of the staked ETH reaches consensus. While an attacker controlling at least one-third of the staked ETH cannot finalize malicious blocks, they can completely undermine finality by disrupting consensus. In this case, Ethereum can still propose and process blocks, but due to the lack of finality, these transactions may be reversed or reordered, leading to significant settlement risks for institutional use cases.

Even when operating on Layer 2 that relies on Ethereum for final settlement, institutional participants depend on the security of the underlying layer. Layer 2 does not undermine ETH; rather, it enhances the value of ETH by driving demand for the underlying layer's security and Gas. They submit proofs to Ethereum, pay base fees, and typically use ETH as their native Gas token. As the scale of Rollup execution expands, Ethereum continues to accumulate value through its foundational role in providing secure settlements.

In the long run, many institutions may move beyond the passive staking practices through custodians and begin operating their own validators. While third-party staking solutions offer convenience, operating a validator allows institutions to have greater control, enhanced security, and direct participation in consensus. This is particularly valuable for stablecoin and RWA issuers, as it enables them to capture MEV, ensure reliable transaction inclusion, and leverage privacy execution—features that are crucial for maintaining operational reliability and transaction integrity.

Importantly, broader institutional participation in the operation of validator nodes helps address one of Ethereum's current challenges: the concentration of stakes in the hands of a few large operators, such as liquidity staking protocols and centralized exchanges. By diversifying the validator node set, institutional participation contributes to enhancing Ethereum's level of decentralization, increasing its resilience, and bolstering the network's credibility as a global settlement layer.

A significant trend during the period from 2020 to 2025 has reinforced the consistency of this incentive mechanism: the growth of on-chain assets is closely related to the growth of staked ETH. By June 2025, the total supply of stablecoins on Ethereum reached a record $116.06 billion, while tokenized RWA climbed to $6.89 billion. Meanwhile, the number of staked ETH grew to 35.53 million ETH, highlighting how network participants balance security and on-chain value.

Figure 7: On-chain total value of ETH vs staked native ETH value Source: Artemis

From a quantitative perspective, the annual correlation between on-chain asset growth and native ETH staking volume among major asset classes has remained above 88%. Notably, the supply of stablecoins is closely related to the growth of staked ETH. Although short-term fluctuations can cause significant volatility in quarterly correlations, the overall trend remains unchanged— as assets flow on-chain, the motivation to stake ETH also increases.

Figure 8: Monthly, quarterly, and annual native correlation of staked ETH and on-chain value Source: Artemis

Moreover, the increase in staking volume also affects the price dynamics of ETH. As more and more ETH is staked and removed from circulation, the supply of ETH tightens, especially during periods of strong on-chain demand. Our analysis shows that on an annual basis, the correlation between the amount of staked ETH and the price of ETH is 90.9%, while on a quarterly basis, the correlation is 49.6%. This supports the view that staking not only secures the network but can also create favorable supply and demand pressure on ETH itself in the long run.

Figure 9: The intrinsic correlation between staking ETH and price Source: Artemis

The U.S. Securities and Exchange Commission (SEC) recently released a policy clarification that alleviated regulatory uncertainty surrounding Ethereum staking. On May 29, 2025, the SEC's Division of Corporation Finance stated that certain staking activities (limited to non-fundraising roles, such as self-staking, delegated staking, or custodial staking under specific conditions) do not constitute the issuance of securities. While more complex arrangements still need to be determined based on the actual circumstances, this clarification encourages institutions to participate more actively. Following the announcement, Ethereum ETF application documents began to include staking provisions, allowing funds to earn rewards while maintaining network security. This not only enhances the return rates but also further solidifies institutional acceptance and trust in the long-term adoption of Ethereum.

combinability and ETH as a productive asset

One significant feature that distinguishes ETH from pure value storage assets like gold and Bitcoin is its composability, which in itself drives demand for ETH. Gold and BTC are non-productive assets, while ETH has native programmability. It plays an active role in the Ethereum ecosystem, supporting decentralized finance (DeFi), stablecoins, and Layer 2 networks.

Composability refers to the ability of protocols and assets to seamlessly interoperate. In Ethereum, this means that ETH is not only a currency asset but also a fundamental building block for on-chain applications. As more and more protocols are built around ETH, the demand for ETH also increases—not only as Gas but also as collateral, liquidity, and staking funds.

Today, ETH is used for various key functions:

• Staking and Re-staking - ETH can secure Ethereum itself and can be re-staked through EigenLayer to provide security for oracles, rollups, and middleware.
• Collateral in lending and stablecoins - ETH supports major lending protocols such as Aave and Maker, and is the foundation of over-collateralized stablecoins.
• Liquidity in AMM - ETH dominates decentralized exchanges like Uniswap and Curve, enabling efficient exchanges throughout the ecosystem.
• Cross-chain Gas – ETH is the native Gas token for most Layer 2 solutions, including Optimism, Arbitrum, Base, zkSync, and Scroll.
• Interoperability - ETH can be bridged, wrapped, and used in non-EVM chains such as Solana and Cosmos (through Axelar), making it one of the most transferable assets on-chain.

This deep integration utility makes ETH a scarce yet efficient reserve asset. As ETH gradually integrates into the ecosystem, conversion costs rise and network effects strengthen. In a sense, ETH may resemble gold more than BTC. Most of gold's value comes from industrial and jewelry applications, not just investment. In contrast, BTC lacks this functional utility.

Ethereum vs. Solana: Layer-1 Divergence

During this period, Solana seems to be the biggest winner in the Layer 1 space. It effectively occupies the memecoin ecosystem, creating a vibrant network for the issuance and development of new tokens. Although this momentum does exist, the degree of decentralization of Solana is still not as high as Ethereum due to the limited number of validators and higher hardware requirements.

That being said, the demand for Layer 1 block space may show a stratification. In this stratified future, both Solana and Ethereum can thrive. Different assets will need to make different trade-offs between speed, efficiency, and security. However, in the long run, Ethereum—due to its stronger decentralization and security guarantees—may capture a larger share of asset value, while Solana may capture a higher transaction frequency.

Figure 10: Quarterly Trading Volume of SOL and ETH

However, in the financial markets, the market size for assets that pursue stability and security is much larger than that for assets that focus solely on execution speed. This dynamic is favorable for Ethereum: as more and more high-value assets are brought on-chain, Ethereum's role as the foundational settlement layer will become increasingly valuable.

Figure 11: Total value of on-chain guarantees (billion USD) Source: Artemis

Reserve Asset Momentum: ETH's Microstrategy Moment

Although on-chain assets and institutional demand are long-term structural drivers for ETH, Ethereum's asset management strategy—similar to how MicroStrategy (MSTR) utilizes Bitcoin—could serve as a continuing catalyst for the value of ETH assets. A key turning point in this trend was Sharplink Gaming ($SBET) announcing its Ethereum asset management strategy at the end of May, led by Ethereum co-founder Joseph Lubin.

Figure 12: ETH reserve asset holdings Source: strategicethreserve.xyz

Asset management strategies are tools for acquiring liquidity from traditional finance (TradFi) while enhancing the per-share value of related companies' assets. Since the emergence of Ethereum-based asset management strategies, these asset management companies have accumulated over 730,000 ETH, and the performance of ETH has started to surpass that of Bitcoin—a rarity in this cycle. We believe this marks the beginning of a broader trend for asset management applications centered around Ethereum.

Figure 13: Price Trends of ETH and BTC Conclusion: ETH is the reserve asset of the on-chain economy.

The evolution of Ethereum reflects a broader paradigm shift in the concept of monetary assets within the digital economy. Just as Bitcoin overcame early skepticism to earn recognition as "digital gold," Ether (ETH) is also establishing its unique identity—not by mimicking Bitcoin's narrative, but by evolving into a more versatile and foundational asset. ETH is not merely akin to cloud computing securities, nor is it limited to serving as a utility token for transaction fees or a source of protocol revenue. Rather, it represents a scarce, programmable, and economically essential reserve asset—it underpins the security, settlement, and functionality of an increasingly institutionalized on-chain financial ecosystem.