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

Author: Kevin Li

Translation: TechFlow

Recently, there has been a resurgence of interest in Ethereum, especially following the emergence of ETH as a reserve asset. Our fundamental analysts explore a valuation framework for ETH and build a compelling long-term bull case. As always, we’re happy to connect with you and exchange ideas – remember to do your own research (DYOR).

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

Key Highlights

• Ethereum (ETH) is transforming from a misunderstood asset to a scarce, programmable reserve asset that provides security and power to a rapidly compliant on-chain ecosystem.
• ETH’s adaptive monetary policy foresees a decline in inflation – even if 100% of ETH is staked, inflation is around 1.52% at best, falling to around 0.89% by year 100 (2125). This is well below the 6.36% average annual growth rate of US M2 money supply (1998-2024) and is comparable to gold’s supply growth.
• Institutional adoption is accelerating, with companies like JPMorgan and BlackRock building on Ethereum, driving continued demand for ETH to secure and settle on-chain value.
• The annual correlation between on-chain asset growth and native ETH staking is over 88%, highlighting strong economic alignment.
• The SEC issued a policy statement on staking on May 29, 2025, reducing regulatory uncertainty. Ethereum ETF filings now include staking provisions, improving returns and strengthening institutional alignment.
• ETH’s deep composability makes it a productive asset — 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.
• While Solana has gained traction at Memecoin events, Ethereum’s greater decentralization and security allow it to dominate high-value asset issuance — a larger, more durable market.
• The rise of Ethereum reserve asset trading, which began with Sharplink Gaming ($SBET) in May 2025, has resulted in public companies holding over 730,000 ETH. This new demand trend mirrors the 2020 Bitcoin reserve asset trading wave and has contributed to ETH’s recent outperformance against BTC.

Not long ago, Bitcoin was widely viewed as a legitimate store of value — its “digital gold” narrative seemed fanciful to many. Today, Ethereum (ETH) faces a similar identity crisis. ETH is often misunderstood, has underperformed in annualized returns, has missed key meme cycles, and has experienced slowing retail adoption across much of the crypto ecosystem.

A common criticism is that ETH lacks a clear value accrual mechanism. Skeptics argue that the rise of Layer 2 solutions has cannibalized base layer fees, undermining ETH’s status as a monetary asset. When ETH is viewed primarily through the lens of transaction fees, protocol revenues, or “real economic value,” it begins to resemble a cloud computing security — more like Amazon stock than a sovereign digital currency.

In my view, this framework constitutes a classification error. Valuing ETH purely through cash flows or protocol fees confuses fundamentally different asset classes. Instead, it is best understood through a commodity framework similar to Bitcoin. More precisely, ETH constitutes a unique asset class: a scarce but highly productive, programmable reserve asset whose value accrues through its role in securing, settling, and driving an increasingly institutionalized, composable on-chain economy.

Fiat Currency Debasement: Why the World Needs an Alternative

To fully understand ETH’s evolving monetary role, it must be placed in the broader economic context, especially in an era of fiat currency debasement and monetary expansion. Inflation rates are often underestimated, driven by continued government stimulus and spending. While official CPI data shows inflation hovering around 2% per year, this metric is subject to adjustment and can mask a true decline in purchasing power.

Between 1998 and 2024, CPI inflation averaged 2.53% per year. In contrast, the average annual growth rate of US M2 money supply is 6.36%, outpacing inflation and house prices and approaching the 8.18% return of the S&P 500. This even suggests that much of the nominal growth in the stock market may be more due to monetary expansion than productivity gains.

Figure 1: Returns of the S&P 500, Consumer Price Index, M2 Supply, and Housing 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 programs to respond to economic instability. Recent legislation, such as Trump's "Big and Beautiful Act" (BBB), introduced radical new spending measures that are widely believed to be inflationary. Meanwhile, the launch of the Department of Government Efficiency (DOGE), which Elon Musk strongly advocated, does not seem to have the desired effect. These developments have contributed to a growing consensus that the existing monetary system is inadequate and that a more reliable store of value asset or form of currency is urgently needed.

What constitutes a store of value - and where ETH fits in

A reliable store of value generally meets four criteria:

• Durability - it must stand the test of time without degradation.
• Preservation of value - it should maintain purchasing power throughout market cycles.
• Liquidity - must be easily traded in an active market.
• Adoption and trust - must be widely trusted or adopted.

Today, ETH excels in durability and liquidity. Its durability stems from Ethereum's decentralized and secure network. Its liquidity is also high: ETH is the second most traded crypto asset, with a rich market on both centralized and decentralized exchanges.

However, when evaluating ETH from a purely traditional "store of value" perspective, its value preservation, application, and trust remain a controversial criterion. For this reason, the concept of a "scarce programmable reserve asset" is more appropriate, highlighting ETH's positive role in value maintenance and trust building and its unique mechanism.

ETH's Monetary Policy: Scarce but Adaptable

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

ETH issuance is dynamically related to the amount of ETH staked. While issuance increases with staking participation, the relationship is sublinear: the inflation rate increases at a slower rate than the total amount staked. This is because issuance is inversely proportional to the square root of the total amount of ETH staked, creating a natural regulatory effect on inflation.

Figure 2: Rough formula for inflation of staked ETH

The mechanism introduces a soft cap on inflation, and the inflation rate will gradually decrease over time even if the stake participation increases. In the worst case scenario simulated (i.e. 100% of ETH is staked), the annual inflation rate is capped at about 1.52%.

Figure 3: Illustrative inference of the maximum issuance of ETH, assuming 100% of ETH is staked, the starting stake is 120 million ETH, and the term is 100 years

Importantly, even this worst-case issuance rate will decline as the total supply of ETH increases, 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): ~1.33%
• Year 50 (2075): ~1.13%
• Year 100 (2125): ~0.89%

Figure 4: Illustrative extrapolation of ETH's maximum issuance, assuming 100% of ETH is staked, starting with 120 million ETH, as total supply increases

Even under these conservative assumptions, Ethereum's declining inflation curve reflects its inherent monetary laws - which enhances its credibility as a long-term store of value. The situation gets even better if the destruction mechanism introduced by Ethereum through EIP-1559 is taken into account. A portion of transaction fees will be permanently withdrawn from circulation, which means that the net inflation rate may be much lower than the total issuance, and sometimes even fall into deflation. In fact, since Ethereum transitioned from proof of work to proof of stake, the net inflation rate has been lower than the issuance and periodically fell to negative values.

Figure 5: ETH supply inflation rate annualized

Compared with fiat currencies such as the US dollar (whose M2 money supply has an average annual growth rate of more than 6%), Ethereum's structural constraints (and potential deflation) enhance its attractiveness as a value reserve asset. It is worth noting that Ethereum's maximum supply growth rate is now comparable to that of gold, or even slightly lower than that of gold, which further consolidates its position as a sound monetary asset.

Figure 6: Annual supply growth rate of gold

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

Institutional adoption and trust

While Ethereum's currency design effectively solves the supply dynamics problem, its actual utility as a settlement layer has now become the main driver of 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 tokenizing a money market fund on the Ethereum network using BUIDL.

This on-chain process is driven by a strong value proposition that solves legacy inefficiencies and unlocks new opportunities:

• Efficiency and Cost Reduction: Traditional finance relies on intermediaries, manual steps, and slow settlement processes. Blockchain streamlines these processes through automation and smart contracts, which reduces costs, reduces errors, and reduces processing time from days to seconds.
• Liquidity and Fractional Ownership: Tokenization enables fractional ownership of illiquid assets such as real estate or art, expanding investor access and unlocking locked-up capital.
• Transparency and Compliance: Blockchain’s immutable ledger ensures a verifiable audit trail, simplifying compliance and reducing fraud with real-time visibility into transactions and asset ownership.
• Innovation and market access: Composable on-chain assets allow new products (such as automated lending or synthetic assets) to create new revenue streams and expand the scope of finance outside of traditional systems.

ETH Staking as Security and Economic Alignment

The on-chain migration of traditional financial assets highlights two main drivers of ETH demand. First, the growing presence of real-world assets (RWAs) and stablecoins, which increase on-chain activity, drives up demand for ETH as a gas token. More importantly, as Tom Lee observes, institutions may need to purchase and stake ETH to secure the infrastructure they rely on, thereby aligning their interests with the long-term security of Ethereum. In this context, stablecoins represent Ethereum’s “ChatGPT moment,” a major breakthrough use case that demonstrates the platform’s transformative potential and broad utility.

As more value is settled on-chain, the alignment 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 a malicious block, 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, which poses serious settlement risks for institutional use cases.

Even when running on Layer 2, which relies on Ethereum for final settlement, institutional participants rely on the security of the base layer. Far from harming ETH, Layer 2 increases the value of ETH by driving demand for base layer security and gas. They submit proofs to Ethereum, pay base fees, and generally use ETH as their native gas token. As Rollup execution scales, Ethereum continues to accrue value through its fundamental role in providing secure settlement.

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

Importantly, broader institutional participation in validator node operations helps address one of Ethereum’s current challenges: the concentration of stake in a few large operators, such as liquid proof-of-stake protocols and centralized exchanges. By diversifying the set of validators, institutional participation helps increase Ethereum’s decentralization, strengthen its resilience, and enhance the network’s credibility as a global settlement layer.

A notable trend between 2020 and 2025 reinforces this alignment of incentives: the growth of on-chain assets is closely correlated with the growth of staked ETH. As of June 2025, the total stablecoin supply on Ethereum reached a record $116.06 billion, while tokenized RWAs climbed to $6.89 billion. At the same time, the number of staked ETH grew to 35.53 million ETH, a significant increase that highlights how network participants balance security and on-chain value.

Figure 7: Total value of ETH on the chain vs. value of staked native ETH
Source: Artemis

From a quantitative perspective, the annual correlation between on-chain asset growth and native ETH staked volume has remained above 88% among major asset classes. In particular, the supply of stablecoins is closely related to the growth of staked ETH. Although the quarterly correlation will show greater volatility due to short-term fluctuations, the overall trend remains unchanged - as assets flow on the chain, the motivation to stake ETH will also increase.

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

In addition, the increase in staked volume also affects the price dynamics of ETH. As more ETH is staked and removed from circulation, the supply of ETH tightens, especially during periods of high on-chain demand. Our analysis shows that the amount of staked ETH is 90.9% correlated with the price of ETH on an annualized basis and 49.6% on a quarterly basis, supporting the view that staking not only secures the network, but also creates favorable supply and demand pressures on ETH itself in the long run.

Figure 9: Native correlation between staking ETH and price
Source: Artemis

A recent policy clarification by the U.S. Securities and Exchange Commission (SEC) eased regulatory uncertainty surrounding Ethereum staking. On May 29, 2025, the SEC's Division of Corporation Finance stated that certain protocol staking activities (limited to non-entrepreneurship roles, such as self-staking, entrusted staking, or custodial staking under certain conditions) do not constitute securities issuance. While more complex arrangements still need to be determined based on actual circumstances, this clarification encourages institutions to participate more actively. After the announcement, Ethereum ETF application documents began to include staking clauses, allowing funds to earn rewards while maintaining network security. This not only improves the rate of return, but also further consolidates the acceptance and trust of institutions in the long-term adoption of Ethereum.

Composability and ETH as a productive asset

Another notable feature of ETH that distinguishes it from pure value storage assets such as gold and Bitcoin is its composability, which in itself drives demand for ETH. Gold and BTC are non-productive assets, while ETH is natively programmable. It plays an active role in the Ethereum ecosystem, providing support for decentralized finance (DeFi), stablecoins, and Layer 2 networks.

Composability refers to the ability of protocols and assets to interoperate seamlessly. In Ethereum, this makes ETH not only a monetary asset, but also a fundamental building block for on-chain applications. As more protocols are built around ETH, demand for ETH grows—not just as gas, but also as collateral, liquidity, and staking funds.

Today, ETH is used for a variety of critical functions:

• Staking and re-staking—ETH secures Ethereum itself and can be re-staking through EigenLayer to provide security for oracles, rollups, and middleware.
• Collateral in lending and stablecoins—ETH powers major lending protocols like Aave and Maker, and is the basis for over-collateralized stablecoins.
• Liquidity in AMMs—ETH pairs dominate decentralized exchanges like Uniswap and Curve, enabling efficient swaps across the ecosystem.
• Cross-chain Gas—ETH is the native gas token for most Layer 2s, including Optimism, Arbitrum, Base, zkSync, and Scroll.
• Interoperability - ETH can be bridged, wrapped, and used in non-EVM chains like Solana, Cosmos (via Axelar), and more, making it one of the most widely transferable assets on-chain.

This deeply integrated utility makes ETH a scarce but efficient reserve asset. As ETH becomes more integrated into the ecosystem, switching costs rise and network effects strengthen. In a sense, ETH may be more like gold than BTC. Gold derives most of its value from industrial and jewelry applications, not just investment. In contrast, BTC lacks this functional utility.

Ethereum vs. Solana: Layer-1 Divergence

Solana appears to be the biggest winner in the Layer 1 space during this cycle. It has effectively captured the memecoin ecosystem, creating a vibrant network for new tokens to be issued and developed. While this momentum is certainly there, Solana is still less decentralized than Ethereum due to its limited number of validators and high hardware requirements.

That being said, demand for Layer 1 block space is likely to be stratified. In this stratified future, both Solana and Ethereum can thrive. Different assets require different tradeoffs between speed, efficiency, and security. However, in the long run, Ethereum — due to its greater 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 market, the market size of assets that pursue robust security is much larger than that of assets that only focus on execution speed. This dynamic is beneficial to Ethereum: as more and more high-value assets are on the chain, Ethereum's role as a basic settlement layer will become more and more valuable.

Figure 11: Total value guaranteed on the chain (US$1 billion)
Source: Artemis

Reserve asset momentum: ETH's microstrategy moment

While on-chain assets and institutional demand are long-term structural drivers of ETH, Ethereum's asset management strategy - just like MicroStrategy (MSTR) uses Bitcoin - may become a continuous catalyst for ETH's asset value. A key turning point in this trend was the announcement of its Ethereum asset management strategy by Sharplink Gaming ($SBET) at the end of May, led by Ethereum co-founder Joseph Lubin.

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

Asset management strategies are tools for tokens to obtain traditional financial (TradFi) liquidity, while increasing the value of the assets per share of the relevant companies. Since the emergence of Ethereum-based asset management strategies, these asset managers have accumulated more than 730,000 ETH, and ETH has begun to outperform Bitcoin - a rare occurrence in this cycle. We believe this marks the beginning of a broader trend of asset management applications centered on Ethereum.

Figure 13: Price trend of ETH and BTC
Conclusion: ETH is a reserve asset for the on-chain economy

The evolution of Ethereum reflects a broader paradigm shift in the concept of monetary assets in the digital economy. Just as Bitcoin overcame early skepticism to earn recognition as “digital gold,” Ethereum (ETH) is building its own unique identity — not by mimicking Bitcoin’s narrative, but by evolving into a more versatile, foundational asset. ETH is more than a cloud computing security, nor is it limited to being a utility token for transaction fees or a source of protocol revenue. Instead, it represents a scarce, programmable, and economically essential reserve asset — one that underpins the security, settlement, and functionality of an increasingly institutionalized on-chain financial ecosystem.