Ethereum set for bull run, but short-term struggles expected: Kaiko

Last week marked a significant shift in the market sentiment for Ethereum (ETH) following the SEC’s unexpected approval of spot ETH exchange-traded funds (ETFs), and market data suggests that ETH is headed for a bull run soon, according to a report from on-chain analysis firm Kaiko.

The SEC’s decision came through the approval of 19b-4 filings from major exchanges including NYSE, Cboe, and Nasdaq. This pivotal step precedes the review of S-1 forms from issuers such as BlackRock, Fidelity, and VanEck, with the commencement of trading in ETH ETFs pending these approvals.

“With these approvals, the SEC implicitly stated that ETH (without staking) is a commodity rather than a security,” stated Will Cai, Head of Indices at Kaiko. “This isn’t just about access to ETH, but has significant and likely positive ramifications on how all similar tokens will be regulated in the US with respect to trading, custody, transfer, etc.”

Image: Kaiko

The anticipation of approval was hinted at earlier in the week when several exchanges amended their filings to exclude staking, and Bloomberg increased its approval odds from 25% to 75%. The market’s reaction was swift, with ETH’s implied volatility for the nearest expiry jumping from under 60% to nearly 90% within two days, before settling down by week’s end.

The derivatives market echoed this sentiment shift, with ETH perpetual futures funding rates soaring from a year’s low to a multi-month high within three days. Open interest also reached a record $11 billion, indicating robust capital inflows. Despite this, the ETH to BTC ratio showed a surge from 0.044 to 0.055, remaining below February’s highs.

Moreover, the ETH Cumulative Volume Delta (CVD) revealed a broad-based rally, with strong net buying in both US and offshore spot markets starting May 21. This marked a change from the net selling previously recorded on offshore exchanges.

Image: Kaiko

However, the upcoming launch of ETH ETFs may exert selling pressure on ETH due to potential outflows from Grayscale’s ETHE, which has been trading at a discount. ETHE, the largest ETH investment vehicle with over $11 billion in assets under management, could see significant outflows, impacting ETH’s average daily volume on Coinbase.

Despite potential short-term inflows disappointment, the SEC’s approval is a milestone for Ethereum, alleviating some of the regulatory uncertainty that has affected its performance over the past year.

Taiko, an Ethereum-based rollup, has launched on the mainnet following a year of development and seven testnet iterations.

Ethereum co-founder Vitalik Buterin proposed the inaugural block, which included metadata containing the names of all Taiko core contributors.

As a based rollup, Taiko relies on Ethereum block validators to sequence transactions, benefiting from the liveness and security assurances provided by Ethereum. Initially, Taiko’s rollup protocol contracts on Ethereum are controlled by a multisig arrangement, with plans to transition to requiring 50% of blocks to use zero-knowledge (ZK) proofs as part of its long-term strategy.

The project incorporates a type-1 zero-knowledge virtual machine built to emulate Ethereum’s core architecture. Such a design enhances protocol security by allowing the submission and contestation of proofs.

“It’s been a long time in the making, and we’re beyond thrilled to deliver what we believe is the most secure technology to scale Ethereum,” Taiko co-founder and CEO Daniel Wang shares.

The project will be launching a token some weeks after the mainnet launch, with plans to introduce an incentive program to engage its community through rewards for task completion and interaction. Ahead of the mainnet launch, an airdrop was run for its community, with a distribution scale of 5% of the planned token’s 5 billion supply. A DAO is also slated for launch sometime before the end of the year, with a phased governance mechanism to incrementally update its systems.

To ensure network stability post-mainnet launch, Taiko says that it will be setting up controls for block proposals and proving for up to two weeks. Based on the progress, the processes will then be decentralized and permissionless, enabling node running, and other requisite functions for all users.

Taiko has raised $37 million from two previous funding rounds, with a seed raise led by Sequia China in Q3 2022 and a $12 million pre-Series A round led by Generative Ventures. Its Series A funding round was completed on March 2 this year led by Lightspeed Faction, Hashed, Generative Ventures, and Token Bay Capital, with participation from Wintermute Ventures, Presto Labs, Flow Traders, Amber Group, OKX Ventures, GSR, and WW Ventures, among others.

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