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Cryptocurrency has entered the mainstream. The era of digital assets being confined to the fringes of society is over. A significant milestone in this transition occurred in July 2024 when the U.S. Securities and Exchange Commission (SEC) approved spot Ethereum ETFs.
Fast forward to Donald Trump’s re-election as president, which has ignited a surge of optimism in the cryptocurrency market, propelling Bitcoin to an unprecedented peak. In addition to launching the $TRUMP and $MELANIA meme coins and introducing the World Liberty Financial venture, Trump’s supportive stance on crypto signifies a complete turnaround from previous skepticism to active engagement.
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Meanwhile, Ethereum has fallen behind, leading crypto analysts to anticipate a breakthrough for Ethereum ETFs. As investors seeking underperformers shift their attention from Bitcoin, many are looking to ETH as a viable alternative.
If the demand for traditional ETFs continues to grow, ETF providers will need to start leveraging native on-chain infrastructure to access staking yields, DeFi yields, and composability to maintain competitive performance.
Limitations of the Current ETF Offering
Cryptocurrency has revolutionized finance by removing the need for intermediaries, automating financial processes, and introducing a range of new financial products. However, ETF issuers remain reliant on outdated infrastructure and intermediaries to invest in crypto products. This restricts their ability to tap into the best-performing opportunities for clients and results in ETF underperformance compared to equivalent on-chain products.
Without a system upgrade, they will be outpaced by issuers who transition to on-chain technology. For instance, ETH ETFs do not capture staking yield, let alone other opportunities in DeFi. Money market ETFs for digital USDC are still nonexistent, despite the risk-free rate in DeFi being significantly higher—and very uncorrelated—to that of traditional finance. This highlights the urgent need for innovation, as adopting on-chain technology presents untapped potential that conventional finance has yet to address or replicate.
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Undermining the Ethos of Cryptocurrency
The fundamental advantages of Ethereum’s decentralized architecture are compromised when accessing Ethereum through an ETF. It reintroduces intermediaries and centralized control, which contradicts the original intent of blockchain technology.
Conversely, it is inevitable that over time, crypto ETFs will evolve to offer non-custodial options to their end clients, meaning that they will assume full responsibility for holding the private key or the actual assets. Current spot crypto ETFs do not permit investors to hold the cryptocurrency as they rely on third-party intermediaries and custodians.
Non-custodial options provide users with enhanced control, as well as transparency and security. As more investors become acquainted with crypto, many may opt for non-custodial holdings of Ethereum to fully benefit from decentralized technology, such as reduced costs, the elimination of counterparty risk, and the ability to transact directly. As the crypto ecosystem matures, the transition towards non-custodial crypto ETFs will empower investors to fully embrace the decentralized ethos, offering them a safer, more cost-effective, and transparent way to engage with blockchain technology.
Source: The Block
ETFs Risk Falling Behind
The traditional structure of ETFs brings crypto products to the attention of conventional financial institutions. However, without significant innovation from providers into more natively on-chain technology to access opportunities, they risk being supplanted by more modern products that can perform better and offer greater security and transparency. Money markets serve as a prime example of this. Traditional money market funds yield less than 5%, while the USDC risk-free equivalent is in the double digits.
The true success of bridging DeFi and CeFi will only be evident when these yields converge, underscoring the necessity for providers to evolve and adopt on-chain solutions to remain competitive and relevant.
The post Ethereum ETFs Optimism: Overrated or Missed? appeared first on Cryptonews.
