From Misunderstood to Rising: Why has ETH become the Reserve Asset of the on-chain Economy?

Recently, Ethereum has once again attracted attention, especially after the concept of ETH reserve assets emerged. By conducting an in-depth analysis of the valuation framework of ETH, we have reached a compelling long-term bullish forecast.

Key Points

• Ethereum is transforming from a misunderstood asset into a scarce, programmable reserve asset, providing security for a rapidly compliant on-chain ecosystem.

• The adaptive monetary policy of ETH is expected to reduce the inflation rate. Even if 100% of ETH is staked, the inflation rate will be as low as about 1.52%, dropping to approximately 0.89% by 2125. This is far lower than the annual growth rate of the USD M2 supply at 6.36%, and can even be comparable to the supply growth rate of gold.

• Institutional adoption is accelerating, with companies like JPMorgan and BlackRock building on Ethereum, driving sustained demand for ETH.

• The annual correlation between on-chain asset growth and native ETH staking exceeds 88%, highlighting strong economic consistency.

• The staking policy statement released by the SEC on May 29, 2025, has reduced regulatory uncertainty. The Ethereum ETF application documents now include staking provisions, enhancing returns and strengthening institutional consistency.

• The deep composability of ETH makes it a productive asset—usable for staking/re-staking, as DeFi collateral, AMM liquidity, and as the native gas token of Layer 2.

• Although Solana 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 enduring market.

• The rise of Ethereum reserve asset trading has led public companies to hold over 730,000 ETH. This new trend has contributed to ETH recently outperforming BTC.

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 depreciation and monetary expansion. Under continuous government stimulus and spending, inflation rates are often underestimated. Although official CPI data shows inflation hovering around 2% per year, this figure may mask the real decline in purchasing power.

From 1998 to 2024, the average annual CPI inflation rate was 2.53%. In contrast, the average annual growth rate of the M2 money supply in the United States was 6.36%, exceeding both 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 is largely likely to stem more from monetary expansion rather than an increase in productivity.

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 has introduced aggressive new spending measures, which are widely believed to lead to inflation. These developments have prompted a growing consensus that the existing monetary system is inadequate, and there is an urgent need for a more reliable form of value storage asset or currency.

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 the lack of a fixed supply cap in Ethereum. However, this criticism overlooks the architectural complexity of Ethereum's adaptive issuance model.

The issuance of ETH is dynamically related to the amount of staked ETH. While the issuance will increase with the rising participation in staking, this relationship is sub-linear: the growth rate of the inflation rate is lower than the growth rate of the total staked amount. This is because the issuance is inversely proportional to the square root of the total amount of staked ETH, thus naturally moderating the inflation.

The mechanism introduces a soft cap on inflation, which means that even as the staking participation increases, the inflation rate will gradually decrease over time. In the worst-case scenario simulated, where 100% of ETH is staked, the annual inflation rate cap is approximately 1.52%.

Importantly, even in this worst-case scenario, the issuance rate will decrease 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 ( Year 2045 ): ~1.33%
• Year 50 ( Year 2075 ): ~1.13%
• The 100th year (2125 year ):~0.89%

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

Compared to the average annual growth rate of M2 money supply of fiat currencies like the US dollar, which exceeds 6%, the structural constraints of Ethereum and its potential deflation enhance its attractiveness as a store of value asset. It is worth noting that Ethereum's maximum supply growth rate is currently comparable to gold, and even slightly lower than gold, further consolidating its position as a robust monetary asset.

Institutional Adoption and Trust

Although the currency design of Ethereum effectively addresses the supply dynamics issue, its actual utility as a settlement layer has now become a major driving force behind adoption and institutional trust. Major financial institutions are building directly on Ethereum: a certain platform is developing a tokenized stock platform, a certain bank is launching its deposit token on Ethereum Layer 2, and a certain asset management company is using tools to tokenize a money market fund on the Ethereum network.

This on-chain process is driven by a strong value proposition, 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, thereby lowering costs, reducing errors, and shortening processing time from days to seconds.

• Liquidity and fractional ownership: Tokenization enables fractional ownership of illiquid assets such as real estate or art, broadening investor access and unlocking locked capital.

• Transparency and Compliance: The immutable ledger of blockchain ensures a verifiable audit trail, simplifying compliance and reducing fraud by allowing real-time visibility into transactions and asset ownership.

• Innovation and market access: Composable on-chain assets allow for new products ( such as automated lending or synthetic assets ) to create new sources of income and expand the financial scope beyond traditional systems.

ETH Staking as Security and Economic Coordination

The on-chain migration of traditional financial assets highlights two main drivers of ETH demand. 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, 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", which is a significant breakthrough use case that demonstrates the platform's transformative potential and broad applicability.

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 a block can only be finalized when two-thirds or more of the staked ETH from the vast majority of ( reaches consensus. While attackers 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 not only does not undermine ETH, but actually enhances the value of ETH by driving demand for the security and Gas of the underlying layer. They submit proofs to Ethereum, pay the 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 settlement.

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

Importantly, broader institutional participation in validating node operations helps address one of the current challenges of Ethereum: the concentration of stake in the hands of a few large operators, such as liquidity staking protocols and centralized exchanges. By diversifying the set of validating nodes, institutional participation contributes to enhancing the level of decentralization of Ethereum, strengthening its resilience, and improving 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. As of June 2025, the total supply of stablecoins on Ethereum reached a record $116.06 billion, while tokenized RWA rose to $6.89 billion. Meanwhile, the amount of staked ETH grew to 35.53 million ETH, highlighting how network participants balance security and on-chain value.

From a quantitative perspective, the annual correlation between the growth of on-chain assets and the native ETH staking volume among major asset classes has remained above 88%. It is particularly noteworthy that the supply of stablecoins is closely related to the growth of staked ETH. Although the quarterly correlation may exhibit significant volatility due to short-term fluctuations, the overall trend remains unchanged — as assets flow on-chain, the motivation for staking ETH will also be enhanced.

In addition, 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 ensures network security but also exerts favorable supply and demand pressure on ETH itself in the long run.

A recent policy clarification issued by a regulatory agency has alleviated the regulatory uncertainty surrounding ETH staking. On May 29, 2025, the relevant authorities stated that certain protocol staking activities ) are limited to non-entrepreneurial roles, such as self-staking, delegated staking, or custodial staking under specific conditions, which do not constitute securities issuance. While more complex arrangements still need to be determined based on actual circumstances, this clarification has encouraged institutions to be more proactive.