Ethereum Co-founder: Why Ethereum ETF will cause ETH supply contraction

• The U.S. Securities and Exchange Commission (SEC) appears ready to approve a spot Ethereum ETF.

• A large portion of Ethereum is locked in staking, DeFi protocols, and DAOs.

• The asset could see a supply crunch.

After months of silence, the U.S. Securities and Exchange Commission appears ready to approve a spot Ethereum exchange-traded fund.

Joe Lubin, co-founder of Ethereum and founder and CEO of crypto infrastructure company Consensys, noted that the resulting huge demand for Ethereum could lead to a supply crunch.

Lubin said institutions that already have exposure to bitcoin through the asset’s newly launched ETF “will likely want to diversify into a second approved ETF.”

He said there will be “considerable natural, pent-up pressure to buy Ethereum through an ETF,” but that there will be less supply to meet that demand than when a spot Bitcoin ETF was approved in January.

In the case of Bitcoin, authorized participants — the companies that enter into contracts to buy Bitcoin on behalf of the ETF each day as new shares are created — can simply buy idle Bitcoin on an exchange or through an over-the-counter counterparty.

But on-chain data shows that more than 27% of the total supply of Ethereum has been staked on the Ethereum network. It is locked in contracts and earns returns for its owners.

“Most of Ethereum is either in the core protocol, DeFi systems, or DAOs,” Lubin said.

In other words, not only is Ethereum’s market value lower than Bitcoin’s — making its price more responsive to inflows — but a large portion of its supply is unavailable for consumption by an ETF.

On top of that, new activity on Ethereum will cause the network to consume a large portion of the existing Ethereum supply over time, further limiting supply.

Even in the case of Bitcoin, banks were so eager to buy Bitcoin for the ETF that they approached at least one major Bitcoin mining company to acquire some of its holdings. The supply crunch for the Ethereum ETF could be even more severe.

“This could be a very profound watershed moment” for Ethereum and the crypto industry as a whole, Lubin said.