Artemis: Ethereum’s Evolution into an On-Chain Reserve Asset

Author: Kevin Li Artemis Researcher, Translator: Shaw Golden Finance

Abstract

• Ethereum (ETH) is transforming from a misunderstood asset to a scarce, programmable reserve asset, providing security and power for a rapidly institutionalized on-chain ecosystem.

• ETH's adaptive monetary policy expects inflation to decline - even if 100% of ETH is staked, the upper limit is only about 1.52%, and it will drop to about 0.89% by the 100th year (2125). This is much lower than the average annual growth rate of 6.36% of the US M2 money supply (1998-2024), and is even comparable to the supply growth of gold.

• 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 ETH native staking is as high as 88%+, highlighting the high degree of economic alignment.

• The U.S. Securities and Exchange Commission (SEC) released a policy statement on staking on May 29, 2025, reducing regulatory uncertainty. Ethereum exchange-traded fund (ETF) filings now include staking provisions, which both improves returns and promotes alignment with institutional investors.

• Ethereum’s deep composability makes it an efficient asset - for staking/re-staking, as decentralized finance (DeFi) collateral (e.g. Aave, Maker), automated market maker (AMM) liquidity (e.g. Uniswap), and as a native fee token on Layer 2.

• While Solana has gained traction in meme coin activity, Ethereum’s greater decentralization and security have positioned it to dominate high-value asset issuance — a larger and more durable market.

• Marked by the rise of Ethereum treasury reserve strategies, which began with Sharplink Gaming (SBET) in May 2025, more than 730,000 ETH are now held by public companies. This new demand dynamic mirrors the 2020 Bitcoin reserve boom and has fueled ETH’s recent outperformance relative to Bitcoin.

Not long ago, Bitcoin was widely considered not to be a legitimate store of value, and its “digital gold” thesis was considered absurd by many. Today, Ethereum (ETH) faces a similar identity crisis. ETH is often misunderstood, has underperformed in annual returns, has missed key hot cycles, and has seen slow retail adoption across much of the cryptocurrency 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 role as a monetary asset. When ETH is viewed primarily in terms of transaction fees, protocol revenues, or “real economic value,” it starts to resemble a cloud computing security — more like Amazon stock than a sovereign digital currency.

In my view, this framework is a category error. Valuing ETH purely through cash flows or protocol fees confuses fundamentally different asset classes. Instead, ETH 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 Debasement: Why the World Needs an Alternative

To fully understand ETH’s evolving role as a currency, it must be considered in the context of the broader economy, especially in an era characterized by fiat debasement and monetary expansion. Inflation is often underestimated due to continued government stimulus and spending. Although official Consumer Price Index (CPI) data indicate annual inflation of around 2%, this indicator is subject to revisions and may mask a decline in real 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 price gains, and close to 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, CPI, 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) has introduced radical new spending measures that are widely believed to be inflationary. At the same time, the implementation of the Department of Government Efficiency (DOGE), which was strongly advocated by Elon Musk, seems to be ineffective. These developments have led to a growing consensus that the existing monetary system is imperfect and that a more reliable store of value or form of currency is urgently needed.

What constitutes a store of value - where ETH fits in

A reliable store of value typically meets four criteria:

1. Durability - it must stand the test of time without degrading.

2. Preservation of value - it should maintain purchasing power throughout market cycles.

3. Liquidity - it must be easily traded in an active market.

4. Adoption and trust - it must be widely trusted or adopted.

Today, ETH excels in durability and liquidity. Its durability stems from Ethereum's decentralized and secure network. It is also highly liquid: ETH is the second most traded cryptoasset, with a deep 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 controversial. This is where the concept of "scarce programmable reserve asset" is more appropriate, highlighting ETH's positive role and unique mechanism in value maintenance and trust building.

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 its approach to supply and inflation. Critics often point to Ethereum's lack of a fixed supply cap. However, this criticism ignores the architectural subtleties 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 nonlinear: inflation 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 regulating effect on inflation.

Figure 2: Rough formula for inflation of staked ETH

The mechanism introduces a soft cap on inflation, which gradually decreases over time even as staking participation increases. In the worst case scenario simulated (i.e., 100% of ETH is staked), the annual inflation rate is capped at approximately 1.52%.

Figure 3: Illustrative extrapolation of ETH maximum issuance, assuming 100% of ETH is staked, starting with 120 million ETH, and a term of 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% of ETH is staked and no ETH is destroyed, the estimated 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 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%), the structural constraints on ETH supply (and potential deflation) enhance its attractiveness as a value asset. It is worth noting that ETH's maximum supply growth is now comparable to or even slightly inferior to gold, which further consolidates its position as a sound monetary asset.

Figure 6: Annual gold supply growth rate. 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 will launch its deposit token (JPMD) on Base (Ethereum Layer2 network), and BlackRock is tokenizing a money market fund through BUIDL on the Ethereum network.

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

1. Efficiency and cost reduction: Traditional finance relies on intermediaries, manual operations, and slow settlement processes. Blockchain simplifies these links through automation and smart contracts, thereby reducing costs, errors, and processing time from days to seconds.

2. Liquidity and fractional ownership: Tokenization enables fractional ownership of illiquid assets such as real estate or art, broadening investor access and unlocking locked-up funds.

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

4. 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 financial reach outside of traditional systems.

ETH Staking as Security and Economic Synergy

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 has increased on-chain activity, driving up demand for ETH as a fee token. More importantly, as Tom Lee observes, 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,” a major breakthrough use case that demonstrates the platform’s transformative potential and broad utility.

As more and 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 are finalized only 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 malicious blocks, they can disrupt finality entirely by undermining 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, creating 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 will increase the value of ETH by driving demand for base layer security and fees. They submit proofs to Ethereum, pay base fees, and typically use ETH as their native fee 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 real-world asset (RWA) issuers, as it enables them to capture maximum extractable value (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 operations helps address one of Ethereum’s current challenges: the concentration of stake in a few large operators, such as liquidity staking 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 supply of stablecoins on Ethereum reached a record $116.06 billion, while tokenized real-world assets (RWA) climbed to $6.89 billion. At the same time, the number of staked ETH grew to 3,553, a significant increase that highlights how network participants can improve security as on-chain value grows.

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

From a quantitative perspective, the annual correlation between on-chain asset growth and ETH native stake has remained above 88% across major asset classes. In particular, the supply of stablecoins is closely correlated with the growth of staked ETH. Although quarterly correlations can be more volatile due to short-term fluctuations, the overall trend remains the same - as assets move on-chain, the incentive to stake ETH increases.

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

In addition, the increase in staked ETH also affects ETH's price trend. 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 correlation between the amount of staked ETH and ETH price is 90.9% on an annualized basis and 49.6% on a quarterly basis. This supports the view that staking not only secures the network, but also creates favorable supply and demand pressures for ETH itself in the long run.

Figure 9: Native correlation of staked ETH to price. Source: Artemis

A recent policy clarification by the U.S. Securities and Exchange Commission (SEC) has 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-entrepreneurial roles, such as self-staking, entrusted staking, or custodial staking under certain conditions) do not constitute securities issuance. Although more complex arrangements still need to be determined based on actual circumstances, this policy 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 returns, but also further consolidates institutional acceptance and trust in the long-term adoption of Ethereum.

Composability and ETH as a productive asset

Another notable feature of Ethereum 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 Bitcoin 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 work seamlessly together. In Ethereum, this makes ETH not only a monetary asset, but also a fundamental building block for on-chain applications. As more and more protocols are built around ETH, the demand for ETH grows - not only as fees, but also as collateral, liquidity, and staking funds.

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

1. Staking and re-staking - ETH can protect Ethereum itself and can be re-staking through EigenLayer to provide security for oracles, rollups, and middleware.

2. Collateral in lending and stablecoins - ETH supports major lending protocols such as Aave and Maker, and is the basis for over-collateralized stablecoins.

3. Liquidity in AMMs - ETH dominates decentralized exchanges such as Uniswap and Curve, enabling efficient exchanges across the ecosystem.

4. Cross-chain fees – ETH is the native fee token for most Layer 2s, including Optimism, Arbitrum, Base, zkSync, and Scroll.

5. Interoperability – ETH can be bridged, wrapped, and used in non-EVM chains (e.g. Solana, Cosmos), making it one of the most widely transferable assets on-chain.

This deeply integrated utility makes ETH a scarce but productive 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 Bitcoin. Most of the value of gold comes from industrial and jewelry applications, not just investment. In contrast, Bitcoin 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 meme coin ecosystem, creating a vibrant network for new tokens to be issued and developed. While the momentum is certainly there, Solana is still less decentralized than Ethereum due to its limited number of validators and higher hardware requirements.

That being said, demand for Layer 1 block space may be stratified. In this stratified future, both Solana and Ethereum can thrive. Different assets require different trade-offs between speed, efficiency, and security. But in the long run, Ethereum may capture a larger share of asset value due to its stronger decentralization and security guarantees, while Solana may account for a higher transaction frequency.

Figure 10: Quarterly trading volume of SOL and ETH

However, in the financial market, the market size of assets seeking robustness and security is much larger than the market size of assets seeking execution speed alone. This dynamic trend is in favor of Ethereum: as more and more high-value assets are transferred to the chain, Ethereum's role as a basic settlement layer becomes increasingly important.

Figure 11: Total value secured by Chain ($1 billion). Source: Artemis

Ethereum Reserve Driving Force: ETH’s MicroStrategy Moment

While on-chain assets and institutional demand are long-term structural drivers of ETH, Ethereum’s treasury reserve management strategy — just as MicroStrategy (MSTR) leverages Bitcoin — could be a sustained catalyst for ETH’s asset value. A key turning point in this trend was the announcement of Sharplink Gaming (SBET)’s Ethereum Treasury Reserve Management Strategy in late May, led by Ethereum co-founder Joseph Lubin.

Figure 12: ETH Treasury Reserve Holdings. Source: strategythreserve.xyz

Treasury Reserve strategies provide tokens with access to traditional finance (TradFi) liquidity while also increasing the value of the underlying company’s stock assets. Since the emergence of Ethereum-based reserve strategies, these companies have accumulated more than 730,000 ETH, and ETH has begun to outperform Bitcoin - a rare occurrence in this cycle. We believe this is a sign of a broader trend in Ethereum-focused asset reserve adoption.

Conclusion: ETH is a reserve asset for the on-chain economy

Ethereum's development journey reflects a broader paradigm shift in the concept of monetary assets in the development of the digital economy. Just as Bitcoin overcame early skepticism and was eventually recognized as "digital gold", ETH is establishing its unique identity - not by imitating Bitcoin's narrative, but by growing into a more general and foundational asset. ETH is not just a cloud-computing-like security, nor is it just used to pay transaction fees or serve as a source of protocol revenue. Instead, it is a scarce, programmable, and economically critical reserve asset - supporting the security, settlement, and function of an increasingly institutionalized on-chain financial ecosystem.