Joseph Lubin, Ethereum's co-founder and head of Consensys, has suggested that the approval of spot Ethereum ETFs by the U.S. Securities and Exchange Commission (SEC) could lead to a significant shortage of ETH. This scenario could mark a crucial moment for Ethereum.

Ethereum's Unique Supply Characteristics

Lubin predicts that the green light for spot Ethereum ETFs will spark substantial demand from institutional investors. He pointed out that since many institutions started their crypto ventures with spot Bitcoin ETFs, Ethereum would logically be the next major asset for diversification. This pent-up demand to buy Ethereum is expected to be considerable. Unlike Bitcoin, Ethereum’s supply dynamics are quite unique.

Limited Market Availability of Ethereum

One key difference between Ethereum and Bitcoin in the context of ETF creation is how these assets are utilized. On-chain data shows that over 27% of Ethereum is staked in various protocols within the Ethereum network. These staked funds are locked in contracts that ensure the network’s security and functionality, meaning they are not available for market trading.

Lubin explained, “A significant portion of Ethereum is involved in the core protocol, DeFi systems, or DAOs.” This structural feature means there will be less Ethereum on the market for ETF providers to buy and use for new ETF shares.

In August 2021, Ethereum introduced a burn mechanism with EIP 1559, which permanently removes a portion of transaction fees from circulation. This deflationary measure was designed to balance the increase in Ethereum’s supply and gradually create scarcity. As network activity and institutional interest through ETFs rise, this burn mechanism will further reduce the available supply, potentially leading to a shortage. Lubin remarked, “This could be a very significant turning point.”

Predicted Impact on Ethereum's Price

The approval of a spot Ethereum ETF could have a notable effect on the market. Crypto analyst Miles Deutscher believes that Ethereum could experience a price surge similar to Bitcoin’s following its ETF approval.

Deutscher's analysis shows that BTC increased by 75% in value within 63 days after its spot ETF was approved. If Ethereum follows a similar pattern, it could reach a price of $6,446 by July 23.

In conclusion, the potential approval of spot Ethereum ETFs is expected to drive significant institutional demand and create supply constraints due to Ethereum’s unique usage and deflationary mechanisms. This could mark a pivotal moment for Ethereum’s market dynamics and future value.