Ethereum utility coins on the rise

Date: Thursday 7th November 2024

Why are Ethereum utility coins rallying?

Until recently, DeFi tokens have been largely labelled as "useless governance tokens", tokens which serve no value other than voting on protocol changes via governance voting rights. However, investors and token holders have been buying on the bet that one day, these protocols will be able to pass value back to the token through fees earned by the protocol. Under the previous administration, such value accrual mechanisms faced regulatory hurdles. The SEC had already taken enforcement actions against Uniswap, raising concerns that DeFi tokens might be seen as violating securities laws. While passing revenue to token holders enhances their fundamental value, it also risks categorizing them as securities from a traditional financial perspective.

So why are we now seeing these tokens pump?

The recent DeFi rally appears to be driven by regulatory optimism. Prior to the election, President-elect Trump promised to replace SEC Chair Gary Gensler on his first day in office. With his election win, markets are now pricing in the anticipated regulatory shift, expecting a friendlier environment for DeFi projects and their tokens. Leading protocols like Aave and Uniswap, which announced fundamental changes prior to the election, are now experiencing price surges as regulatory uncertainty eases.

In April 2024, Marc Zeller of Aave proposed a “fee switch” for the AAVE token, redirecting a portion of protocol revenue back to token holders—a significant step toward creating intrinsic value (note this change has yet to be formally approved for implementation). Between the announcement and election day, AAVE was up over 60%. Now with Trump coming into office, we are seeing the market eat this up with AAVE up around 30% post-election.

Uniswap made a similarly impactful move in October with the announcement of Unichain, its own Ethereum Layer-2 solution built on Optimism's Superchain. Unichain’s fees will flow to UNI token holders, transforming UNI from a governance token into a utility asset and expanding its investment appeal. This fundamental shift has led UNI to rise over 33% post-election.

The optimism isn’t limited to Aave and Uniswap. Other governance tokens, such as LIDO, ENA, MKR, and FXS, are also gaining as the market anticipates similar value-accruing changes across the DeFi landscape.

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