What happened?
The Ethereum Foundation has changed its previously neutral stance and now plans to more actively utilize its substantial Ether reserves to invest in the decentralized finance (DeFi) ecosystem, such as engaging in independent staking and providing funding to lending protocols. In response to community concerns regarding its operations, the Ethereum Foundation also committed to regularly publishing financial reports to enhance transparency in the use of funds.
This move by the Ethereum Foundation is a direct response to community perceptions of its “sluggishness” and the increasing pressure from competing blockchain platforms such as Solana. To this end, the Foundation has undergone significant internal reforms, including the hiring of two new co-directors, Hsiao-Wei Wang and Tomasz Stanczak, in March of this year. The Foundation believes the next 18 months will be a “critical period” for Ethereum, necessitating a greater focus on important outcomes.
The Ethereum Foundation’s new strategy is not only aimed at generating revenue but also at supporting DeFi protocols that align with its “Defipunk principles,” which emphasize decentralization, censorship resistance, and self-custody. To practice these ideals, the EF even requires its employees responsible for fund management to learn to use open-source and privacy-preserving tools, hoping to demonstrate and promote the development of the entire Ethereum ecosystem towards these core values through their own actions.
Adjustment of Strategy by the Ethereum Foundation
The Ethereum Foundation recently announced a new strategy aimed at more effectively utilizing its vast reserves of Ether (ETH) and focusing on supporting Ethereum as a leading platform for decentralized applications (dApps).
The new strategy emphasizes the combination of short-term operations with long-term goals. Particularly during market downturns or “critical” periods, the Foundation will take a more active role in supporting the Ethereum ecosystem. The Foundation believes that the next 18 months will be such a critical period, requiring “enhanced focus on key outcomes.”
To improve transparency, the Ethereum Foundation has committed to regularly releasing quarterly and annual financial reports that detail its asset holdings, investment performance, and any significant developments. As of October 31, 2024, the Ethereum Foundation holds approximately $970 million in total assets, of which $788.7 million are crypto assets and $181.5 million are non-crypto investments. Over 81% of its total holdings are in Ether.
Additionally, the Ethereum Foundation plans to more thoughtfully deploy its reserves to ensure that “short-term operations align with long-term strategies.” This means the Foundation will strengthen its support for the Ethereum ecosystem during unfavorable market conditions or periods deemed “critical” by the Ethereum Foundation’s board.
Deepening DeFi Participation and “Defipunk” Principles
The Ethereum Foundation will also engage more actively in the decentralized finance (DeFi) ecosystem and explore various funding strategies, including solo staking and providing wETH to yield-generating lending protocols.
In simple terms, the Foundation will lock its held Ether directly on the Ethereum blockchain to participate in the block validation process. Through staking, the Foundation can earn staking rewards, and unlike participating in liquidity staking pools or other third-party staking services, “solo staking” means the Foundation will operate its own validation nodes directly.
Furthermore, the Ethereum Foundation will deposit its held “wrapped Ether” (wETH) into DeFi lending platforms. This allows the Foundation’s wETH to be borrowed by other users, enabling the Foundation to earn interest income and thereby increase the yield on its assets.
The Foundation may even borrow stablecoins and earn higher on-chain yields through exposure to real-world assets (RWA) and DeFi configurations.
In the past, the Ethereum Foundation avoided directly supporting any specific crypto protocols to maintain impartiality. However, they have now changed their strategy to actively participate in and support certain DeFi protocols, aiming to practice their core values of promoting truly decentralized, censorship-resistant projects that allow users to have full control over their assets.
To demonstrate this strategic shift, the Ethereum Foundation has invested $120 million (45,000 ETH) into multiple DeFi protocols this past February. One example is their deposit of Ether into the well-known Aave lending protocol, while also borrowing $2 million in the decentralized GHO stablecoin from Aave. Additionally, DeFi protocols such as Spark and Compound have also received funding support from the Foundation.
This indicates that the Ethereum Foundation is actively becoming a participant and supporter in the DeFi ecosystem rather than merely an observer.
Internal Adjustments and Responses to Community Concerns
In recent months, the Ethereum Foundation has undergone a series of significant changes, primarily in response to community criticisms of its “sluggish” reactions and the growing pressure from competitors like Solana. In March of this year, the Ethereum Foundation hired two new co-directors, researcher Hsiao-Wei Wang and Nethermind founder Tomasz Stanczak, to lead the reformed organization.
Hsiao-Wei Wang noted that the Ethereum Foundation currently has only 2.5 years of cash reserves, which sets the stage for critical deployments over the next 18 months. She emphasized that 2025-2026 could be a pivotal period for Ethereum, necessitating greater focus on important outcomes.
While the Ethereum Foundation emphasizes its commitment to core cyberpunk values, some observers have noted a decrease in the prominence of the two key goals of “decentralization” and “permissionlessness” in some of Ethereum’s recent public statements.
The Ethereum Foundation is undergoing an internal reform, requiring its fund management employees to delve into and utilize blockchain tools that align with its core principles (such as open-source and privacy protection).
The Foundation believes that by practicing these “Defipunk principles” (decentralization, censorship resistance, self-custody, privacy, etc.) in its daily operations, it can not only steadfastly progress towards its established goals but also accumulate experience and capabilities to better guide and support other projects within the entire Ethereum ecosystem to follow and realize these important decentralized values.
Reference sources: cointelegraph, the block