ETH holdings by major exchanges have decreased by 20% since August, are institutions buying or is there another mystery?

Data shows that the amount of ETH held by top exchanges has decreased by 20.5% (about 4 million ETH) since August. Some believe this is due to institutional investors' participation, but is that really the case?

Large-scale Outflow of ETH

According to data released by blockchain analytics company Santiment, the amount of ETH held by top exchanges has significantly decreased (approximately 4 million ETH) since August. This trend seems to indicate a decrease in short-term trading demand for ETH among investors, while increasing faith in holding ETH for the long term:Source.

"Data from the top ten ETH exchange addresses shows that ETH continues to flow out to non-exchange wallets at a surprisingly fast rate. Over the past two months, exchange holdings of ETH have decreased by 20.5%, indicating long-term confidence in the coin's value by large holders."

Is this Due to Institutional Investors?

Many analysts speculate that this trend is closely related to the involvement of institutional investors. According to Barry Silbert, the co-founder of Grayscale, Grayscale's Ethereum Trust Fund (ETHE) has accumulated 2% of the circulating ETH supply:

"While everyone focuses on the amount of Bitcoin we custody, Grayscale Ethereum Trust quietly manages over 2% of the ETH market's circulating supply."

While everybody has been focused on our bitcoin accumulation, the @Grayscale Ethereum Trust now holds over 2% of all ETH in circulation

— Barry Silbert (@BarrySilbert) October 15, 2020

On the other hand, Spencer Noon, the head of DTC Capital, tweeted in August this year that institutional investors looking to participate or use decentralized finance (DeFi) often choose to buy ETH as a first step:

"After conversations with international investors, fund managers, OTC desks, and family offices over the past few weeks, all I can say is: the bulls are here. They are excited about DeFi but still unfamiliar, so they first choose to buy ETH and gradually transition into DeFi protocols once the funds are in place."

My read on #DeFi after speaking with instl investors, fund mgrs, OTC desks, and FOs over the last few wks:

The herd is coming. They’re excited about DeFi but new to it, so they’re buying $ETH first. Once positions are set, I expect them to move up the risk spectrum to protocols.

— spencernoon.eth (@spencernoon) August 3, 2020

Is Uniswap Liquidity Mining the Main Cause?

However, are institutional investors truly the main factor? In fact, the significant decrease in ETH holdings on exchanges may have a strong connection to DeFi liquidity mining. According to data from Uniswap, ETH liquidity has increased significantly since late August, as Sushiswap leveraged Uniswap's platform to launch liquidity mining. Many market makers, large holders, and retail investors have chosen to transfer ETH from exchanges to Uniswap to provide liquidity and earn mining rewards. In September, Uniswap launched its own governance token and initiated liquidity mining, further stabilizing the platform.

The amount of ETH on the Uniswap platform has surged from 210,000 in August to 3.66 million currently, indicating that a significant portion of the outflow from exchanges has gone to Uniswap.

While the large outflow of ETH from exchanges may not be directly related to institutional investors, depositing ETH into liquidity pools can be seen as a form of lock-up and also demonstrates investors' long-term bullish sentiment towards ETH.