According to a recent report by brokerage firm Bernstein, Ethereum (ETH) has been experiencing a notable rally, outperforming Bitcoin (BTC) with a 33% gain year-to-date. Bernstein identified five key catalysts contributing to Ethereum's recent surge.

One major factor fueling the rally is the deflationary nature of the Ether supply, which has not increased since the Ethereum blockchain shifted to a proof-of-stake consensus model in September 2022. Furthermore, the amount of ETH held on exchanges has hit an all-time low of 11%, indicating a trend of more cryptocurrency being locked up in staking pools, DeFi smart contracts, and layer-2s.

The growth of ETH transaction fees based on higher blockchain activity in DeFi, NFTs, and tokens has incentivized more ETH holders to stake their assets. Additionally, the integration of financial smart contracts on Ethereum Layer 2 networks like Arbitrum, Optimism, and Polygon has led to increased demand as more ETH becomes locked in smart contracts, creating a feedback loop of rising demand.

The report also highlighted the Eigen layer protocol for restaking ether, attracting additional staking demand. Bernstein noted the introduction of new layer 2 networks since the start of 2023, bringing scalability and lower fees to the Ethereum network, contributing to a revival of decentralized finance.

Looking ahead, with the Dencun upgrade of the Ethereum blockchain planned for March this year, ETH contributors anticipate a further 90% reduction in Ethereum layer 2 transaction costs and improved profitability of layer 2 networks. This upgrade is expected to reduce congestion on the mainnet and drive higher volumes to the ecosystem.

Bernstein's analysis suggests that Ethereum could emerge as the next 'Institutional Darling' given these catalysts driving its growth. With further clarity on token regulations and healthier DeFi ecosystems, the report anticipates higher activity and Ethereum fees resulting in increased value accrual to ETH.