OPRR Flash Depth Activities

Search Extension

Anniversary Recap: Changes and Challenges in Ethereum and Its Ecosystem.

2023-10-04 11:00

Read this article in 14 Minutes

AI summary

View the summary

The content you provided is:

Source: Ebunker Chinese

The Ethereum merge is one of the most important upgrades in the history of Ethereum, which enhances the deflationary properties of ETH and significantly reduces the network's carbon footprint. Despite the price of ETH showing a range-bound trend over the past year, there have been many changes in the fundamentals of the Ethereum network. The merged ETH issuance has decreased by over 80%, the staking participation rate has increased by 87%, and approximately 1 million ETH has been permanently destroyed from the supply.

Since the merger, the supply of ETH has decreased by 296,000 coins.

On September 15th, 2022, Ethereum successfully completed the merge, transitioning the network from PoW to PoS consensus mechanism, fundamentally changing the token economics of ETH. The daily issuance of ETH has decreased by over 80%, from 13,500 to approximately 2,300. Additionally, with the introduction of Ethereum's burning mechanism, as long as the basic transaction fee is higher than the reward for stakers, Ethereum will exhibit a deflationary state.

Currently, the supply of ETH is nearly 300,000 coins less than it would be if merged, assuming it is still in the PoW mechanism. The supply of ETH would increase by 3.8 million coins, equivalent to approximately 6.27 billion US dollars.

Liquidity collateral brings challenges

Although the deflationary properties of ETH have been strengthened, new challenges to the decentralization of the Ethereum network have also emerged. The merger of Ethereum has led to the prosperity of liquidity staking tokens (LST) in 2023, which represent assets of staked ETH certificates that can be easily traded on trading platforms or used in various DeFi applications.

In April of this year, Ethereum activated the staking withdrawal function after completing the Shanghai upgrade, thereby reducing the difference between ETH and staked ETH and further strengthening the adoption of LST. Currently, various liquidity staking protocols are staking approximately 10.8 million ETH, accounting for 42.5% of the total ETH staked.

According to data from Dune Analytics, the amount of ETH staked in Lido, the largest liquidity staking protocol, has increased from 4.6 million at the beginning of the year to 8.6 million. CBeth (ETH staked on Coinbase) has also reached a quantity of 1.17 million since its launch in September last year, and Reth staked on Rocket Pool has reached 450,000.

Due to Lido's ETH staking amount has accounted for nearly one-third of the total ETH staking amount. However, some industry insiders believe that Lido's market share is too high, which is not conducive to the decentralization of Ethereum.

The founder of Ebunker, a well-known Ethereum non-custodial staking service provider, Allen, stated that the Lido community has also realized this point. Therefore, Lido is currently actively considering geographical decentralization, client-side decentralization, and decentralization of node supplier jurisdictions. As one of Lido's node suppliers, Ebunker is also promoting diverse clients to avoid too much ETH being concentrated on commonly used clients such as Geth, and to keep Ethereum neutral and robust.

In May of this year, Vitalik Buterin, co-founder of Ethereum, advocated that staking service providers controlling more than 15% of the ETH staking volume should actively raise user fees to slow down their adoption rate until their advantage declines.

NFT interest declines, ETH market sentiment low

According to a set of data released by Messari on September 15th, the trading volume of Ethereum NFTs has significantly decreased, indicating a noticeable decline in user participation and trading activity. Ethereum PFP (i.e. "avatar-type") NFTs had previously achieved great market success, but are now facing large-scale price drops. The floor price of many NFT collections has dropped by at least 30%, causing concern among collectors and investors about the continued decline in their value.

According to the Ethereum payment total fee trend chart released by GlassNode on September 19th, it can be seen that the data has been continuously declining recently, reaching a low point in nearly 8 months. Of course, this downturn is not limited to the NFT market. In the past month, the price of ETH has also been falling, which has affected the overall sentiment of Ethereum and its NFT market.

According to GlassNode's statistics, the number of addresses holding more than 1,000 ETH has dropped to 6,082, reaching a five-year low. Of course, this may be related to the rise of Staking, as whales also like to earn the 4% APR provided by the ETH network.

In addition, the number of addresses holding at least 0.1 ETH has also slightly decreased, which may be related to the launch of cheaper Ethereum L2 networks (such as the recently popular Base L2).

L2 adoption rate continues to rise

Since mid-September, the amount of ETH held on Ethereum L2 has been steadily increasing, currently maintaining over 2 million coins, which is close to 2% of the total supply.

The amount of ETH held on various mainstream L2s is shown in the above figure: Arbitrum holds about 1.3 million ETH, worth about $2 billion; Optimism holds 320,000 ETH; and ZK-based ZKSYNC holds 186,000 ETH. These three L2s have all accelerated user adoption due to previous airdrop rewards or expected airdrops. In contrast, Coinbase's Base is an OP-based blockchain that, although officially stated to have no airdrop rewards, holds about 143,000 ETH according to L2 data, showing impressive performance.

It is worth noting that the above-mentioned L2s all have important Dapp ecosystems, some of which are only launched on specific L2s. These Dapps sometimes automatically airdrop tokens. Therefore, the adoption of Base by users may also be due to the expectation of airdrop rewards from Dapps on Base.

However, fundamentally, it is the market demand for scalability that is the main driving factor for the adoption of L2. Due to the fact that Ethereum can only process about 15 transactions per second, gas fees can sometimes be pushed up to levels that ordinary users consider expensive. Many L2 solutions effectively reduce this data, resulting in an average on-chain gas fee of $0.7 for L2.

Other L2 solutions worth paying attention to besides the mainstream ones mentioned above include:

1) Starknet is a ZK-based L2 with a total of 60,000 ETH on it. The project has not yet been fully launched.

2) Consensys' Linea has not been able to attract more adoption for the time being, and the data has been hovering around 24,000 ETH.

3) Mantle, released by BitDAO, has received support from the cryptocurrency futures exchange Bybit, holding 23,000 ETH.

Polygon ZK, which has not yet fully launched, holds approximately 10,000 ETH. Its three ZK L2s have different structural settings while maintaining a focused development trend.

Currently, the Ethereum ecosystem is waiting for the release of Scroll L2, after which the L2 field may begin to move towards growth and adoption. On the other hand, new participants are also joining the L2 segment. For example, Aztec has been developed for many years with the aim of launching a privacy-focused L2.

L2 will become the catalyst for the prosperity of the Ethereum ecosystem

Overall, the L2 ecosystem will continue to attract a large influx of ETH, which may stimulate a new wave of adoption and revive the DeFi ecosystem.

L2 and L2 SDK allow any project to launch its own Layer 2 software package, especially after the trading platform supports direct deposit to L2, gas fees will become lower and lower.

For example, Coinbase has performed the above operations on the Base chain. Kraken also supports direct deposits for Polygon sidechains. As L2 scales from its initial release phase, larger L2s may attract direct deposits from mainstream cryptocurrency exchanges. In addition, cross-chain bridge projects allow assets to be transferred from mainstream L2s to other L2s at a low cost. Once a user uses one of these L2s, they are participating in the Ethereum ecosystem.

Although the performance of L2 has not been tested by a large number of users in the bull market cycle, its future performance is still unknown. However, after more than ten years of efforts in the encryption industry, the outline of how public blockchains can be expanded to a global network has begun to take shape.

L2 If Ethereum can successfully expand, the encryption world will witness a completely different public chain system from the previous market cycle - Ethereum will become the base chain, and numerous L2s will greatly accelerate the adoption rate of this base chain.

Finally, a "crowd of stars holding the moon" momentum is formed, making the ETH+L2 architecture truly become a global distributed infrastructure.