23.10.2024
Will Ethereum, with its technical upgrades, be able to revitalize its narrative and attract developers, investors, and new projects?
Ethereum has been facing skepticism in the crypto environment due to its poor performance during 2024. While BNB has already established a new all-time high and Solana has attracted new projects and narratives to its ecosystem in this cycle, Ethereum, despite seeing the launch of its SPOT ETFs in the summer, has not managed to take off and consolidate itself.
On the contrary, certain metrics indicate that it has stagnated, and there doesn't seem to be any short-term incentive to reverse this trend, or is there?
In 2024, we saw how the Dencun hard fork was implemented to modify the inflationary dynamics, reducing gas fees since its application and, consequently, the amount of ETH that has been burned. This trend has continued, while the number of transactions has remained stable with a slight downward tendency.
Nevertheless, the Total Value Locked (TVL) has stagnated after a prolific start to the year: it has significantly decreased after the launch of the SPOT ETFs (this could be partly due to Grayscale's sales as they unlock their holdings).
ETH Total Value Locked= $48,687b Source: DeFiLlama
Likewise, staker revenue has decreased since the Dencun hard fork, which aligns with lower activity on the blockchain. In that sense, inflation has started to rise in the last 30 days, following a trend we began to see after the upgrade. On the bright side, the number of validators has increased, providing the network with greater security and robustness.
ETH inflation during the last 30 days. Source: Ultra Sound Money
Ethereum Block Validator Revenue (Monthly) Source: The Block
While Proof-of-Stake improved efficiency and speed on the Ethereum network, especially after the Shapella upgrade, it still had flaws that the developers will need to address in order to bring the scalability that Ethereum is looking to achieve in the coming years, namely continued issues with speed, interoperability, and transaction fees that make scalability a challenge.
The upcoming two-part Pectra fork (a portmanteau of Prague and Electra, the names of two former, separate package upgrades to the network that were later combined into one) will address several of these issues within a larger package, bringing enhanced scalability, usability, and efficiency to the network.
The Ethereum Foundation’s developer team announced the upgrade earlier in 2024 before deciding to split it into two parts in September. Both upgrades are expected to come in 2025, with the first upgrade expected to contain eight Ethereum Improvement Proposals (EIPs).
Pectra’s Key EIPs (First Phase)
The first set of EIPs to be sent to the mainnet, along with the first phase of Pectra, will include changes that will address issues related to security and scalability. With improvements to the validator process, changes to how data is stored on-chain, and improvements to how smart contracts interact with user wallets, the first phase of the Pectra upgrade addresses issues that made scalability a challenge from a validator, developer, and user perspective. This shows that the Ethereum Foundation is approaching scalability from all angles, making the network more appealing to various types of users.
EIP 7702: This EIP was proposed by Ethereum’s founder Vitalik Buterin and focuses on improving wallet functionality. The EIP will enable regular wallets to temporarily behave like smart contract wallets with features like batch transactions and paying gas fees with ERC-20 tokens. This will enhance user experience and security by allowing users to have more flexibility with which tokens they use to cover gas fees, limiting their use of bridges. It will likely be part of the second phase of Pectra’s upgrades.
EIP 7251: This will allow the validator to have larger effective balances of 2,048 ETH, which will allow larger validators to consolidate and get rid of any redundancies in the network while keeping the minimum staking balance of 32 ETH. The purpose is for large node operators to consolidate into fewer validators. This will increase security by removing said redundancies, and improve efficiencies because those redundant validators don’t have to communicate with one another.
EIP-2935: This EIP introduces Verkle Trees, which are a data structure that significantly reduces the amount of data that Ethereum nodes need to store by batching it into smaller cryptographic proofs within a tree structure (see below). This helps improve network scalability and data efficiency because the data doesn’t have to be stored locally.
Source: Vitalik Buterin
EIP-6110: This EIP will streamline validator operations by minimizing the delay between staking on the execution layer and processing those transactions on the Beacon chain, the consensus layer of the Ethereum blockchain. This will result in quicker processing on transactions and more efficiency within the validators.
EIP-7002: This will allow validators to trigger partial exits and withdrawals, resulting in an improved staking experience and more flexibility. It will also simplify the withdrawal process, which will overall enhance liquidity and flexibility within the network.
EIP-7549: Makes improvements to how validators communicate and verify transactions on the network. This EIP will make the attestation (voting) process more efficient, which will make transactions process faster and with less bandwidth usage.
EIP-2537: This EIP introduces an efficient way for Ethereum to handle advanced cryptographic operations, making zk-SNARKs and layer 2 solutions faster. This will improve overall operations among L2 networks that already help to improve scalability for Ethereum.
EIP-3074: This will add new tools to make smart contracts interact more smoothly with regular user wallets. For end users, this will enhance the user experience and limit issues with wallets when connecting and transacting with smart contracts on the network.
EIP-7685: This will enhance how the execution layer and consensus layer interact with one another, improving transactions and enhancing scalability within the network.
Technical Upgrades, Narrative Shift.
The Pectra fork has the potential to enhance the functionality of the Ethereum PoS blockchain, though its impact might not be immediate and therefore may take time to reflect in the price. The goal of these upgrades is to make Ethereum more accessible and secure for developers building on the network, improve the user experience with wallet enhancements, set a limit for gas fees, and support validators who have locked their investments in Ethereum’s ecosystem.
It's clear that these upgrades aim to expand Ethereum's presence in the industry, especially by attracting institutional investors and making it more appealing and accessible for new developers looking to launch their projects from its platform.
Will Ethereum, with its technical upgrades, be able to revitalize its narrative and attract developers, investors, and new projects?
Ethereum has indeed lagged behind Bitcoin and Solana in this regard. Recently, we have seen the SOL/ETH pair reach a new all-time high (indicating greater market dominance of SOL over ETH), while the ETH/BTC pair has hit a 3-year low, though there are signs that a bottom may be forming.
The launch of ETH Spot ETFs paved the way for more capital inflows and sparked interest from investors outside the crypto ecosystem. Nevertheless, their performance has been somewhat disappointing. However, we cannot solely attribute this to a lack of investor appeal, but rather to the timing of the ETF launch (during summer, when trading volume is lower), which is not ideal. This contrasts with Bitcoin ETFs, launched earlier in the year, a period with greater capital allocation. Additionally, investors have noted that an ETH ETF needs to allow staking, yet it currently doesn’t. This detracts from its appeal as an asset, contributing to Ethereum's somewhat diminished attractiveness.
Many of these circumstances are not directly attributable to the network itself. Indeed, we have seen the meme narrative shift toward Solana, drawing volume and traction away from Ethereum. Other narratives, such as DeFi and NFTs, have also failed to revive within the current crypto ecosystem trends.
For these reasons, our perspective is that Ethereum has undertaken a series of continuous improvements with a technological horizon beyond the crypto environment. It does itself a favor by not favoring or needing to embrace short-term or trendy narratives, which do not necessarily contribute to its legitimacy in an industry that extends beyond just the blockchain space. Ethereum remains with an engaged community and a foundation that is driving network improvements that serve its own purpose with coherence and vision.