The Ethereum merger is one of the most important upgrades in the history of Ethereum, which enhances the deflationary properties of ETH while significantly reducing the networks carbon footprint. Although ETH has been range-bound in price over the past year or so, a lot has changed in the fundamentals of the Ethereum network. Post-merger ETH issuance has dropped by more than 80%, staking participation has increased by 87%, and approximately 1 million ETH has been permanently destroyed from the supply.
Since the merger, ETH supply has decreased by 296,000 coins
On September 15, 2022, Ethereum successfully completed the merger. After transforming the network from PoW to PoS consensus mechanism, it completely changed the token economics of ETH. The daily issuance of ETH has increased from 13,500 to about 2,300 currently. pieces, a drop of more than 80%. Coupled with the previous introduction of the Ethereum burning mechanism, Ethereum will show a deflationary state as long as the basic transaction fee is higher than the new circulation amount awarded to stakers.
Currently, the supply of ETH is nearly 300,000 less than at the time of the merger. Assuming that it is still in the PoW mechanism, the supply of ETH will increase by 3.8 million, equivalent to approximately US$6.27 billion.
Challenges posed by liquidity staking
Although the deflationary properties of ETH have increased, new challenges to the decentralization of the Ethereum network have also begun to emerge. The merger of Ethereum has contributed to the 2023 boom in liquid staking tokens (LST), assets that represent staked ETH credentials that can be easily traded on exchanges or used in various DeFi applications.
In April this year, Ethereum activated the pledge withdrawal function after completing the Shanghai upgrade, thereby reducing the price difference between ETH and staked ETH, further strengthening the adoption of LST. Currently, various liquidity staking protocols pledge a total of approximately 10.8 million ETH, accounting for 42.5% of the total pledged amount of ETH.
According to data from Dune Analytics, the number of ETH pledged 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 pledged on Coinbase) has now reached 1.17 million pieces after its launch in September last year, and Reth pledged on Rocket Pool has also reached 450,000 pieces.
Because Lidos ETH pledge amount has accounted for nearly one-third of the total ETH pledge amount. However, some people in the industry believe that Lidos market share is too high, which is not conducive to the decentralization and decentralization of Ethereum.
Allen, founder of Ebunker, a well-known Ethereum non-custodial staking service provider, said that the Lido community is also aware of this, so Lido is currently actively considering decentralization at the geographical level, client level and node supplier jurisdiction. change. As one of Lidos node providers, Ebunker is also promoting diverse clients to avoid concentrating too much ETH on very commonly used clients such as Geth, and to keep Ethereum neutral and robust.
In May of this year, Ethereum co-founder Vitalik Buterin advocated that staking service providers that control more than 15% of ETH pledged volume should proactively increase user fees to slow their adoption until their advantage diminishes.
NFT interest declines, ETH market sentiment subdued
According to a set of data released by Messari on September 15, Ethereum NFT transaction volume has decreased significantly, indicating a significant decline in user participation and transaction activity. Ethereum PFP (i.e. avatar) NFTs have enjoyed huge market success, but are now facing massive price drops. The floor prices of many of these NFT collectibles have dropped by at least 30%, causing collectors and investors to worry that their value will continue to decline.
According to the total fee trend chart of Ethereum payments released by GlassNode on September 19, we can see that the data has continued to decline recently and has hit a low in nearly 8 months. Of course, this downturn is not limited to the NFT market. The price of ETH has also fallen over the past month, and its price has also affected the overall sentiment of Ethereum and its NFT market.
According to GlassNode statistics, the number of addresses holding more than 1,000 ETH fell to 6,082, a five-year low. Of course, this may have something to do with the rise of Staking. After all, whales also like to earn the 4% APR provided by the ETH network.
In addition, the number of addresses holding no less than 0.1 ETH has also declined slightly, which may be related to the launch of the cheaper Ethereum L2 network (such as Base L2, which has been very popular recently).
L2 adoption continues to rise
Since mid-September, the number of ETH held on Ethereum L2 has been rising and currently remains above 2 million, close to 2% of the total supply.
The number of ETH held on each mainstream L2 is shown in the figure above: Arbitrum holds a total of about 1.3 million ETH, worth about US$2 billion; Optimism holds a total of 320,000 ETH; ZKSYNC based on ZK holds a total of 186,000 ETH ETH. These three L2s all accelerated user adoption because they had airdrop rewards or airdrop expectations. In contrast, Coinbases Base is a blockchain based on OP. Although the official has made it clear that there will be no airdrop rewards, according to L2 data, Base holds approximately 143,000 ETH, performing well.
It is worth noting that the above-mentioned L2s all have important Dapp ecosystems, and some of them are only launched on specific L2s. These Dapps sometimes automatically airdrop tokens. Therefore, Bases adoption by users may also be due to the expectation that Dapps on Base may receive airdrop rewards.
But, fundamentally, it is the market demand for capacity expansion that is the main factor driving L2 adoption. Since Ethereum can only handle about 15 transactions per second, this can sometimes push gas costs to levels that the average user would consider expensive. Many L2s have effectively reduced this data, and the average gas cost of L2 on the chain has been reduced to 0.7 US dollars.
In addition to the above-mentioned mainstream L2, the development of the following L2 is also worthy of attention:
1) Starknet is an L2 based on ZK, 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 is supported by crypto futures exchange Bybit and holds 23,000 ETH.
Polygon ZK, which has not yet been fully launched, holds approximately 10,000 ETH. Its three ZK L2s all have different structural settings while maintaining a focused development posture.
Currently, the Ethereum ecosystem is awaiting the release of Scroll L2, after which the L2 space may start moving towards a growth and adoption phase. On the other hand, new players are also joining the L2 segment. Aztec, for example, has been in development for years to launch a privacy-focused L2.
L2 will become a catalyst for the prosperity of the Ethereum ecosystem
Overall, the L2 ecosystem will continue to attract large amounts of ETH, which may promote new waves of adoption and revitalize the DeFi ecosystem.
L2 and L2 SDK can allow any project to launch its own second-tier software package. Especially after the trading platform supports direct deposits to L2, gas fees will become increasingly lower.
For example, Coinbase has already done this on the Base chain. Kraken also supports direct deposits for the Polygon sidechain. As L2 moves from its initial launch phase, the larger L2 will likely attract direct deposits from major crypto exchanges. In addition, cross-chain bridge projects also allow assets to be transferred from mainstream L2 to other L2 at low fees. Once a user uses one of the L2s, it is equivalent to participating in the Ethereum ecosystem.
Although the performance of L2 has not been tested by a large number of users during the bull market cycle, its future performance is still unknown. However, after more than ten years of efforts in the encryption industry, how public blockchains can be expanded to global-level networks has begun to take shape.
If L2 can successfully expand Ethereum, the crypto world will witness a completely different public chain system from the previous market cycle - Ethereum will become the basic chain, and many L2s will greatly accelerate the adoption rate of this basic chain.
In the end, a many stars support the moon trend was formed, making the ETH+L2 architecture truly become a global distributed infrastructure.
