Ethereum: Overview & Current Information.
Since Thursday’s Ethereum developer meeting, ETH has rallied an impressive 30%, indicating increased confidence in the new timeline. In another sign of strength for ETH, the cryptocurrency’s options markets on Monday indicated more bullish than bearish bets, signaling upside momentum for the first time in six months. And maybe the most significant (but hardest to quantify) force at play? Narrative. After weeks of adverse headlines about struggling crypto firms, inflation, and the Fed’s rate hikes, the reality that the long-awaited upgrade to the second-biggest cryptocurrency’s blockchain is near might have injected some much-needed optimism into the market. As CoinDesk’s Nathaniel Whittemore notes, “One of the very few narratives that some contend has the power to shift the crypto markets around is the Ethereum merge.”
The ETH rally began last Friday after Ethereum developers agreed to an updated September timeline for the blockchain’s long-awaited “merge” upgrade, which will see it move from its current, energy-intensive “proof-of-work” system to a 99% more efficient “proof-of-stake” system. The merge is a complex, multi-year technological feat that's seen many delays. Here’s how it will work and why it matters.
Proof of work is the original crypto “consensus mechanism,” beginning with Bitcoin. It allows many computers across a decentralized network to verify transactions — Ethereum also currently uses this process to create new coins. It requires a huge amount of computer power from virtual “miners” around the world, who compete to solve a time-consuming math puzzle. The winner gets to update the blockchain with the latest block of verified transactions, and is rewarded with a predetermined amount of new ETH.
With the rise of DeFi and NFTs, Ethereum’s network has endured traffic bottlenecks and unpredictable spikes in transaction (gas) fees. Enter proof of stake. Proof-of-stake blockchains — which are used by low-fee ETH alternatives like Solana and Avalanche — are designed to be faster, less resource-intensive, and theoretically more secure. Instead of requiring energy-intensive mining, proof-of-stake networks rely on “validators” that contribute their own ETH as collateral in exchange for a chance to update the blockchain with the latest verified transactions and earn newly minted tokens. (Learn about staking via Coinbase.)
So, what exactly is being merged? Ethereum’s upgrade will combine the current proof-of-work blockchain with a proof-of-stake blockchain called the Beacon Chain, which has been running since 2020. Once complete, the Beacon Chain will take over the process of validating new transactions. Hundreds of thousands of validators have already staked more than 13 million ETH on the Beacon Chain.
On Thursday, ETH developer Tim Beiko suggested the upgrade will happen the week of September 19, but that date “isn’t final.” The merge has been in the works since 2015 and has seen repeated delays (In May, ETH co-founder Vitalik Buterin said August was the goal). However, the recent successful launches of proof of stake on the Ropsten and Sepolia testnets seem to have inspired faith in the new timeline, which includes August’s final trial on the Goerli testnet before September’s main upgrade.
Ethereum Q2 Updates
1) Network revenue decreased 51% from Q1 2022 ($2.48B USD to $1.28B USD), much of this due to the continued decline in the price of Ether over the period. Approximately 85% of transaction fees were burned and removed from the circulating supply.
2) Average network transaction fees dropped 53% from Q1 2022 ($23.47 USD to $12.47 USD). Transactional volume was down 6% from Q1 2022, and average daily active addresses decreased 27% in Q2 2022 (595,473 addresses to 468,337 addresses). While most networks experienced reduced transactional volume last quarter (Bitcoin’s decreased 8%), the drop in average daily active addresses on Ethereum is significantly greater than most leading networks over the quarter (in fact, Bitcoin’s increased by 1%).
3) While gas fees were consistently low over Q2 2022, a few events generated extreme spikes in fees, especially in early May. Circulating supply increased slightly, just 1% over Q2 2022 (118,146,202 ETH to 118,856,190 ETH). Post-Merge, circulating supply will likely be deflationary.
4) Despite significant and continued market volatility, the total amount staked increased 18% in Q2 2022 (10,987,218 ETH to 12,984,421 ETH), equating to 11% of circulating supply.
